managing asset decumulation risk in capital accumulation plans · managing asset decumulation risk...

Managing Asset Decumulation Risk in Capital Accumulation Plans

Hosted by the Ontario Regional Council May 8, 2014

Twenty Toronto Street Toronto, ON

Ontario Regional Council 3

Managing Asset Decumulation Risk in Capital Accumulation Plans

Paul Partridge GRS Investment Director

Manulife Financial


Retirement risks


We look forward to the perfect retirement


Its not always an easy path


Does the plan protect against the risk ?

Plan Inflation

Market volatility

Longevity Liquidity Behaviour

Estate planning

Defined Benefit Plans

Med High High Low High Low

DC / CAP Plans Med Low Low High Low High

Adapted from the QWeMa Group Inc.


Member understanding How much

should I contribute ?

Do I need a Financial

Plan? How much will I need to retire?

What do I invest in?


Current guaranteed income options


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


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


Sponsors are embracing target date funds

Number of Funds

2006 37

2007 50

2008 87

2009 148

2010 150

2011 162

2012 188

Source: Investor Economics Group Retirement and Savings Report, January 2013


Current guaranteed options available Product category Cashable

GMWB (IncomePlus) Non-cashable deferred

annuity

Invested in markets Yes – some sort of balanced mandate No

Guaranteed income for life

5% of Guaranteed Benefit Base (i.e., total deposits)

Depends upon interest rates at time of deferred

annuity purchase

Potential for higher income later Yes – due to bonus or reset No

Liquid / cashable Yes – invested in segregated funds

No – only under certain life events

Risk to insurance provider Equity (high) Duration mismatch (low)


Service Provider Hurdles / Issues


Its complicated !

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

Gua

rant

eed

Ben

efit

Bas

e ($

)

Ret

irem

ent

Assumptions:

$15,000 initial transfer into Group IncomePlus $2,000 annual contributions

3% enhancement per year

Begin contributions at 60

Retire at 65

Guaranteed Annual Income Amount - $1,350.55

May

9, 2

011

May

9, 2

012

May

9, 2

013

May

9, 2

014

Guaranteed Benefit Base - $27,011

May

9, 2

010

Feb

1, 2

010

Chart is for illustration purpose only


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


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


Provide a great solution …..


….. but will they come?

Service Provider makes option

available

Market Source

analyzes option

Market Source

supports option

Plan sponsor

adds option

Member under-stands option

Member selects option


U.S. Group based retirement income products


US providers have refocused on providing steady income in retirement

Source: Corporate Executive Board, The Future of Retirement Income, 2012


Plan sponsors considering in-plan retirement income solutions

Source: Corporate Executive Board, The Future of Retirement Income, 2012


Target date funds with embedded income


Managed payout solutions


Other ideas for assisting with retirement risks


Product allocation 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

There is no single product solution that covers all risks

Adapted from the QWeMa Group Inc.


• Education / advertising • Tools to assist members contributing

• Auto-enrollment • Auto-escalation • Mandatory PRPP

Increase member contributions


• 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

Life planning


Hybrid Annuity Products

Robert Klosa Director, Product Development

Sun Life Financial


Agenda

• Why is decumulation different? • Annuity + managed withdrawal solutions • Hybrid product examples • Why some good ideas don’t get built

Ontario Regional Council

Have you ever serviced

your own Brakes?


• 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.

Human Problems are complicated…

Retirement Risks

Why decumulation is different.


Accumulation – Risk-Return Paradigm

• Well established framework

• Risk is volatility • Optimization

Risk

Ret

urn


Decumulation – Competing Paradigms

• Multiple Frameworks • Hard to classify & compare • Risk is multi-dimensional • Trade Offs

% of Lifetime Spending Needs Met

Esta

te V

alue

80%Equity + 20% Bond

80%Equity + 20% Life Annuity

Pfau, 2011

20%Equity + 80% Bond

Annuities


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?


What if I die? Payout per $100,000

6.9% 6.6% 6.0%

5.1%

6.4% 6.3% 5.9%

4.7%

5.4% 5.4% 5.3%

3.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Life Life + 10 Life +20 Life + 3%

Male - Age 65Source: ImmediateAnnuities.com.

As retirement risk decreases income will decline


35 40 45 50 55 60 65 70 75 80 85

How you buy an Annuity impacts Perceptions

Life Annuity

Contingent Annuitization

Auto-Annuitization

Deferred Annuity

Longevity Insurance (Long Deferred

Annuity)

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

Managed Withdrawals


• 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

Realistic Withdrawal Rate?

Greater Safety

Higher Income

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.

Hybrid Products


Benefits • Low cost • Simple • Embedded advice • Solves for longevity • Higher income

Long Deferred Annuity + Managed Withdrawal

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%55.0%60.0%65.0%70.0%

M65 M75 M85

Deferring purchase of Immediate Annuity vs Deferred Annuity - $100K

Single Premium Immediate Annuity

Deferred Annuity

Source: ImmediateAnnuities.com


Long Deferred Annuity + Managed Withdrawal

Challenges • Required/maximum withdrawals • Taxation without income • Long dated asset supply • Longevity risk capacity


Benefits • Dollar cost average into

annuities • Guaranteed income at

retirement with liquidity • Integrates well with popular

target date concept

Auto-Annuitization

Challenges • Big enough to matter? • Liability for in plan

annuities • Liquidity / Anti-selection • Demand vs Cost

Why some good ideas don’t get built


Member

Consultant / Advisor

Sun Life Society

(Regulatory)

Sponsor


1. Doesn’t solve problem better than existing products

2. Low demand

3. Profitability

4. Regulations

5. Complexity

6. Risk Constraints

7. Investment Constraints

Why good ideas don’t get built

Will the Plan add it?

Will the member buy it?

Present Value of Revenue net of Cannibalization

Present Value of fixed and variable costs

Target Market

$?

Sales Potential Profitability


• 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

Supporting Income Solutions

managing asset decumulation risk in capital accumulation plans · managing asset decumulation risk...

Documents