Presenters:

Linda Ritchie

4 November 2012

Momentum Employee Benefits Investments – With profit annuities training for Financial Advisors

Agenda

• Background

• Golden Income With-Profit Annuity

• Annuity Retailisation

• Conclusion

Background

What happens at retirement?

• Often the largest accumulation of wealth in an individual’s life

• Financial Goals

o Continuity of income and maintain standard of living

o Leaving money as bequest

• Very stressful period

o Due to changes in life, maintain self worth and health

o No longer fall under “wing” of employer

o Important (sometimes daunting) decisions to be made

• Individual often requires impartial/unbiased guidance or financial advice

What is there to choose from in the market?

• Take benefit in cash

• Choose guaranteed annuity from insurer

o Guaranteed to pay for life

o Guarantees current level of pension (Level annuities);

o Provide for future increases (With-profit annuities or fixed escalating);

o Guarantees inflation increases (Inflation-linked annuities)

• Buy a living annuity

o Provides no guarantees

o If money is depleted – no further income

o If money is not depleted at death – remaining money reverts to

estate

• Combination of guaranteed and living annuity

The market

But...

Financial Advice

• Individual requires unbiased advice to choose the correct solution

• Advisors need to provide “best advice” for retirees

• Remuneration from selling living annuities greater than other annuities –

living annuities are not always appropriate for all clients

Landscape

• Retirement Reform process

o Preservation

o Purchase annuities

o Emphasis on low cost solutions

• Fund Trustees and Advisors are realising members left out in the cold at

retirement date

The Solution

• Selection of an appropriate annuity product to suit the needs of most

members – still on voluntary basis

• Obtain quotes from the various provider/s

• Present the quote to retiree and the benefits of selecting the chosen

product

• Low cost option aligned with proposals for retirement reform

• Can be implemented on a default annuity selection, no advice, no

commission basis

• Best product in the market in terms of increases

Golden Income With-Profit AnnuityProduct features

Product features

• Description – Provides regular pension for life as well as the opportunity to

participate in investment and mortality profits via an annual pension increase.

• Objective – To provide minimum guaranteed pension for life, aim to:

o Declare competitive pension increases;

o Avoid declaring zero pension increases; and,

o Declare pension increases that keep pace with inflation over the long-

term.

• Risk profile – Moderate. Future increases are linked to the performance of

the assets.

• Our guarantee – Pension will never decrease. Each time an increase is

awarded, the new higher amount is guaranteed for life.

Golden Growth’s unique features

• Uses dynamic hedging to accurately price and manage the product • All embedded investment guarantees priced accurately up front and no

clawbacks from future bonuses• Funding level maintained at 100% due to dynamic hedging• No entry time dependence – no funding level cross subsidy at entry

• Lower charges, including capital charge• Transparent pension increase formula based on weighted average of

6 years underlying asset performance• Greater exposure to growth assets and these are actively managed• Built in future increases

Leading to significantly enhanced expected bonuses

Long term asset allocation in reference portfolio

• Asset allocation drives bonuses

o Aggressive allocation to equities

o Total equity exposure of 60%

o Bonds split between inflation-linked

and conventional

• High equity exposure improves the

increase expectations over the longer

term

Drivers of future increases

• Future increases depend ono Return on underlying investments (1) o Explicit charges (2)o Implicit charges (3)o Chosen PRI (4)o Mortality profits (5)o Distribution of built-in increases (6)

• Future increases ≈ (1) - (2) - (3) - (4) ± (5) + (6)

• Typically only the price and 4 are used to compare WPA’s

Drivers of future increasesWhat differentiates GGWPA

• Future increases depend ono Return on underlying investments (1) (Expected to be 0.64% higher

than competitors)o Explicit charges (2) (0.7% lower than competitors)o Implicit charges (3) (generates 1.35% higher expected increases)o Chosen PRI (4)o Mortality profits (5)o Distribution of built-in increases (6) (0.96% higher expected

increases)

• Future increases ≈ (1) - (2) - (3) - (4) ± (5) + (6) = 3.65%

• Typically only the price and 4 are used to compare WPA’s

How traditional market offerings claw back adverse performance from policyholder increases

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Rolling 12-month return in excess of 3.5% PRI

What happens here?

What happens here?

