Different Types of Annuities

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Different Types ofAnnuities

Mr. Kenver Regis

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Structure of the talk

• What do we mean by annuities?

• Distinguishing between annuity payments

and annuity products.• The type of annuity products.

• ow annuity products can he!p bridge the

transition from accumu!ation to payoutphase.

• The ris"s invo!ved #e.g. !ongevity ris"$.%


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What is an annuity?

• &n annuity is an amount of money paid tosomeone at some regu!ar interva!.

• Most peop!e thin" in terms of annuityproducts' an agreement or contract forone person or organisation to pay another

#the annuitant$ a stream or series ofpayments #annuity payments$.

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Annuity payments and products

• & pub!ic pension is a stream of incomepaid at regu!ar interva!s.

• The pension benefits paid by a defined) benefit pension p!an is a stream of incomepaid at regu!ar interva!s.

• &n annuity product is a contract* differentfrom an annuity payment.

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Annuitization

• ,inancia! economics' peop!e better off if a!arge share of their retirement income isannuiti-ed #protect against !ongevity ris"$

• nti! recent!y peop!e where heavi!yannuiti-ed through pub!ic pensions andD/ pension p!ans.

• They both provide a constant stream ofincome at retirement or annuity payment.

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Relevance of annuity products

• Recent changes in pub!ic pensions' !ower RR.

• hift from D/ to D2 funded pension p!ans

• 3eed to buy annuity products to protectagainst ris"s* especia!!y !ongevity ris" #the!i"e!ihood of out!iving one4s resources$.

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Relevance of annuity products

• ome countries in 6& and 277 haveintroduced D2 persona! p!ans as main sourceof retirement income.

• &t retirement* pension wea!th is the form of a!ump)sum. Retirement income is notannuiti-ed.

• &nnuity products cou!d he!p in bridging theaccumu!ation and the pay)out phase.

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Type of annuity products

• There are severa! dimensions to c!assifiedannuity products.

• &ccording to the type of guarantees theyprovide.

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According to how they financed

• ing!e premium

• ,!e:ib!e premium #e.g. contributions$

; ,i:ed;


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According to primary purpose

• >mmediate pay)out

• Deferred #accumu!ation$

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According to the underlyinginvestment

• &ccording how annuity products createfuture va!ue

• ,i:ed' guarantee a return and a specificpayout at retirement.

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According to the nature of thepayout commitment

• The duration of the payout

• 6ife' payout !ast for the !ife time of the

annuitant• ,i:ed)tem or certain' e.g. 1 years

• Temporary' payout !ast for the ear!ier of the

two

• Auarantee' payout !ast for the !ater of the two

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According to the providers

• Bua!ified annuities' the provider during both the accumu!ation and the pay)outphases is the same #annuities as vehic!es

attached to certain retirement p!ans*+1#"$s* >R&s$

• 3on)@ua!ified' providers are separateentities

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According to …

• Ceop!e covered; ing!e

; oint)survivor

• Way annuity is purchased; >ndividua!

; Aroup

• Ether feature; 7nhanced or impaired

; >nf!ation inde:ed

; Ta: advantages1+


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Several dimensions to classify annuities

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Annuity products and guarantees

• What distinguishes the different type ofannuity products is the type of guaranteesthey provide

• These guarantees determine the si-e of theris"s invo!ved in annuities'

; 6ongevity ris".

; >nvestment ris".; >nterest rate ris".

; >nf!ation ris".15


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Annuity products and risks

• 6ife* deferred and fi:ed annuity. This is theannuity product that rep!icates a D/ p!an

1. >mpact of 6R on the tota! amount ofannuity payments #!iabi!ities$

#6R' uncertainty regarding future morta!ity

and !ife e:pectancy outcomes$%.The interaction btw the ris"s invo!ved

#interest rate and 6R$' super)additivity.18


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The impact of unexpected gains in LEx

• >ncrease in the 3C< of annuitypayments to an individua! aged8* 50* 00 and (0 in %0.

• The payment is 1.F in %0. Wages grow at 1.80G* inf!ation

1.80G and the discount rate is(.0G

• /ase case' using current !ifetab!es.

• 2ase 1' using proHections of

improvements in !ife e:pectancyat birth of on!y 1.% years perdecade.

• 2ase %' !ife e:pectancy at birthincreases a %.% years per decade.

A fund (membership structure 2.5, 10,

25 and 62.5%)


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Interest rates

Improvements in life epectanc! ".5 #.5 5.5

$o improvements, latest available mortalit! table used (2005)

individual aed 65 in 2005 11&.6 10&.6 100.0

individual aed 25 in 2005 25#.6 15&.' 100.0

ife epectanc! improves b! 1.2 !ears per decade

individual aed 65 in 2005 122." 111.6 102.#

individual aed 25 in 2005 "12. 1'2.6 11'.&

Impact of lonevit! improvements and chanes in interest rates on annuit! pa!ments

*ercentae chane in the net present value of annuit! pa!ments, 2005+ 20'0

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Conclusions

• &nnuity products cou!d he!p bridge thetransition from the accumu!ation to thepayout phase.

• evera! types of annuity products dependingon the type of guarantees provided.

• Depending on those guarantees differentimpact of ris"s.

• 6R non)neg!igib!e. uper)additivity effect.%1


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THANK YOU!

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Different Types of Annuities

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