Marie-Lise Tassoni & Kyle Audley 15 January 2019 Annuities Reinvented Are annuities the missing asset class for sustainable drawdown solutions? Marie-Lise Tassoni & Kyle Audley 15 January 2019

Milliman Actuarial insight into longevity and insurers Investment strategy expertise Stochastic retirement planning platforms Retirement research and market entry support

Retirement Landscape March 2014 Pensions freedom is announced 2015 Range of new hybrid retirement products launched June 2018 FCA’s retirement outcome review highlights lack of innovation Many insurers withdraw hybrid retirement products 2016/2017

Drawdowns and Annuities Annuity

Can replacing bonds with annuities increase income sustainability and offer competitive death benefits? “Bond-Equity” Strategy “Annuity- Equity” Strategy Drawdown investing in equities and bonds + Cash account Drawdown investing in equities + Underwritten level annuity Cash account These strategies were modelled over retirement under 1,000 different economic scenarios.

Our approach Robin 65 year old female in good health with a £100,000 pension pot Initial income of £4,000 a year increasing with inflation Underlying investment: 5% cash for flexibility, 55% equity and 40% in either annuity or bonds In each year of retirement, we calculated: Likelihood of meeting target income Average shortfall Average death benefit: (size of drawdown fund and cash account plus any payment in the guaranteed period from annuity strategy)

Likelihood of meeting target income Likelihood of a healthy 65yr old meeting target income of £4,000 a year (increasing with inflation). Fund: 55% equity, 5 % cash, 40% Bond or annuity Likelihood of survival Likelihood of survival

Flat income requirement Likelihood of a healthy 65yr old meeting target income of £4,000 a year (fixed). Fund: 55% equity, 5 % cash, 40% Bond or annuity Likelihood of survival

Increasing target income Likelihood of a healthy 65yr old meeting target income of £8,000 a year (increasing with inflation). Fund: 55% equity, 5 % cash, 40% Bond or annuity Likelihood of survival

Decreasing target income Likelihood of a healthy 65yr old meeting target income of £3,000 a year (increasing with inflation). Fund: 55% equity, 5 % cash, 40% Bond or annuity Likelihood of survival

Health statuses Likelihood of a 65yr old meeting target income of £4,000 a year (increasing with inflation). Fund: 55% equity, 5 % cash, 40% Bond or annuity

Health statuses Age at which annuity-equity strategy outperforms bond-equity strategy Average life expectancy Healthy 90 94 Reasonable 88 Challenging 82 83 Critical 81 70

Average shortfall Average Shortfall in meeting target income of £4,000 a year (increasing with inflation) for a healthy 65yr old Fund: 55% equity, 5 % cash, 40% Bond or annuity

Death Benefit AVERAGE DEATH BENEFIT FOR HEALTHY 65YR OLD TARGET INCOME OF £4,000 A YEAR (INCREASING WITH INFLATION). FUND: 55% EQUITY, 5 % CASH, 40% BOND OR ANNUITY Likelihood of survival

Death benefit variance DEATH BENEFIT variance FOR HEALTHY 65YR OLD, TARGET INCOME OF £4,000 A YEAR (INCREASING WITH INFLATION). FUND: 55% EQUITY, 5 % CASH, 40% BOND 75th percentile: 75% chance of results being lower or 25% change of results being higher 10th percentile: 10% chance of results being lower or 90% change of results being higher

Death benefit variance Fund: 55% equity, 5 % cash, 40% bond Fund: 55% equity, 5 % cash, 40% Annuity

Conclusions 1 Combining annuity with equity drawdown can lead to higher death benefits and higher likelihood of meeting target income levels 2 3 Not suitable for everyone Annuities shouldn’t be discounted when considering retirement options Our white paper: www.milliman.com/annuities-reinvented

Next Steps Further annuity purchases Other sources of retirement wealth and income Complex customer behaviour Consumer friendly metrics

Deferred annuity strategy Next Steps Age-based Fund-based Further annuity purchases Deferred annuity strategy

Next Steps Other sources of retirement wealth and income Each source of income has its own characteristics, and interacts differently with a given retirement strategy Defined Benefit pensions Private pension provision Supplementary income Property and Equity release Other sources of retirement wealth and income

Performance-based spending Next Steps Spending patterns Performance-based spending Long term care Complex customer behaviour Unknown events

875 Next Steps Consumer friendly metrics Retirement Goal Grade Income requirements B Inflation matching A+ Death benefit C Flexibility 875 Consumer friendly metrics

Thank you Marie-Lise Tassoni and Kyle Audley marie-lise.tassoni@milliman.com and kyle.audley@milliman.com This presentation has been prepared for illustrative purposes. The information herein shall not constitute advice and shall not be relied on. All of the assumptions are intended to be purely illustrative. All of the results presented throughout this presentation are based on simulated or hypothetical performance results that have certain inherent limitations Where the authors of this document have expressed views and opinions, these are views of their own and are not necessarily held by Milliman This is an example of a THANK YOU — BLUE page. To change the text, double-click in the text box. Text box may need to be resized to accommodate longer quotes.

Disclaimer The views expressed in this presentation are those of the authors, Marie-Lise Tassoni and Kyle Audley, of the paper and not necessarily of the Staple Inn Actuarial Society or Milliman