Retirement Income: The Future of Distribution Trends, Opportunities and Challenges

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1 Retirement Income: The Future of Distribution Trends, Opportunities and Challenges A LIMRA Retirement Markets Presentation Paul S. Henry Managing Director, Retirement Clients & Products

2 Agenda Retirement Income Market State of Retirees and Pre-Retirees Industry Response The Future of Distribution This presentation is a benefit of LIMRA membership. No part may be shared with other organizations or reproduced in any form without LIMRA's written permission. Page 2

3 Over 30 million Americans approaching Income Phase Number of Retirees by Age Millions million pre-retirees age million pre-retirees age 40+ Percent of Retired 100% 90% % Non-retirees Retirees Percent retired 80% 70% 60% 47% 50% % 30% million retirees 20% 10% % Source: LIMRA analysis of U.S. Census Bureau s Current Population Survey, March 2009 Supplement Page 3

4 The Income Market likely to increase 50% by 2025 Number of Projected Retirees by Age Millions million million million Age or more Source: LIMRA analysis of U.S. Census Bureau s Current Population Survey, March 2009 Supplement Page 4

5 More Americans entering retirement Without Pensions Percent Receiving Employment Based Pension 40% 35% Age 61 to 70 Age 71 & up 37% 30% 25% Median Annual Pension is $12,000 27% 20% 22% Source: EBRI estimates of data from the Current Population Survey, Department of Labor, 2010 Page 5

6 Assets will be Re-allocated as HH s transition to retirement Financial Assets by Age and Retirement Status $ trillions $4.5 $4.0 $3.5 $3.0 $2.5 $15.5T No one in HH retired Partially retired HH All in HH retired $2.0 $1.5 $1.0 $0.5 $3.9T $6.5T $0.0 < Source: LIMRA analysis of 2007 Survey of Consumer Finances, Federal Reserve Board, Page 6

7 Rollover market to exceed $600 billion in 3 years $602 IRA Rollovers (in billions) $452 $282 $339 $226 $205 $ E 2011E 2013E 2015E Sources: Investment Company Institute, The IRA Investor Profile: Traditional IRA Investors Rollover Activity, 2007 and 2008 (2010) and LIMRA analysis of Internal Revenue Service, Statistics of Income Bulletins and Bureau of Economic Analysis, NIPA Table 6.11, Table 6.11D. Employer Contributions for Employee Pension and Insurance Funds by Industry and by Type, years Figures based on total IRA inflows resulting from rollovers. Includes some IRA-to-IRA rollovers. 7

8 State of Pre-retirees & Retirees Page 8

Consistent Need for Income to Cover Basics Percent of Retirement Expenses by Household Income 5% 6% 6% 7% 11% 11% 14% 13% 15% 15% 19% 17% 20% 13% 13% 12% 55% 51% 50% 49% <$50k $50k-$74.9k $75k-$99.

9 Consistent Need for Income to Cover Basics Percent of Retirement Expenses by Household Income 5% 6% 6% 7% 11% 11% 14% 13% 15% 15% 19% 17% 20% 13% 13% 12% 55% 51% 50% 49% <$50k $50k-$74.9k $75k-$99.9k $100k+ Charities/inheritance Saving for future & emergencies Discretionary expenses Health & long-term care Basic living expenses Source: Retirement Income Trade-offs, Implications for Product Development, LIMRA, Survey based on 1,188 pre-retirees and retirees aged 55 to 75 with at least $100,000 in household current investable assets. Page 9

Middle/Affluent Lack Guaranteed Income Sources Percent of Essential Expenses

63% 61% 15% 13% 13% 12% 55% 51% 50% 49% 79% 18% 61% 64% 30% 34% 54% 32% 22%

9k $100k+ Health & long-term care Basic living expenses <$50k $50k-$74.

9k $100k+ Pensions/Retirement Social Security Source: Retirement Income

Survey based on 1,188 pre-retirees and retirees aged 55 to 75 with at least

10 Middle/Affluent Lack Guaranteed Income Sources Percent of Essential Expenses by Household Income Guaranteed Income Sources by Household Income 70% 64% 63% 61% 15% 13% 13% 12% 55% 51% 50% 49% 79% 18% 61% 64% 30% 34% 54% 32% 22% 36% 21% 15% <$50k $50k-$74.9k $75k-$99.9k $100k+ Health & long-term care Basic living expenses <$50k $50k-$74.9k $75k - $99.9k $100k+ Pensions/Retirement Social Security Source: Retirement Income Trade-offs, Implications for Product Development, LIMRA, Survey based on 1,188 pre-retirees and retirees aged 55 to 75 with at least $100,000 in household current investable assets. Source: LIMRA analysis of U.S. Census Bureau s Current Population Survey, March 2009 Supplement. Analysis based upon fully retired households. Page 10

Paradigm Shift in Expectations Most Important Source of Retirement Income 35% 37% Retirees Experience Pre-retirees Expectations 25% 23% 25% 26% 14% 9% Co.

