PAT R I C K S H E E H Y

Transcription

1 O PTIMISING ANNUITY STRATEGIES FOR A SUSTAINABLE I NCOME IN RETIREMENT PAT R I C K S H E E H Y

2 DECIDING ON AN OPTIMAL ANNUITY STRATEGY. THE CLIENT S PERSPECTIVE Where will I get the most long term income? And how do I best ensure my partner will be okay? What are the chances of running out of money? When should I consider a guaranteed life annuity is it just about interest rates? Can I select other options as I get older? What is a sustainable drawdown rate?

3 ANNUITY STRATEGY - TO ENSURE A SUSTAINABLE I NCOME IN RETIREMENT 39. (1) (a) the boards of all pension, pension preservation and retirement annuity funds must establish an annuity strategy. (b) Where the rules of a provident or provident preservation fund enable a member to elect an annuity, the board must establish an annuity strategy. (2) Boards must ensure, and be able to demonstrate to the Registrar on request, that - The proposed annuity or annuities as per the annuity strategy are appropriate and suitable for the specific classes of members who will be enrolling into them. Amendments to the Regulations issued in terms of Section 36 of the Pension Funds Act 1956 (ACT 24 of 1956) 25 August 2017

4 THE RETIREMENT PARADIGM SHIFT Years in retirement continue to get longer. The luxury of receiving a guaranteed inflation-adjusted income for life is a thing of the past. Retirees need a different approach to risk and investments. Investing in the conventional manner will ensure they run out money. A one size fits all approach is not appropriate

5 BUT.WHEN THE PLANTHE PLAN DOESN T WORK OUT Car Children House Car Savings Education Car New House University O/S holiday Retirement Car Holiday Holiday Car Retirement house Holiday R & R Nursing home Estate transfer Now 60 80

6 BECAUSE WE DELAY TOO LONG 35yrs, 100% 30yrs, 58% 25yrs, 33% 18% 9% 4% 1% Saving Years

7 AND PORTFOLIOS UNDERPERFORM. 10%, 100% 9%, 82% 68% 56% 47% 40% 34% 12% 10% 8% 6% 4% 2% Investment Return

8 THE OPTIONS AT RETIREMENT WHAT ANNUITY STRATEGY? Age Prevailing interest rates Health and family longevity Inflation erosion of income Tolerance for investment risk Taxation

9 O PTIMISING THE ANNUITY STRATEGY SOME (ACADEMIC) HYPOTHESES Living annuity annuitant cannot risk capital depleting and accordingly, all other things being equal, will have a lower total income from this source than a guaranteed life annuity. Risk averse annuitants who are not concerned about leaving capital to heirs should buy a guaranteed life annuity. The life annuity has the lowest charges.the living annuity the highest. Higher equity allocation in a living annuity should mean a higher income than a guaranteed life annuity. But a low equity allocation in a living annuity may mean a lower income than a guaranteed life annuity. As the client gets older so the case for a life annuity increases and for a living annuity with no bequest motive reduces. All other things being equal, the Living annuity only makes sense if the rate above the risk-free rate is greater than the mortality credit.

10 THE OPTIONS AT RETIREMENT LIFE ANNUITY Initial yield and ROI vary according to choice Initial yield a function of client s age, choice of annuity benefits (including inflation protection), prevailing interest rates (and future returns for with profit annuities) Terminal ROI by all of the above and client s health life expectancy Live longer than expected client profits, live shorter client loses Choice Male & Female aged 60 Initial Yield Level 10.5% Escalating at 5% 6.8% Joint life- level 9.2% Joint Life escalating at 5% 5.5% Choice Initial Yield Male 60 Level 10.5% Male 70 Level 12.2% Male 75 Level 14.1% Calculations based on prevailing annuity rates Sep 2017 for a male/female aged 60

11 PROVIDING CERTAINTY MAY NOT BE SUSTAINABLE. Nominal annual income by age (at time of retirement) Real income: Male, Increasing annuity, 5% Level annuity Increasing annuity, 5% Level annuity R investment Guaranteed income Inflation: 6%