Increase comparison (Annual increases)

Pension increase history compares well to competitorsIncreases based on a 3.5% PRI

Increase comparison (Cumulative)

-0.05

0.15

0.35

0.55

0.75

0.95

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Year

Cumulative increase - 3.5% PRI

Golden Growth Competitor A Competitor B

Dynamic Hedging

• If you have a known set of cash flows and

• If increases are explicitly based on some reference asset and

• If we have information about the riskiness of the reference asset

• Then you can accurately determine a market value of the cash flows and increases

• Dynamic Hedging used to price and manage risks

• Different from an expected value approach to pricing and managing risk

Dynamic Hedging

• Risk neutral pricing determines an accurate market price of guarantees

• Prices the cost of non-negative increases up front

• Allows more exposure to growth assets in the reference portfolio

• Transparent

• No inter generation smoothing i.e. no cross-subsidy at inception

• No conflict of interest between shareholders and policyholders

• Reduced capital requirement means lower charges to policyholders

• Metropolitan were the first to introduce this pricing technology in 2007

How dynamic hedging works

Smoothing formula

• Momentum’s smoothing formula is fully transparent• The weighted average of the past 6 years returns on underlying assets

2006 2007 2008 2009 2010 2011 YTDYear t-5 t-4 t-3 t-2 t-1 t

Weight 5.0% 7.5% 15.0% 17.5% 25.0% 30.0%

Return 7.0% 7.0% 7.0% 14.4% 12.1% 5.4%*

* The 2011 return is YTD to July

6. Built-in increases

• To compare Momentum’s level of built-in increases with a traditional competitor that has a bonus stabilisation reserve of zero after 6 years, you need to assume future returns will equal the PRI% p.a.

Post Retirement Interest Rate (PRI)

Expected future returns 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%

PRI% 21.1% 19.3% 17.6% 16.0% 14.4% 12.8%

Bonus & Increase for 2012

PRI Increase

2.5% 6.83%

3% 6.26%

3.5% 5.7%

2012 Bonus is 9.5%

2012 increases for the various PRI’s

Benefit options• Spouses pension:

o Spouses pension reversion chosen by the pensioner at retirement and

in case of multiple spouses the pension will be divided amongst all the

surviving spouses

• Guarantee period:

o Maximum of 15 years

• Children's pension:

o Provide children's pension up to the age of 18 - can be extended to 25

with proof of study

• Lump sum death benefit

• Bonus pension (13th cheque)

Post Retirement Interest Rate• Maximum PRI is 3.5%

• Consider it the minimum net investment return required to maintain a

pensioners current level of income

• The PRI is the level of investment guarantee provided by the insurer.

• PRI (%) is CHOSEN by the pensioner to meet their needs- once the PRI is

chosen it can’t be changed later on

• Based on the PRI selected a guaranteed regular pension amount FOR

LIFE is calculated e.g.

o High PRI = high initial pension & low increases

o Low PRI = low initial pension & high increases

Product Fees

• Initial Administration Fee: 1% plus R174 during 2012 increasing by CPI

every year.

• Monthly Administration Fee: An amount of R52.50 per pensioner per month,

during 2012 increasing by CPI every year. The monthly fee is in respect of

ongoing administration functions.

• Annual Fee: 1% p.a. and increases by 0.05% for every 0.5% of PRI above

2.5%. For example, for a 3.5% PRI the fee is 1.10%. This covers the capital

charge, expense charge and asset management fee.

Annuity Retailisation

What is Retailisation?

• ABSA Consultants and Actuaries partners with an insurer to provide a

selected annuity product to retiring members on retirement

• Selection of an annuity product that is appropriate for most members at

retirement

• Retiring members have a good starting point for securing their retirement

income

• Cost effective solution for enable retiring member to achieve financial goals

in retirement

• The quotes and subsequent processes are streamlined between the

insurer and, typically, the Fund administrator

How can Momentum EBI assist?

• We are experienced in the annuity retailisation process

• Transnet and Alexander Forbes are some of our successes

• We have a range of products to choose from

o With-Profit Annuities

o Inflation-Linked Annuities

• Flexibility in methods for obtaining quotes

• If preference for individual advice to members, remuneration can be

fee-based or commission-based

What is required to implement retailisation?

• Choose the appropriate annuity product and quotation specifications

• i.e. The financial planners/advisors

• Discuss and implement the various processes

o Quotation and initial communication

o New business submission process

Example: Fund’s preselected quotation specificationsCriteria Selection *

Pension Portfolio Name Momentum Golden Income With-Profit AnnuityPension Increase Type With-ProfitPricing Interest Rate 3.5%Pension Payable Monthly in ArrearAnnual Increase Date 1 AprilFirst Increase ProportionateMinimum Capital Purchase Amount

R 250 000

13th Cheque Not ApplicableGuaranteed Period 5 Years

Second Life Pension Spouses Pension, if married No second life, if not married

Second Life Pension Percentage 75%Commission No Commission

* Specifications have been selected as a default. Members may request some changes and we can quote based on their individual requirements.