11 Paradigm Shift in Expectations Most Important Source of Retirement Income 35% 37% Retirees Experience Pre-retirees Expectations 25% 23% 25% 26% 14% 9% Co. Pension Plan Savings in Employer Plan & IRA Social Security Other sources Source: Retirement Income Trade-offs, Implications for Product Development, LIMRA, Survey based on 1,188 pre-retirees and retirees aged 55 to 75 with at least $100,000 in household current investable assets. Note: Other sources include savings in Mutual Fund/Brokerage, Annuities, Equity in home, Real estate/rental income, inheritance and salary and wages. Page 11

12 Challenge: Low Savings Age group 50s 60s Average 401(k) Balance by Age and Tenure ($ in thousands) $173 Average 401(k) account balance for plan participants in their 50s and 60s = $77,650 $140 $135 $146 $76 $74 $44 $43 $15 $18 $24 $ >2 5 >5 10 >10 20 >20 30 >30 Job Tenure (years) Source: VanDerhei, Jack, Sarah Holden, and Luis Alonso, 401(k) Plan Asset Allocation, Account Balances, and Loans, Employee Benefits Research Institute (EBRI) Issue Brief No. 335, October Page 12

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 Note: The portfolio has an asset allocation of 42.5% large company stocks, 17.

13 Challenge: Manage Timing, Markets & Inflation Value of Portfolio Retirement age 62, $500,000 initial portfolio 4.05% initial withdrawals Portfolio value $2,000, $1,500,000 $1,000, $500, $0 Age Note: The portfolio has an asset allocation of 42.5% large company stocks, 17.5% small company stocks, and 40% intermediate-term government bonds and is rebalanced annually. The initial withdrawal amount was $20, 250 or 4.05% of beginning assets; thereafter adjusted based on prior year s inflation rate. Page 13 LL Global, Inc.SM 1969

Challenge: Outliving Assets Pre-retirees Longevity Expectations Retirees 65% 58% 62% 66% 51% 49% 35% 42% 38% 34% 5-10 years away 3-4 years away 0-2 years away 0-2 years 3-5 years From Retirement In

14 Challenge: Outliving Assets Pre-retirees Longevity Expectations Retirees 65% 58% 62% 66% 51% 49% 35% 42% 38% 34% 5-10 years away 3-4 years away 0-2 years away 0-2 years 3-5 years From Retirement In Retirement 1-20 years 20 or more years Source: Retirement Income Trade-offs, Implications for Product Development, LIMRA, Survey based on 1,188 pre-retirees and retirees aged 55 to 75 with at least $100,000 in household current investable assets. Page 14

Challenge: Working Longer Later 6% Timing of

, LIMRA, Society of Actuaries, and InFRE, 2009.

15 Challenge: Working Longer Later 6% Timing of Retirement When planned 38% Earlier 56% Involuntary 24% Voluntary 32% Source: Will Retirement Last a Lifetime?, LIMRA, Society of Actuaries, and InFRE, Survey based on 1,524 retirees aged 55 to 75 with at least $100,000 in household investable assets. Page 15

Challenge: The Unexpected Percent of pre-retirees Value of investments will drop by 25% or more 19% 39% Become widowed 12% 32% Lose their current job 12% 23% Better than 50-50

16 Challenge: The Unexpected Percent of pre-retirees Value of investments will drop by 25% or more 19% 39% Become widowed 12% 32% Lose their current job 12% 23% Better than chance chance Become disabled and no longer able to work 9% 27% Employer will eliminate pension 9% 17% Source: LIMRA survey of 1,000 pre-retirees, February Page 16

No wonder: Pre-Retirees Feel Unprepared Very Prepared by Household Income Level Only 30% of preretirees consider themselves to be very prepared for retirement 24% 29% 44% 14% <$25K $25K-$49.

