CRC 2015– Breakout #9Retail Longevity / DecumulationA discussion around retirement products for the retired.

Challenges and Opportunities

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Agenda1. Introduction - George Graziani (5)

2. Retail Longevity/Decumulation–Retirement Products and Strategies–Mark Warshawsky (10)

3. Building Sustainable Income with longevity in mind –Steve Tedesco (10)

4. Retail Longevity/ Decumulation – George Turpie (10)

5. Retail Longevity - Timothy Paris(10)

6. Q&A (15)

IntroductionGeorge Graziani

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Risk Tolerance and Focus is Personal…Longevity is a Trend

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Growth Potential

Bequest

Liquidity

Lifetime Income

Canadian Market Size

Retail Retirement Nest Eggs:$1.5Trillion Assets*

RRSP contributions 2012:$35B made by 6 Million People

*Assets ,here includes DC plans, RRSPs, LIRAs, RRIFs , and RSPs

Retail Longevity/Decumulation–Retirement Products and StrategiesMark Warshawsky

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RETAILLONGEVITY/DECUMULATION –RETIREMENT PRODUCTS ANDSTRATEGIESMark J. Warshawsky, Ph.D.,ReLIAS LLC59th Annual Canadian ReinsuranceConference, Toronto, Ontario

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AGENDA

•Market•Needs of Retired Households•Retail Products• Income and Asset Strategies•Empirical Analysis

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MARKET (Canada, Macro)

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MARKET (US, Micro)

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NEEDS OF RETIRED HOUSEHOLDS• Putting aside those well covered by social and/or employer

pensions and those with very high net worths….• Retired households need a plan that accounts for

• Uncertainty about longevity• Risky asset returns (including real estate) and interest rates• Uncertain inflation, general and specific• Uncertain uninsured expenses, especially long-term care• Need or desire for inter vivos transfers• Dynamic and likely declining cognitive abilities• Bequests• Current and possibly different future tax policy• Different and personal attitudes toward risk, future spending, liquidity,

and legacies.• Different and personal expectations of health and future employment,

and demographic and asset holdings.

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RETAIL RETIREMENT PRODUCTS• SPIAs

• Deals well with risks of longevity, declining cognitive abilities, anddownside asset returns – produces high income for life

• Deals poorly with timing risk, inflation, liquidity, and bequests• Inflation-indexed SPIAs

• Covers inflation risk well• Higher load; thin market

• DIAs• Only part of a strategy• Higher load; relatively thin market

• Variable annuity with GMWB (or similar wrappers)• Solves liquidity and timing risk problems well, bequests not so well• Complex, somewhat constrained, and seems quite expensive

• Personal Endowment• Solves liquidity and bequest problems well• No guarantees; produces relatively low income; governance?

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INCOME AND ASSET STRATEGIES• The “Bengen Rule”

• 4% inflation-adjusted distribution from a mixed asset portfolio• Financial advisors’ workhorse; also investment companies’• Recent concerns that it is too aggressive and risky, given low

interest rates, high stock market, and increased lifespans• 3% distribution or even less may be more appropriate

• Fixed or increasing percentage distribution• Laddered purchases of SPIAs

• Dollar cost averaging – deals well with timing and inflation risks• Can provide for liquidity and bequest needs, in combination with

other strategies; also somewhat flexible

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EMPIRICAL ANALYSIS – HISTORICALSIMULATIONS (1919 – 2013)

Simple Comparison For All Cohorts of Annual Real Income Flows (toage 110) between Bengen Rule and J&50%S Life Annuity

RetirementAge

Number of CohortsBengen Rule Has HigherAverage Income

Number withHigher WeightedAverage Income

Total Numberof CompleteCohorts

Mean AverageValue ofDifference

MeanWeightedAverage Valueof Difference

55 30 26 40 $720 -$38

62 25 9 47 -$55 -$1,007

65 23 2 50 -$480 -$1,549

67 20 0 52 -$794 -$1,979

70 8 0 55 -$1,302 -$2,708

EMPIRICAL ANALYIS – HISTORICAL SIMULATIONS

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Means of Inflation-Adjusted Annual Income Produced by A CombinationStrategy from a $100,000 Retirement Account, Historical Simulations ofCohorts Retiring at Age 70 from 1919 through 1983, in the First, Tenth,Twentieth and Thirtieth Years After Retirement

Combination Strategy ComboTotal Fund Annuity Fund Less

Payment Balance Payment Payment AnnuityOnly

Year 1 $4,191 $84,485 $1,248 $2,943 -$4,448

Year 10 $4,688 $96,777 $1,318 $3,370 -$2,126

Year 20 $5,145 $112,892 $1,194 $3,951 $256

Year 30 $5,117 $122,789 $819 $4,298 $1,783

Mark.Warshawsky@reliasllc.com

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Building Sustainable Incomewith longevity in mindSteve Tedesco

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with longevity in mind

BUILDING SUSTAINABLE INCOME

Steve Tedesco, BMath, FSA, FCIA

April 2015

[70%]

Source: 2014 Sun Life Financial Canadian Unretirement™ Index

97% of respondents say it’sVERY IMPORTANT SOMEWHAT IMPORTANTOR

[27%]to them that some of theirRETIREMENT INCOME IS GUARANTEED

for the rest of their lives.

of respondents arenot sure if theywould consider

of respondentssay that62 %

THEY DON'T UNDERSTANDannuities well.

