Managing Asset Decumulation Risk in Capital Accumulation Plans. Hosted by the Ontario Regional Council May 8, 2014 Twenty Toronto Street Toronto, ON

Transcription

1 Managing Asset Decumulation Risk in Capital Accumulation Plans Hosted by the May 8, 2014 Twenty Toronto Street Toronto, ON

2 Managing Asset Decumulation Risk in Capital Accumulation Plans Hosted by the May 8, 2014 Twenty Toronto Street Toronto, ON

3 Managing Asset Decumulation Risk in Capital Accumulation Plans Paul Partridge GRS Investment Director Manulife Financial 3

4 Retirement risks 4

5 We look forward to the perfect retirement 5

6 Its not always an easy path 6

7 Does the plan protect against the risk? Plan Inflation Market volatility Longevity Liquidity Behaviour Estate planning Defined Benefit Plans DC / CAP Plans Med High High Low High Low Med Low Low High Low High Adapted from the QWeMa Group Inc. 7

8 Member understanding What do I invest in? How much should I contribute? How much will I need to retire? Do I need a Financial Plan? 8

9 Current guaranteed income options 9

10 CAP / DC Plan basics Most Service Providers have implemented the following options for members to receive income Annuity Transfer assets to Group RRIF/LIF/LRIF/PRIF plan Allow withdrawals from existing plans when permitted Combination of the above Member is also able to transfer their assets to another financial institution / product or redeem 10

11 Frequently used investments for income Target Date Funds Member stays invested in Target Date fund and asset mix automatically changes over time Target equity content is 20-40% at and during retirement for most Target Date programs in Canada GIAs, Money market, Fixed income, Balanced, Equity income (dividend, REITs), and Equity funds Specialty guaranteed income products Limited choice 11

12 Sponsors are embracing target date funds Number of Funds Source: Investor Economics Group Retirement and Savings Report, January

13 Current guaranteed options available Product category Invested in markets Cashable GMWB (IncomePlus) Yes some sort of balanced mandate Non-cashable deferred annuity No Guaranteed income for life Potential for higher income later Liquid / cashable Risk to insurance provider 5% of Guaranteed Benefit Base (i.e., total deposits) Yes due to bonus or reset Yes invested in segregated funds Equity (high) Depends upon interest rates at time of deferred annuity purchase No No only under certain life events Duration mismatch (low) 13

14 Service Provider Hurdles / Issues 14

15 Its complicated! Guaranteed Benefit Base ($) 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 Guaranteed Benefit Base - $27,011 Retirement Guaranteed Annual Income Amount - $1, Assumptions: $15,000 initial transfer into Group IncomePlus $2,000 annual contributions 3% enhancement per year Begin contributions at 60 14,000 Retire at 65 12,000 10,000 Feb 1, 2010 May 9, 2010 May 9, 2011 May 9, 2012 May 9, 2013 May 9, 2014 Chart is for illustration purpose only 15

16 Key considerations Simplicity Member (and market sources) needs to understand product and/or have access to advice Complexity has plagued retirement income products in the past Flexibility Members prefer liquidity don t necessarily want to lock away their assets and give up market value Sustainability Solution needs to have acceptable pricing and risk to the Service Provider 16

17 Key considerations (cont d) Affordability Guaranteed income needs to be affordable to the member System / process build(s) can be significant for the Service Provider Portability Plans desire the option to transfer guarantees to a new Service Provider Service Model Products need to be accompanied by the right education, advice and service 17

18 Provide a great solution.. 18

19 .. but will they come? Service Provider makes option available Market Source analyzes option Market Source supports option Plan sponsor adds option Member understands option Member selects option 19

20 U.S. Group based retirement income products 20

21 US providers have refocused on providing steady income in retirement Source: Corporate Executive Board, The Future of Retirement Income,

22 Plan sponsors considering in-plan retirement income solutions Source: Corporate Executive Board, The Future of Retirement Income,

23 Target date funds with embedded income 23

24 Managed payout solutions 24

25 Other ideas for assisting with retirement risks 25

26 Product allocation There is no single product solution that covers all risks Product Inflation Market volatility Longevity Liquidity Behaviour Estate planning Annuity Low High High Low High Low Seg / Mutual Fund withdrawals High Low Low High Low Med Market-based Guaranteed income solutions Med High Med Med Med Med Adapted from the QWeMa Group Inc. 26

27 Increase member contributions Education / advertising Tools to assist members contributing Auto-enrollment Auto-escalation Mandatory PRPP 27