Information needed from the Fund’s administration team for quotations• Pre-selected default quote specifications

• The additional information needed is (can be supplied in an excel form):

o Member’s name and surname

o Gender

o Date of birth

o Date of retirement

o Spouse date of birth

o Capital Purchase amount

Requesting quotes• There are three ways that quotes can be supplied

• The options are:

o Quotation requests can be e-mailed to Momentum's quotes team, who

will respond in one working day web-based quotation system

o Fund administrator login to

o Automated interface - Build IT Webserver interface where Fund’s

administration system seamlessly requests quotation from

Momentum’s quotation system

• The option selected is driven by expected quotation volumes, Fund

administration system capabilities, administration resources available etc

Momentum Annuity Quotation

Cover letter

• Fund and Advisor will need

to decide on the detail in the

letter to be sent out with the

annuity quote to the member

Once client has accepted quotation

Take on requirements

Momentum requires the following information for all new pensioners in order to comply with the latest requirements from SARS. This is a legal requirement without which Momentum will be unable to process new business applications.

1. Initials, first two names and surname;

2. ID Number; (spouse’s ID number where applicable)

3. Passport number and country of issue (where no SA ID is available);

4. Date of Birth;

5. Spouse’s Date of Birth;

6. Income tax reference number;

7. E-mail address (where available);

8. Business, cell, home telephone and/or fax numbers;

9. Physical business, postal and residential address;

10. Directive numbers (where applicable);

11. Bank account details, including:

a. Bank account type;

b. Bank account number (into which the salary, pension or annuity

is paid);

c. Bank Name;

d. Branch name and number;

e. Account holder name; and

f. Account holder relationship (either own, joint or third party).

The Fund will need to submit to Momentum’s quotes team:

• Signed quotation;

• Signed and completed

application form;

• Proof of payment of

purchase amount;

• Member’s take on

requirements

Retail annuity timeline*Time Process Responsible

Prior to members’ retirement

Receive details of members expected to retire in x months and request quotes Fund/Advisor

1 working day Prepare/request quotes from EB Annuities EB Annuities

After receiving quote

Retirement packs circulated to members incl. 1) Cover letter2) Individual retirement quote3) Annuity brochures4) Annuity application form

Fund/Advisor

Accept quote within 3 months

Quote needs to be accepted within 3 months or we will need to requote Member

3 months prior to retirement

Provide signed annuity quote to quotes team, together with signed application form. Fund/Advisor

Post retirement date EB annuity purchase process commences and regular pensions are paid to members EB Annuities

* Fund needs to decide on the timeline to following

Process flow chart *

Momentum’sannuity quotes

team

Fund’s administration

teamRetiring member

Send quote1 working day

Request memberquotes

Attach letter &quote & mail to client

Receive signed quote, application with take on requirements

Forward client’s signed quote, proof of payment, application with take on requirements

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* Refer to the retail annuity timeline for timings

Send acceptance letter & contract document6

Service Level Agreement

• To be entered into between ABSA C & A and Momentum

• Clarifies responsibilities and service standards

EB Annuities Quotes Team Contact Details

Quotes, queries and assistance.

E-mail: ebannuities@momentum.co.za

Tel: 021 917-3010

Annuity payment process

• Once application form with supporting documents are submitted and

purchase consideration paid

• Annuity payment commences

Communication to annuitants

• Welcome letter and contract at inception

• Monthly remuneration advice

• Annual tax certificates and annual pension increase letters

• With-Profit Annuity – Feedback Reports twice a year

• Support by a dedicated administration team

Conclusion

Conclusion

• Significant value add to retiring member in securing retirement income

• Low cost option

• Comfort regarding welfare of retiring members-pursuit of best advice for

financial planners

Disclaimer• This presentation  should not be  regarded  as  advice.  Whilst all reasonable 

care  has   been  taken  in  the  preparation  thereof, MMI Holdings Limited, its

subsidiaries, including Momentum Group Limited and Metropolitan Life Limited,

and its employees shall not be liable  for any loss, damage (whether direct or

consequential) or expense of any nature which may be suffered as a result of or

which may be attributable , directly or indirectly , to the use of or reliance upon it.

• We suggest that you consult your financial advisor  before taking any decision

based on this presentation.