Guaranteed minimum withdrawal benefit products. Paul Partridge, MBA Director, Investments Marketing

Transcription

1 Guaranteed minimum withdrawal benefit products Paul Partridge, MBA Director, Investments Marketing

2 Discussion Segregated fund guarantees a brief history Retirement risks Guaranteed minimum withdrawal benefits Product allocation Summary 2

3 Marketing/Sales 101 Don t let the truth get in the way of a good story! 3

4 Segregated fund guarantees a brief history

5 Segregated fund guarantees Sales of segregated funds increased dramatically in 1993 Early focus on 100% maturity guarantee Began to promote reset ( step-up ) feature in 1998 Sales growth exceeded that of mutual funds New capital rules first to hit in 1999, recurring theme Sales slowed until

6 Retirement risks

7 The need for reliable income Markets have provided poor/unpredictable returns Interest rates are low Annuities are inflexible Many baby boomers haven t saved enough 7

8 Retirement risks 8

9 Longevity risk Probability of healthy 65-year old living until Age Single Female Single Male At Least One Member of a Couple 70 96% 93% 99% 80 81% 71% 94% 90 44% 33% 63% 95 23% 16% 36% Source: Annuity 2000 Mortality Table, Society of Actuaries. For illustration purposes only. 9

10 Will your retirement income be protected? Average price of gas in 1980: $0.59/l In October 2011: $1.20/l Statistics Canada (table Average retail prices of gasoline and fuel oil, by urban centre, in cents per litre; and Table Consumer Price Index (CPI). The CPI for the economy as a whole was used to adjust the date for inflation. This data product is provided as-is, and Statistics Canada makes no warranty, either express or implied, including but not limited to, warranties of merchantability and fitness for a particular purpose. In no event will Statistics Canada be liable for any direct, special, indirect, consequential or other damages, however caused. 10

11 When does market volatility really matter? $140,000 $130,000 $127,000 $135,890 +7% -13% $120, % $118,224 $110,000 $100,000 $100, % $90,000-13% $87,000 $93,090 +7% Start End of year 1 End of year 2 End of year 3 For illustrative purposes only. 11

12 The danger of retiring in a down market Michael Poor returns, then good returns Patricia Good returns, then poor returns Both Michael and Patricia retire with $100,000 They withdraw $5,000 per year during retirement Each of them enjoys a 30-year average annualized return of 4.6% Experienced poor returns just after retirement, followed by good returns Experienced good returns just after retirement, followed by poor returns 12

13 Significant difference in outcomes $ $ Michael (poor returns first) $ $ Mr. McIntosh retires Assets depleted after 17 years $ $ $0 10 Years 20 Years 30 Years $ $ Patricia (good returns first) $ $ $ Ms. Courtland retires $165,000 after 30 years and going strong $ $0 10 Years 20 Years 30 Years For illustration purposes only 13

14 Why the sequence of returns matters Sequence of Returns (poor then good) Balance Sequence of Returns (good then poor) Balance Michael s money runs out in year 18 Patricia has an ending balance of $164,102 after 30 years Both Patricia and Michael retire with $100,000 and withdraw $5,000 per year Both experience a 30-year average annualized return of 4.6% For illustration purposes only 14

15 Retirement risk zone 15

16 Guaranteed minimum withdrawal benefits

17 GMWB products are introduced Guaranteed income for life! Access to your savings Introduced in Canada in 2006 Extended to group savings plans in

18 Important Product rules have been simplified for illustration purposes. Not all products are the same and features / definitions vary by insurer. 18

19 GMWB Basics: Benefit Base Notional value (not real money) Figure on which annual retirement income is based Established with initial deposit (dollar for dollar) Increased by subsequent deposits Increased by any reset ( step-up ) Increased by any bonus (i.e., benefit base enhancement) Reduced by withdrawals 19

