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Variable Annuities

This session from the Faculty of Actuaries explores variable annuities as a response to the decline of with-profits and defined benefit pension schemes. Highlighting substantial growth in markets like the USA and Japan, the discussion covers recent product launches in the UK and Europe. Key features include guaranteed minimum withdrawal benefits and a unique equity backing strategy. The meeting engages participants in critical discussions about market conditions, consumer benefits, hedging techniques, and the role of actuaries in the evolving landscape of retirement products.

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Variable Annuities

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Presentation Transcript

  1. Variable Annuities Faculty of Actuaries Sessional Meeting 17/03/08

  2. The Next Big Thing • Bridges the gaps left by the decline of with-profits and defined benefit pension schemes • Strong growth in the USA and Japan • Product launches in the UK and throughout Europe

  3. Sample Product Design • Guaranteed Minimum Withdrawal Benefit • 5% pa guaranteed income at age 65 • Annual Step-Up (subject to 15% maximum to age 75) • 60 % Equity Backing Ratio • Charge for Guarantee 0.75 % pa

  4. Customer Outcomes (1)

  5. Customer Outcomes (2)

  6. Customer Outcomes (3)

  7. Customer Outcomes (4)

  8. Cost at 30/06/07 = 0.49 % pa Sensitivity 1% absolute fall in interest rates – 0.82 % pa 25% relative increase in equity vol – 0.67 % pa Longevity 80% of central assumptions – 0.60 % pa Pricing

  9. Instantaneous Stresses

  10. Projection over time – Unhedged

  11. Hedged

  12. Measures of Economic Capital at Risk

  13. Regulatory Constraints • Example 1 – poor investment returns and withdrawals lead to GAD Max falling below guaranteed income constraining pension • Example 2 – GAD Min increases above guaranteed income forcing higher payments at expense of long term guarantee level

  14. Market Conditions

  15. Discussion Topics (1) • Is the authors’ optimism regarding the prospects for the product justified ? • Is there a genuine consumer benefit from these products ? • Will domestic companies succeed in this market or will companies with established track records elsewhere dominate ?

  16. Discussion Topics (2) • Will hedging techniques perform as intended in extreme market conditions ? • What changes to legislation would facilitate better outcomes for the customer (and acceptable outcomes for HMRC) ? • Are actuaries well equipped to develop and market these products ?

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