17 No wonder: Pre-Retirees Feel Unprepared Very Prepared by Household Income Level Only 30% of preretirees consider themselves to be very prepared for retirement 24% 29% 44% 14% <$25K $25K-$49.9K $50K-$99.9K $100K+ Household Income Source: LIMRA survey of 1,000 pre-retirees, February Note: Retirement preparedness measured on a 10-point scale. Very prepared based on values Page 17

18 Industry Response to Opportunity: Product Manufacturers Distributors Page 18

19 Dollars in Billions U.S. Individual Annuity Sales Variable Fixed $67.7 $61.3 $55.5 $54.1 $51.5 $57.0 $56.0 $57.9 $59.5 $61.9 $60.1 $56.9 $ Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 Source: LIMRA, U.S. Individual Annuities survey. 19

Demand for Income Benefit Driving VA Sales Q1 2012 VA New Sales In Billions VA GLB Election Rates When Any GLB Available Hybrid GLB GMWB GMAB GMIB GLWB GLB Not Available 5% GLB Not Elected 10% 90%

20 Demand for Income Benefit Driving VA Sales Q VA New Sales In Billions VA GLB Election Rates When Any GLB Available Hybrid GLB GMWB GMAB GMIB GLWB GLB Not Available 5% GLB Not Elected 10% 90% 89% 89% 87% 87% 88% 89% 87% 88% 88% 88% 90% 90% 55% 59% 69% 64% 64% 64% 65% 65% 65% 61% 57% 59% 63% GLB Available 95% GLB Elected 90% 29% 25% 15% 17% 17% 17% 18% 16% 17% 22% 27% 26% 23% 1Q '09 2Q '09 3Q '09 4Q '09 1Q '10 2Q '10 3Q '10 4Q '10 1Q '11 2Q '11 3Q '11 4Q '11 1Q '12 Source: LIMRA, Variable Annuity Guaranteed Living Benefit Election Tracking Survey. 20

21 Dollars in Billions Fixed Deferred Annuity Sales $33.2 Book value Market value adjusted $25.8 Indexed $ $18.0 $ $18.2 $ $16.2 $ $17.8 $16.8 $15.7 $ Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Source: LIMRA, U.S. Individual Annuities survey. 21

GLB Available - GLB Elected 65% 62% 64% 65% Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1

22 Indexed GLB election rates Industry Indexed Annuity GWLB Election Rates GLB Available - GLB Not Elected 35% 67% 70% GLB Not Available 16% GLB Available 84% GLB Available - GLB Elected 65% 62% 64% 65% Q Q Q Q Q Source: LIMRA, Indexed Annuity Guaranteed Lifetime Withdrawal Benefit Elections Survey. 22

23 Older GLB clients are taking income Percentage of owners taking withdrawals IRA Non-Qualified Overall Age 70 60% 40% 20% 0% Age of Owner Source: Guaranteed Living Benefit Utilization Study 2009 Data, LIMRA 2011 Based on 1,278,547 contracts issued in respective years and still in force at the end of Page 23

24 Dollars in Billions Immediate Annuity Sales Structured Settlements Fixed immediate Variable immediate $3.5 $ $3.1 $3.1 $ $ $ $ $ $3.5 $ $ $ Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 Amounts less than $0.5 billion not shown 24 Source: LIMRA, U.S. Individual Annuities survey.

25 Dollars in Billions Deferred annuity assets have reached high Variable Fixed $2,220 $2,268 $2,391 $2,009 $1,294 $1,255 $1, $1,494 1,016 $1,633 1,136 $1,916 $2,028 $1,751 $1,707 1,397 1,517 1,231 1,151 1,389 1,561 1,593 1, Q Source: LIMRA, U.S. Individual Annuities survey. 25

Dollars in Billions Annuity Sales To grow 2% over next 4 years CAGR $238 $237 $246 $253 $262 2% 158 157 160 165 171 2%

26 Dollars in Billions Annuity Sales To grow 2% over next 4 years CAGR $238 $237 $246 $253 $262 2% % % 2011 (actual) Fixed Variable Source: LIMRA, U.S. Individual Annuities survey. 26

4 $4.8 $4.8 $5.3 $5.3 $6.1 $6.5 $3.0 $3.

27 SPIA sales to reach $13b; 10 Days of Rollovers Fixed Immediate Annuity Sales & Forecast ($ Billions) $11.8 $13.0 $10.6 $9.4 $7.9 $7.5 $7.6 $8.4 $4.8 $4.8 $5.3 $5.3 $6.1 $6.5 $3.0 $ E 2012E 2013E 2014E 2015E Source: LIMRA Page 27

28 The Future of Distribution? Page 28

Q1 2012 Fixed Annuity Sales by Distribution Channel Dollars in Billions $8.5 $1.0 $1.0 $3.2 $0.4 $0.7 $3.