20 GMWB Basics: Resets ( Step-ups ) Establishes a higher value for the Benefit Base Example: Original deposit on June 1, 2010: $100,000 Market value on August 13, 2011: $120,000 Benefit Base is reset to $120,000 Reset frequency varies by product 20

21 GMWB Basics: Bonus (Benefit Base enhancement) Reward for opening a contract early and for not making any withdrawals With $100,000 deposit, a 3% bonus increases Benefit base to $103,000 (assuming no withdrawals that year) Bonus levels vary and may not increase the Benefit Base immediately Bonus availability varies 21

22 GMWB Basics: Lifetime withdrawal amount At age 65, if Benefit Base is $200,000, lifetime guaranteed income would be $10,000 (5% of Benefit Base) As long as you don t break the rules Retirement ages and % s vary by contract Lower age, lower % Higher age, higher % Joint / spousal options may be available (at reduced incomes) 22

23 GMWB Basics: Don t break the rules Never withdraw more than you are allowed In a down market, Benefit Base will be reduced Don t invest all of your money in GMWB products They re not for everyone 23

24 GMWB Basics: No guaranteed return GMWB savings are invested in fund(s) Market value is always available (less any charges) Benefit Base is not available (a notional value) No guaranteed return (not a GIC) 5% payout is simply an income stream 24

25 GMWB Basics: Fees Vary by asset class Many U.S. contracts did not vary fees Can be: Embedded in MER / IMF (percentage of market value ) Visible fee paid separately (percentage of Benefit Base) 25

26 Important Product rules have been simplified for illustration purposes. Not all products are the same and features / definitions vary by insurer. 26

27 GMWB products in action (down market, accumulation phase) Portfolio Market Value $10,000 Income bonus Benefit Base $400,000 $200,000 $20,000 LWA Year After year 20 For illustration purposes only. Portfolio markets values are hypothetical and not indicative of future performance. 27

28 Feb 1, 2010 May 9, 2010 May 9, 2011 May 9, 2012 May 9, 2013 May 9, 2014 Feb 1, 2015 GMWB products In Action Assumptions: $15,000 initial contribution $2,000 annual contributions Date of birth May 9 3% enhancement each year For illustration purposes only. Portfolio markets values are hypothetical and not indicative of future performance. 28

29 Benefits For Sponsors (Employers) Provides plan members (employees) with something more than traditional retirement savings Helps sponsors meet needs of close-to-retirement employees more effectively Provides members with source of guaranteed income when company moves from Defined Benefit to Defined Contribution plan 29

30 Benefits For Plan Members Provides peace of mind Diversifies sources of retirement income while saving Provides guaranteed retirement income for life Ensures retirement income won t be reduced by declining markets 30

31 Risk considerations October s market declines highlights the fact that this is ultimately a risky business for insurers, and that marketing opportunities must be continually considered against issues of pricing and product economics. Investor Economics; 2008 Segregated Fund Report 31

32 Risk considerations Product Equity level of fund(s) Bonus levels Reset frequency Income level(s) and earliest withdrawal age Fees Death benefit guarantees Plan member education Plan member behaviour What happens when the plan moves to a new insurer? 32

33 Product allocation

34 Product allocation Inflation Leaving an estate Behaviour Sequence of returns Longevity Liquidity 34

35 Product allocation Product Category Inflation Retirement Risks Sequence of Returns Retirement Preferences Longevity Liquidity Behaviour Estate Annuities LOW MED HIGH LOW HIGH LOW SWPs HIGH LOW LOW HIGH LOW HIGH GMWBs MED HIGH MED MED MED MED 35

36 Summary

37 Summary GMWB products can be an excellent retirement product Best when combined with other sources of income Important to make this easy for members GMWB products are not for everyone 37

38 Thank you Disclaimer The Information in this presentation is provided for informational purposes only and is not intended to be relied upon as investment, tax or consulting advice. You should contact your own advisor or consultant for advice that responds to your own situation. 38