Status, Importance and
Measures for Development of
Annuity Products after
Introduction of Voluntary
Pension System
Javed Ahmed
President, Pakistan Society of Actuaries
Presentation Summary
 Overview of Voluntary Pension System
 Annuity Market and Need for Annuity
Products
 Annuity Products
 Challenges for Insurance Companies
Overview of Voluntary
Pension System
 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
Key Aspects of Pre and Post
Retirement Periods in VPS
Pre-Retirement Period
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Investment
Withdrawals
Charges
Administration
Unit Pricing
Trustees
Market Conduct
Post-Retirement Period
Retirement
 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
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
Annuity Market and
Need for Annuity
Products
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
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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
Annuity Products
Types and Additional Benefits
 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
Challenges for Insurance
Companies
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