12 THE OPTIONS AT RETIREMENT - LIVING ANNUITY Not a solution for people who have saved too little Don t withdraw more than the markets are returning certainly in the early years Make allowance for longevity 50% of people aged 65 will be dead before age 85 but, 25 in 100 will live beyond age 90 and, 1 in 10 will live to 100 These 1 in 10 currently will require a ROI Chance of 65-year old 65-year old (after fees) to be at least 10.5% to match the survival - RSA man woman couple * return on a level life annuity. Make allowance for inflation 65-year old 1 in in in * at least one surviving Life annuity calculations based on prevailing annuity rates September 2017 for a male aged 60

13 THE OPTIONS AT RETIREMENT - LIVING ANNUITY Not a solution for people who have saved too little Don t withdraw more than the markets are returning certainly in the early years Make allowance for longevity 50% of people aged 65 will be dead before age 85 but, 25 in 100 will live beyond age 90 and, 1 in 10 will live to 100 These 1 in 10 currently will require a ROI (after fees) to be at least 10.5% to match the return on a level life annuity. Make allowance for inflation Life annuity calculations based on prevailing annuity rates September 2017 for a male aged 60

14 LIVING ANNUITY CLIENT BEHAVIOR Income withdrawal levels drop by 100bps for IFA clients Little change for selfdirected clients Total of advisor and platform fees have come down Exposure to growth assets is low 35% of clients younger than 65 have less than 40% in equities 12.50% 11.0% 10.00% 10.0% 9.0% 7.50% 8.0% 5.00% 7.0% 2.50% 6.0% 5.0% 0.00% 9.20% 0.63% Aug-17 To maintain real value of income Total Drawdown 39.7% Self Directed 44.0% Intermediary IFA 15.1% Fee & Brokers Admin 1.2% Fee 100% at 6.7% and preserve capital, total return in excess of 14% (net of AM fees) pa is required 8.84% Equity allocation Average Drawdowns 0-40% 40-60% 60-80% > 80% TOT < % 47.9% 16.3% 1.0% 44.1% 0.52% % 42.1% 14.6% 1.1% 47.8% 7.51% % 33.7% 12.4% 1.9% 7.5% 7.58% % 28.2% 17.4% 4.1% 0.6% Source: Glacier by Sanlam Living Annuity Review 2017

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16 I NDICATIVE MAXIMUM DRAWDOWN RATES FOR SUSTAINABLE I NCOME Multi-asset Income Multi-asset Medium Equity Multi-asset High Equity Age Male Female Male Female Male Female % 2.5% 4.0% 3.5% 4.0% 3.0% % 2.5% 4.5% 4.0% 4.5% 3.5% % 3.0% 5.0% 4.5% 4.5% 4.0% % 3.5% 5.5% 5.0% 5.0% 4.5% % 4.5% 5.5% 5.0% 5.5% 5.0% % 5.0% 6.0% 5.5% 6.0% 5.5% % 5.5% 7.0% 6.0% 7.0% 6.0% % 6.5% 8.0% 7.0% 8.0% 7.5%

17 NO ONE PRODUCT CAN REASONABLY PROVIDE FOR ALL THE REQUIREMENTS Access to good returns The Retirement Tri-lemma Protection of risks Dr David Knox Mercer, Australia Access to capital

18 NO ONE PRODUCT CAN REASONABLY PROVIDE FOR ALL THE REQUIREMENTS 38% The average member replacement ratio at retirement Sanlam Employee Benefits L E V E L A N N U I T Y I N F L A T I O N - LINKED A N N U I T Y ILLA Best replacement ratio but pushes pensioners into reducing income as budgets increase Too little income from outset immediately poorer Better replacement ratio and income management and hope that markets will take care of the rest

19 M O RTALITY CREDITS, EQUITY RISK PREMIUM Mortality Credits

20 SO, WHERE S THE EQUILIBRIUM? Mortality Credit Mortality Credit + Equity Risk Premium Equity Risk Premium

21 T I M E F O R C H A N G E 2014 Glacier announces the first breakthrough in retirement income since the birth of ILLA the Investment Linked Lifetime Income (ILLI) Product addresses shortcomings of traditional products by providing longevity protection without compromising market exposure Product is an essential building block in the retirement portfolio not a substitute

22 M A R K E T ENDORSEMENT Higher sustainable replacement ratios with flexibility Flexibility with guarantees GLA ILLA DIP ILLI Guarantees with legacy Legacy with sustainability Increasing risk/return Legacy Wants Needs

23 ADVICE DISCLAIMER Any guidance, opinions or proposals expressed by the presenter are for information purposes only and are not intended to be advice as contemplated in the FAIS Act, 37 of 2002

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