28 Life planning More than just a financial plan Have you planned for health concerns? What does retirement really mean? Will a hobby or volunteer work be fulfilling? What happens if? 2014 Manulife / Ipsos Reid Health & Wealth Wellness Study 28

29 Hybrid Annuity Products Robert Klosa Director, Product Development Sun Life Financial 29

30 Agenda Why is decumulation different? Annuity + managed withdrawal solutions Hybrid product examples Why some good ideas don t get built 30

31 Have you ever serviced your own Brakes?

32 Human Problems are complicated Retirement Planning is a human problem not just a technical problem You can offer the optimal product solution and still not succeed Building good products is necessary but not sufficient It s a team sport and you need to do it all Simplicity, nudging, education, advice, service etc.

33 Retirement Risks Why decumulation is different.

34 Accumulation Risk-Return Paradigm Return Well established framework Risk is volatility Optimization Risk

35 Decumulation Competing Paradigms 80%Equity + 20% Life Annuity Multiple Frameworks Hard to classify & compare Estate Value 80%Equity + 20% Bond 20%Equity + 80% Bond Risk is multi-dimensional Trade Offs % of Lifetime Spending Needs Met Pfau, 2011

36 Annuities

37 Annuities What do you want? A pension. What does that mean to you? Simple Guaranteed lifetime income What about an Annuity? No thanks! 1. I can do better! Bad time to buy 2. Liquidity What if I need money? What if I die? 37

38 What if I die? Payout per $100, % 7.0% 6.0% 5.0% 6.9% 6.6% 6.4% 6.3% 6.0% 5.9% 5.4% 5.4% 5.3% As retirement risk decreases income will decline 5.1% 4.7% 4.0% 3.8% 3.0% 2.0% 1.0% 0.0% Life Life + 10 Life +20 Life + 3% Male - Age 65 Source: ImmediateAnnuities.com. 38

39 How you buy an Annuity impacts Perceptions Life Annuity Contingent Annuitization Auto-Annuitization Deferred Annuity Longevity Insurance (Long Deferred Annuity)

40 Managed Withdrawals

41 Managed Withdrawals Probabilistic Specify income in advance based on a model e.g. Simple retirement calculator at retirement e.g. Level lifetime income with 90% probability of success indexed to inflation aka 4% rule Contingent Income varies based on some measured variable e.g. Simple retirement calculator repeated through retirement e.g. 4% rule recalculated every n-years + floor/ceiling Proportional Specify proportion of assets to liquidate e.g. RIF table, RMD in US

42 Realistic Withdrawal Rate? Depends on assumptions and model Investment income + return of capital Contingent withdrawal schemes maximize total income but introduce variability For moderate risk aversion annuities are hard to beat even at today s low interest rates Higher Income Greater Safety

43 Hybrid Products

44 Hybrid Products Normally built up from pre-existing tried and true products Seeks to marry the benefits /offset weakness of one or more products or strategies Embeds advice Simplifies product allocation Look at two very general examples Real products typically integrate other features including asset allocation etc.

45 Long Deferred Annuity + Managed Withdrawal Benefits Low cost Simple Embedded advice Solves for longevity Higher income 70.0% 65.0% 60.0% 55.0% 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Deferring purchase of Immediate Annuity vs Deferred Annuity - $100K M65 M75 M85 Single Premium Immediate Annuity Deferred Annuity Source: ImmediateAnnuities.com

46 Long Deferred Annuity + Managed Withdrawal Challenges Required/maximum withdrawals Taxation without income Long dated asset supply Longevity risk capacity

47 Auto-Annuitization Benefits Dollar cost average into annuities Guaranteed income at retirement with liquidity Integrates well with popular target date concept Challenges Big enough to matter? Liability for in plan annuities Liquidity / Anti-selection Demand vs Cost

48 Why some good ideas don t get built

49 Member Sponsor Consultant / Advisor Society (Regulatory) Sun Life

50 Why good ideas don t get built 1. Doesn t solve problem better than existing products 2. Low demand 3. Profitability 4. Regulations 5. Complexity Target Market Sales Potential Will the Plan add it? Will the member buy it? Profitability Present Value of Revenue net of Cannibalization Present Value of fixed and variable costs $? 6. Risk Constraints 7. Investment Constraints

51 Supporting Income Solutions Building new products is risky business It helps if you share: What you like and don t like about existing products What kinds of solutions you would like to see and would actually add to your plan How we can implement solutions that are defaults or auto-on

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