1. 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

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

3. 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

4. Drawdowns and Annuities
Annuity

5. 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.

6. 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)

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

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

17. 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:

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

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

20. 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

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

22. 875 Next Steps Consumer friendly metrics Retirement Goal Grade
Income requirements B
Inflation matching A+
Death benefit C
Flexibility
875
Consumer friendly metrics

23. Thank you Marie-Lise Tassoni and Kyle Audley
and
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
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24. 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