61%

buying a life annuityat any life stage as a&

GUARANTEED RETIREMENTINCOME option.

IS 100 THE NEW 85?

were concerned because they DON’T HAVE A PLANthat would ensure their money would outlasttheir life.

of respondents were concerned about

outliving their money.

On average, respondentsaged 55-72 expected theywould only live to age80.

IS 100 THE NEW 85?

Source: The Canadian Pensioners’ Mortality Table published by the Canadian Institute of Actuaries in 2014.

80 years old

85 years old

90 years old

95 years old

65%76%

45%59%

24%38%

9%17%

Probability (at age65) of living to thefollowing ages91%

77%

53%

24%

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Money for Life

Payout Annuities

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Payout Annuities

Managing the long tail risk

History is Compelling

Source: J. Oeppen & J. Vaupel (2002) - highest female life expectancy at birth

Actuaries…

…have been consistently wrong inpredicting a slowdown.

Source: J. Oeppen & J. Vaupel (2002) - highest female life expectancy at birth

And ……”oodles” of potential medicaladvancements on horizon.

Source: J. Oeppen & J. Vaupel (2002) - highest female life expectancy at birth

On the other hand…

Law of Diminishing Returns:The “S” Curve• Exponential processes follow sigmoid curve or

“S” curve.• Phenomenon crosses natural, technological,

business processes.

InflexionPoint

Maturity plateauthen decline

Initialinefficiency

Improvementphase

Longevity & the “S” Curve

IndustrialRevolution

GreatDepression

Post WarBoom

80s+ Debt-Fueled Growth

• Socio-economics deteriorating globally

• Who’s gonna pay for this stuff??: everyone’s broke

• Demographic ‘tsunami’ impact on

health care and economy

• Rapid global environmental degradation

• Inter-generational conflict

• Cheap-to-extract oil:

thing of the past• Decades long trend of improvement

• Many areas of potential medical breakthroughs

• Increasing awareness of healthy lifestyles

Worseningboom/bust cycles

?

Post CarbonWorld

The survival curve

Squaringeffect

“Mortality Projections for Social Security Programs in Canada: Actuarial Study #12”, OSFI[Note: red overlay added]

The survival curve “ah ha”ROI impact if a stronger industry table is adopted

Wrap up

• Making good on our promises to clients is paramount

Wrap up

• Making good on our promises to clients is paramount

• SLF took an industry leading position:Strengthened improvement assumption

Wrap up

• Making good on our promises to clients is paramount

• SLF took an industry leading position:Strengthened improvement assumption

• But tempered our view of improvement compared to

those crazy reinsurers (George)

Retail Longevity/ DecumulationGeorge Turpie

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Retail Longevity/ Decumulation

Speaker George TurpieDate April 14, 2015

Long Term Rates

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

1/19

2612

/192

911

/193

310

/193

79/

1941

8/19

457/

1949

6/19

535/

1957

4/19

613/

1965

2/19

691/

1973

12/1

976

11/1

980

10/1

984

9/19

888/

1992

7/19

966/

2000

5/20

044/

2008

3/20

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US LT Govt10 yr Cdn Govt

3.02%

7.68%

3.82%

Importance of Annuities in LowInterest Rate Environment

• Compare Strategies– Annuity Income

• Purchase Annuity to provide guaranteed life time income– Interest Income

• Invest Proceeds and “live off the interest”– Flat % Withdrawal Rule

• Take Income of a flat of capital and increase with inflation

Comparison of KeyMeasurements

Current Rates +200bps +400bpsAnnuity Income 5.0% 6.3% 7.6%

Flat % WithdrawalIncome Expires 89 88 88

Interest Only 2.0% 4.0% 6.0%Annuity Advantage 150% 58% 27%

Make your clients’ money lasttheir whole lives

Probability of 65-year-old Canadian living beyond selected ages

Low Interest Rates andAnnuities

• Low interest rates are often used as an excuse for notpurchasing an annuity.

• Where will clients invest their money while waiting for rates inincrease?

• Importance of an annuity amplified in low interest rateenvironment

Retail LongevityTimothy Paris

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Canadian Reinsurance Conference 2015

Breakout #9 – Retail Longevity

Timothy ParisRuark Insurance Advisors, Inc.

Simple Complex

A Lesson from South of the Border

Less rich More rich

Actu

al /

Expe

cted

Death benefits Living benefits Aggregate

Models

Gradual

Kick the Can

Distraction UnmanagedLongevity Risk

Managed Longevity Risk

Simplify DataAggregation

StatisticalRigor Prudence

Timothy ParisChief Executive Officer

Ruark Insurance Advisors, Inc.860.866.7786

timothyparis@ruark.co

Q&A

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