29 Q Fixed Annuity Sales by Distribution Channel Dollars in Billions $8.5 $1.0 $1.0 $3.2 $0.4 $0.7 $3.1 Banks Career Direct Indep. B-D Independent Other Full Service Nat. B-D Source: US Individual Annuities, LIMRA

30 Banks/Career Agents lead Fixed-Rate Deferred Sales Banks Career Independent Agents Full Service Nat'l B-D Independent B-D Direct 100% 80% 2% 4% 3% 4% 4% 5% 6% 6% 8% 5% 5% 5% 7% 9% 10% 8% 9% 8% 21% 16% 14% 18% 15% 17% 60% 40% 19% 19% 23% 26% 26% 31% 20% 44% 46% 42% 39% 41% 34% 0% Q Source: LIMRA, U.S. Individual Annuities survey. 30

31 Career followed closely by Nat l B/D in Fixed Immediate Career Full Service Nat'l B-D Independent Agents Banks Independent B-D Direct 100% 80% 5% 6% 5% 4% 4% 5% 9% 8% 8% 8% 6% 10% 8% 9% 14% 15% 14% 14% 60% 35% 33% 19% 21% 19% 20% 40% 12% 10% 15% 19% 22% 23% 20% 26% 32% 34% 32% 31% 29% 0% Q Does not include sales reported through Other Systems Source: LIMRA, U.S. Individual Annuities survey. 31

32 Independent Agents Dominate Indexed Annuity Sales Independent B-D Full Service Nat'l B-D Banks Career Independent Agnts Direct 100% 80% 60% 89% 88% 84% 86% 86% 86% 40% 20% 0% 6% 5% 6% 6% 5% 5% 4% 4% 7% 7% 6% 6% Q1 '12 Source: LIMRA, U.S. Individual Annuities survey. 32

Advisors are under-engaged as clients enter retirement Percent indicating advisor helps with How Advisors Help Retirees 80% 48% 35% 56% 34% Managing assets Minimizing taxes RMD planning Minimizing

33 Advisors are under-engaged as clients enter retirement Percent indicating advisor helps with How Advisors Help Retirees 80% 48% 35% 56% 34% Managing assets Minimizing taxes RMD planning Minimizing exposure to retirement risks Retirement income and estate planning Investment related Retirement planning related Source: Will Retirement Assets Last a Lifetime?, LIMRA, Society of Actuaries, and InFRE, Survey based on 1,524 retirees aged 55 to 75 with at least $100,000 in household investable assets. Page 33

Many advisor lack information on role of income products Retiree Portfolio Longevity with Immediate Annuity Portfolio Assets $250,000 $200,000 $150,000 0% SPIA, 100% managed portfolio 10% SPIA, 90%

25 26 27 28 29 30 # of Years in Retirement Source: Liquidity and the Value of Annuitization, LIMRA, 2009.

34 Many advisor lack information on role of income products Retiree Portfolio Longevity with Immediate Annuity Portfolio Assets $250,000 $200,000 $150,000 0% SPIA, 100% managed portfolio 10% SPIA, 90% managed portfolio 20% SPIA, 80% managed portfolio 30% SPIA, 70% managed portfolio 40% SPIA, 60% managed portfolio $100,000 $50,000 $ # of Years in Retirement Source: Liquidity and the Value of Annuitization, LIMRA, Illustration of 1969 to 1998, the worst 30-year period out of 53 possible scenarios since The portfolio has an asset allocation of 42.5% large company stocks, 17.5% small company stocks and 40% intermediate-term government bonds and is rebalanced annually. An annual payout rate of 6.30% was based on actual single-life immediate annuity quotes with inflation adjustments for a hypothetical 65-year-old male in January The initial withdrawal amount was 4.5% of beginning assets; thereafter annual withdrawals were adjusted based on the prior year s inflation rate. The hypothetical portfolio had a 50- basis-point charge assessed annually (following the withdrawals and the investment growth or loss. Page 34

Buyer preferences based on age and source of

buyers are age 74 or less Qualified 7% 41% 24%

Qualified 10% 18% 12% 16% 45% Age in years <60

35 Buyer preferences based on age and source of money Percentage of SPIA Buyers by Age 72% of buyers are age 74 or less Qualified 7% 41% 24% 15% 13% 60% of buyers are age 75 & older Non- Qualified 10% 18% 12% 16% 45% Age in years < & above Source: Guaranteed Income Annuities, LIMRA The study is based on 55,311 immediate contracts issued in 2008 and Page 35

