strategies at retirement John Anderson Steven Empedocles Actuarial - - PowerPoint PPT Presentation

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Jun 21, 2023 156 likes •316 views

The Retirement Income Frontier and its application in constructing investment strategies at retirement John Anderson Steven Empedocles Actuarial Society 2016 Convention 23 24 November 2016 The South African annuity puzzle Most SA

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Actuarial Society 2016 Convention 23 – 24 November 2016

The Retirement Income Frontier and its application in constructing investment strategies at retirement

John Anderson Steven Empedocles

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Actuarial Society 2016 Convention 23 – 24 November 2016

The South African “annuity puzzle”

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  • Full annuitisation is
  • ptimal where there is

no bequest motive

Economic theory

  • Just Retirement SA

research

  • Sanlam Benchmark

2015

Most SA pensioners want guaranteed income for life

  • 2015 ASISA statistics :

90% of flows to living annuities

  • Increasing % to living

annuities over time

Yet most pensioners have no actual longevity protection

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Actuarial Society 2016 Convention 23 – 24 November 2016

The industry is currently more geared towards living annuities…

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World Development Report Framework Relevance to South Africa

Thinking socially

  • High real return expectations
  • Investing, rather than annuitising, popularised
  • Mistrust of life insurance companies
  • Intermediaries very influential in shaping decisions
  • Business models geared towards living annuities

Thinking with mental models

  • “Investment framing” used for post-retirement instead of

“consumption framing”

  • Little evidence of advisor frameworks balancing trade-off

between living and life annuities Thinking automatically

  • Options at retirement currently presented as complex
  • In the face of complexity people think automatically
  • Resort to rules of thumb and mental models based on “how

to invest” rather than “how to convert” capital into income

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Actuarial Society 2016 Convention 23 – 24 November 2016

Our aim is to improve decisions at & during retirement by…

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Creating mental models for key trade-offs at and into retirement

  • Sustainable income
  • Flexibility / liquidity / provision for heirs

Introducing the “retirement income frontier” to arrive at

  • ptimal retirement income strategies taking account of
  • Individual circumstances (age, gender, level of savings etc)
  • Individual goals and being able to trade-off between the key objectives
  • Individual preferences for risk tolerance

Introducing “consumption framing” as the framework after retirement and…

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Actuarial Society 2016 Convention 23 – 24 November 2016

Mental Model Metrics

= 𝑈=1

∞

[𝑅(Percentage Income NeedsT)0.1 . 𝑚𝑦+𝑈 𝑚𝑦 𝑈=1

∞

𝑚𝑦+𝑈 𝑚𝑦 =

𝑈=1 ∞

[[𝑅(Discounted Total PortfolioT)0.5 . 𝑒𝑦+𝑈−1] 𝑚𝑦 ]

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Actuarial Society 2016 Convention 23 – 24 November 2016

Typical high cost retail living annuities unsustainable for 65 year old pensioners

Profile

  • Male
  • Age 65
  • ASISA 6.44%

drawdown rate

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Actuarial Society 2016 Convention 23 – 24 November 2016

Lowering costs to more “reasonable” levels improves sustainability & legacy potential

Profile

  • Male
  • Age 65
  • ASISA 6.44%

drawdown rate

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Actuarial Society 2016 Convention 23 – 24 November 2016

Profile

  • Male
  • Age 65
  • ASISA 6.44%

drawdown rate

Introducing life annuities as an “asset class” improves sustainability & legacy potential

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Actuarial Society 2016 Convention 23 – 24 November 2016

Profile

  • Male
  • Age 65
  • ASISA 6.44%

drawdown rate

The Retirement Income Frontier

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Actuarial Society 2016 Convention 23 – 24 November 2016

Profile

  • Male
  • Age 65
  • ASISA 6.44%

drawdown rate

Allocations to the life annuity “asset class” allows more risk to be taken with remaining strategy…

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Actuarial Society 2016 Convention 23 – 24 November 2016

Profile

  • Male
  • Age 65
  • ASISA 6.44%

drawdown rate

Inflation-linked annuities are sub-optimal compared to with-profit annuities

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Actuarial Society 2016 Convention 23 – 24 November 2016

Other insights into retirement income strategies…

Initial income Results

4%

  • Living annuity strategies sustainable for male and female aged 65 years

6.44%

  • Living annuity strategies unsustainable for male and female aged 65 years
  • Female aged 65 years

(i) value of support required from dependants ranges from 0% – 30% of initial capital (ii) including a suitable portion of life annuities in the investment strategy increases sustainability to 80% 10%

  • Living annuity strategies unsustainable for male and female aged 65 years
  • Including portions of life annuities improves sustainability but full

annuitisation sub-optimal

  • Value of support required from dependents ranges from 15% – 100% of

initial capital

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As initial income requirements increase, more conservative living annuity asset allocations were found to maximise lifetime spending needs.

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Actuarial Society 2016 Convention 23 – 24 November 2016

Practical application of the model to solve the “annuity puzzle”…

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Financial advisors Automated advice-giving platforms Default annuity strategies for retirement funds Optimise retirement income strategy taking into account individual data, goals and risk tolerance…

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Actuarial Society 2016 Convention 23 – 24 November 2016

Thank you

John Anderson Sygnia Asset Management janderson@sygnia.co.za 021 – 446 2464 Steven Empedocles Sygnia Asset Management sempedocles@sygnia.co.za 021 – 446 4984

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