Presentation on theme: "Status, Importance and Measures for Development of Annuity Products after Introduction of Voluntary Pension System Javed Ahmed President, Pakistan Society."— Presentation transcript:
Status, Importance and Measures for Development of Annuity Products after Introduction of Voluntary Pension System Javed Ahmed President, Pakistan Society of Actuaries
OOverview of Voluntary Pension System AAnnuity Market and Need for Annuity Products AAnnuity Products CChallenges for Insurance Companies Presentation Summary
VPS operates under the VPS Rules notified by the SECP Aims to encourage post-retirement savings through tax advantages encouraging competition making necessary products/saving vehicles available Flexibility provided through portability of benefits and options available at retirement
Pre-Retirement Period Post-Retirement Period Retirement Investment Withdrawals Charges Administration Unit Pricing Trustees Market Conduct Retirement Age : 60 – 70 years On onset of defined disability deemed to be retired Options available on retirement Purchase of annuities through life insurance companies Key Aspects of Pre and Post Retirement Periods in VPS
Post-Retirement Period Converting assets into income in orderly manner increasingly important for ageing population Importance of structures available at retirement: Post-retirement period may be as long or longer than the pre-retirement period Investment strategy for retirement income is a delicate and critical issue Greatest risk faced by those saving for retirement is outliving their assets
Options Available at Retirement in VPS 1. Cash + Annuity Withdraw up to 25% of individual pension account as cash and use remaining amount to purchase annuity from life insurance company of choice 2. Cash + Income Drawdown + Annuity Withdraw up to 25% of individual pension account as cash and withdraw monthly installments till age 75 years according to income payment plan. At end of period purchase annuity from life insurance company of choice
Practical Limitations on Pension Options Many can not defer vesting due to immediate need for post-retirement income General tendency is to withdraw maximum cash allowed as lump sum Income drawdown attractive option; however, arguably only for the affluent
Financial Planning Challenge No one knows how long he/she will live. This leads to difficulty that people may: Outlive their assets, and die in poverty Restrict their living standard needlessly and die excessively rich No one knows what will be the investment returns in future.
Annuity Solution Solution to the financial planning challenge is to insure against longevity, passing the risk to the insurer Annuities take large premium and turn it into fixed income stream until death providing insurance against longevity and investment risk Many types with added protection and cost
Problems in Annuity Market Perceptions - Belief that annuities are poor value for money Products - Lack of products that match consumer needs for income flexibility Processes - Inadequate distribution and marketing processes Politics - Withdrawal of tax advantages in subsequent years Liquidity and Flexibility - People want liquidity and flexibility for emergencies, bequest for family if they die early
Section 18(3) VPS Rules states “The annuity purchased may be single life, joint or survivor life, level (with or without guarantee period), increasing, investment-linked and retail price index linked or with any additional features as may be offered by the Life Insurance Companies” Life Insurance Companies need to develop competitive annuity products to cater for the consumer needs
Type of Annuities Conventional Annuities Enhanced/Lifestyle Annuities Impaired Life Annuities Flexible Annuities With-profit Annuities Investment-Linked Annuities
Conventional Annuities Safest type of annuity for retiree Guaranteed income regardless of investment conditions and life span Medical examination would generally not be required Downside - locked into the annuity rate prevailing at the time - if the interest rates improve in future, retiree will miss out
Enhanced/Lifestyle Annuities Essentially a conventional annuity paying enhanced annuity rate because life expectancy may be shorter due to lifestyle or state of health Some medical examination would be required May be eligible if suffering e.g. from diabetes, liver condition, cancer etc.
Impaired Life Annuities Basically a conventional annuity, but rates enhanced dramatically due to significantly reduced life expectancy Typically retiree would have less than 5 years to live Usually requires full medical underwriting
Flexible Annuities Allows flexibility in levels of income Contains investment element, which adds to complexity Example - rolling 5 year annuity Premium for annuity divided into two portions: one for investment and other for purchase of temporary annuity for 5 years, with option to renew for another 5 years at the end of each 5 years or buying a life time annuity
With-profit Annuities Pays bonuses based on performance of the fund Bonuses are smoothed Allows participation in investment returns, whilst giving smoothed income stream
Investment Linked Annuities Pension fund capital is invested in insurance company’s own managed investment fund Similar to with-profit annuities but there is no smoothing effect to income stream Income is derived from disposal of units, and because they can vary in value, income will vary
Additional Benefits Additional benefits can be added to annuity package Cost of additional benefits is reflected in annuity rates being offered Examples of additional benefits Escalation Joint and Survivor Pension Payment Guarantee Period Income Frequency
Mortality tables for population don’t exist Annuitants are select group with higher longevity Future mortality improvements unknown; likely to be high Long term financial instruments not available resulting in asset/liability mismatch risk
Future interest rates unknown, reinvestment risk high Future inflation unpredictable and indexed bonds unavailable; price-indexed annuities not credible Companies may expand now, problem could show up later – long term planning is essential
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