36 Buyers Weigh Trade-off s Monthly payout $650 Features in Lifetime Income Annuities $600 $550 $500 $450 Life Only Guarantee period - 5 years GP - 10 years 12% 4% 18% 17% GP - 15 years Cash refund 31% Installment refund 1% 11% GP - 20 years 5% GP 20+ years 6% COLA CPI (U) $400 1% Less Features More Source: Based on CANNEX top quotes on $100,000 for a 65 year old male as of 12/07/2010 Page 36

37 Clients look for decision-making help when triggers occur Retirement Decision Points Source: LIMRA, The Retirement Income Reference Book 2009 Page 37

and enrollment Minimizing taxes Long term care Survivor income Estate

38 Clients seek support across a broad spectrum of issues Lifestyle budgeting Asset allocation Social Security timing Medicare eligibility and enrollment Minimizing taxes Long term care Survivor income Estate Planning Confidential and proprietary information for institutional use only. 38

Leveraging Contract-Level Data LIMRA s COMPASS: DATA REPORTING INITIATIVE Optimize rep productivity by channel, region, firm size Track your market share against competitors at the local level

39 Leveraging Contract-Level Data LIMRA s COMPASS: DATA REPORTING INITIATIVE Optimize rep productivity by channel, region, firm size Track your market share against competitors at the local level Use regional results as benchmarks for performance Determine channel penetration and areas for growth Distribution Hierarchy Contract # NPN EIN NAIC # Customer Sales rep Firm 1 Firm Carrier 39

Collaboration is the best kept secret to success Likelihood of Success (Top Quartile among all Financial Advisors (Indexed to 100) 338 213 238 100 Solo Lower

40 Collaboration is the best kept secret to success Likelihood of Success (Top Quartile among all Financial Advisors (Indexed to 100) Solo Lower support Higher support Multi- Advisor/Rep * Note 1. Based on rep with 250 clients, and Note 2. Success means top quartile performance of all financial services advisors 40

41 Education is being directed to the financial professional Guaranteed Income Solution Attitudes Percent Agree* Guaranteed income solutions must be backed by a highly-rated, financially-strong insurer 77% 81% Guaranteed income solutions would be more attractive if the guarantees were backed by a federal agency (similar to the FDIC) 63% 67% Guaranteed income solutions provide benefits beyond what could be accomplished through use of non-guaranteed income solutions 40% 56% Guaranteed income solutions should be used to cover nondiscretionary expenses in retirement 38% 48% 2011 Guaranteed income solutions are too complicated to explain to clients 28% 35% *Percentages based on individuals who "strongly" or "somewhat" agreed with the statement. Source: Advisor Perspectives on Retirement Planning, LIMRA, 2012.

42 More than 6 in 10 advisors believe guaranteed income solutions are well-received by clients Guaranteed Income Solution Attitudes* Guaranteed income solutions are often well-received by clients 63% 7% Guaranteed income solutions require significant training and support from product manufacturers 60% 10% Guaranteed income solutions are integrated in tools that you use 58% 11% I do not recommend VAs with GLBs because they are too costly 30% 32% I do not recommend income annuities (SPIAs) because the assets leave the firm and it hurts profitability and assets under management 21% Agree 41% Disagree *Percentages based on individuals who "strongly"/"somewhat" agreed or "strongly"/"somewhat" disagreed with the statement. "Neither agree nor disagree" excluded from chart. Source: Advisor Perspectives on Retirement Planning, LIMRA,

43 Using Social Media to Project & Protect our Message 43

44 A Mobile Application that Engages & Educates

45 Execution is Key Targeting Training Tools Testing 45

46 Distribution of the Future?» Pre-retirees will be more engaged, better informed and prepared to make decisions new technologies will create consumers who are motivated to seek out solutions» The retirement income discussion will permeate the relationship product manufactures, service providers and advisors have with DC Plan participants» Most pre-retirees will continue to fear making a mistake with their single largest financial asset they will seek out products they can understand and advisors/firms they can trust» Successful Advisors will embrace the role of product allocators, and deliver a broader array of services to retirees Page 46

47 Thank you. Your Trusted Source for Retirement Industry Knowledge Paul S. Henry: ; HARTFORD ATLANTA MIAMI TORONTO LONDON KUALA LUMPUR SHANGHAI HO CHI MINH CITY SEOUL

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