Momentum Employee Benefits Investments –
With profit annuities training for Financial Advisors
Presenters:
Linda Ritchie
4 November 2012
Agenda
•
Background
•
Golden Income With-Profit Annuity
•
Annuity Retailisation
•
Conclusion
Background
What happens at retirement?
•
Often the largest accumulation of wealth in an individual’s life
•
Financial Goals
o Continuity of income and maintain standard of living
o Leaving money as bequest
•
Very stressful period
o Due to changes in life, maintain self worth and health
o No longer fall under “wing” of employer
o Important (sometimes daunting) decisions to be made
•
Individual often requires impartial/unbiased guidance or financial advice
What is there to choose from in the market?
•
Take benefit in cash
•
Choose guaranteed annuity from insurer
o Guaranteed to pay for life
o Guarantees current level of pension (Level annuities);
o Provide for future increases (With-profit annuities or fixed escalating);
o Guarantees inflation increases (Inflation-linked annuities)
•
Buy a living annuity
o Provides no guarantees
o If money is depleted – no further income
o If money is not depleted at death – remaining money reverts to
estate
•
Combination of guaranteed and living annuity
The market
But...
Financial Advice
•
Individual requires unbiased advice to choose the correct solution
•
Advisors need to provide “best advice” for retirees
•
Remuneration from selling living annuities greater than other annuities –
living annuities are not always appropriate for all clients
Landscape
•
Retirement Reform process
o Preservation
o Purchase annuities
o Emphasis on low cost solutions
•
Fund Trustees and Advisors are realising members left out in the cold at
retirement date
The Solution
•
Selection of an appropriate annuity product to suit the needs of most
members – still on voluntary basis
•
Obtain quotes from the various provider/s
•
Present the quote to retiree and the benefits of selecting the chosen
product
•
Low cost option aligned with proposals for retirement reform
•
Can be implemented on a default annuity selection, no advice, no
commission basis
•
Best product in the market in terms of increases
Golden Income With-Profit Annuity
Product features
Product features
•
Description – Provides regular pension for life as well as the opportunity to
participate in investment and mortality profits via an annual pension
increase.
•
Objective – To provide minimum guaranteed pension for life, aim to:
o Declare competitive pension increases;
o Avoid declaring zero pension increases; and,
o Declare pension increases that keep pace with inflation over the long-
term.
•
Risk profile – Moderate. Future increases are linked to the performance of
the assets.
•
Our guarantee – Pension will never decrease. Each time an increase is
awarded, the new higher amount is guaranteed for life.
Golden Growth’s unique features
•
•
•
•
•
Uses dynamic hedging to accurately price and manage the product
• All embedded investment guarantees priced accurately up front and no
clawbacks from future bonuses
• Funding level maintained at 100% due to dynamic hedging
• No entry time dependence – no funding level cross subsidy at entry
Lower charges, including capital charge
Transparent pension increase formula based on weighted average of 6
years underlying asset performance
Greater exposure to growth assets and these are actively managed
Built in future increases
Leading to significantly enhanced expected bonuses
Long term asset allocation in reference portfolio
•
Asset allocation drives bonuses
o Aggressive allocation to equities
o Total equity exposure of 60%
o Bonds split between inflation-linked
and conventional
•
High
equity
exposure
improves
the
increase expectations over the longer
term
Drivers of future increases
•
Future increases depend on
o Return on underlying investments (1)
o Explicit charges (2)
o Implicit charges (3)
o Chosen PRI (4)
o Mortality profits (5)
o Distribution of built-in increases (6)
•
Future increases ≈ (1) - (2) - (3) - (4) ± (5) + (6)
•
Typically only the price and 4 are used to compare WPA’s
Drivers of future increases
What differentiates GGWPA
•
Future increases depend on
o Return on underlying investments (1) (Expected to be 0.64% higher
than competitors)
o Explicit charges (2) (0.7% lower than competitors)
o Implicit charges (3) (generates 1.35% higher expected increases)
o Chosen PRI (4)
o Mortality profits (5)
o Distribution of built-in increases (6) (0.96% higher expected
increases)
•
Future increases ≈ (1) - (2) - (3) - (4) ± (5) + (6) = 3.65%
•
Typically only the price and 4 are used to compare WPA’s
-10%
Dec-91
May-92
Oct-92
Mar-93
Aug-93
Jan-94
Jun-94
Nov-94
Apr-95
Sep-95
Feb-96
Jul-96
Dec-96
May-97
Oct-97
Mar-98
Aug-98
Jan-99
Jun-99
Nov-99
Apr-00
Sep-00
Feb-01
Jul-01
Dec-01
May-02
Oct-02
Mar-03
Aug-03
Jan-04
Jun-04
Nov-04
Apr-05
Sep-05
Feb-06
Jul-06
Dec-06
May-07
Oct-07
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
How traditional market offerings claw back adverse
performance from policyholder increases
Rolling 12-month return in excess of 3.5% PRI
50%
What happens here?
40%
30%
20%
10%
0%
What happens here?
-20%
Increase comparison (Annual increases)
Pension increase history compares well to competitors
Increases based on a 3.5% PRI
Increase comparison (Cumulative)
Cumulative increase - 3.5% PRI
0.95
0.75
0.55
0.35
0.15
-0.05
2002
2003
2004
2005
2006
2007
2008
2009
Year
Golden Growth
Competitor A
Competitor B
2010
2011
Dynamic Hedging
•
If you have a known set of cash flows and
•
If increases are explicitly based on some reference asset and
•
If we have information about the riskiness of the reference asset
•
Then you can accurately determine a market value of the cash flows and
increases
•
Dynamic Hedging used to price and manage risks
•
Different from an expected value approach to pricing and managing risk
Dynamic Hedging
•
Risk neutral pricing determines an accurate market price of guarantees
•
Prices the cost of non-negative increases up front
•
Allows more exposure to growth assets in the reference portfolio
•
Transparent
•
No inter generation smoothing i.e. no cross-subsidy at inception
•
No conflict of interest between shareholders and policyholders
•
Reduced capital requirement means lower charges to policyholders
•
Metropolitan were the first to introduce this pricing technology in 2007
How dynamic hedging works
6. Built-in increases
Smoothing formula
•
Momentum’s smoothing formula is fully transparent
• The weighted average of the past 6 years returns on underlying assets
Year
2006
t-5
2007
t-4
2008
t-3
2009
t-2
2010
t-1
2011 YTD
t
Weight
5.0%
7.5%
15.0%
17.5%
25.0%
30.0%
Return
7.0%
7.0%
7.0%
14.4%
12.1%
5.4% *
* The 2011 return is YTD to July
• To compare Momentum’s level of built-in increases with a traditional competitor
that has a bonus stabilisation reserve of zero after 6 years, you need to assume
future returns will equal the PRI% p.a.
Post Retirement Interest Rate (PRI)
Expected future
returns
PRI%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
21.1%
19.3%
17.6%
16.0%
14.4%
12.8%
Bonus & Increase for 2012
2012 Bonus is 9.5%
2012 increases for the various PRI’s
PRI
Increase
2.5%
6.83%
3%
6.26%
3.5%
5.7%
Benefit options
•
Spouses pension:
o Spouses pension reversion chosen by the pensioner at retirement and
in case of multiple spouses the pension will be divided amongst all the
surviving spouses
•
Guarantee period:
o Maximum of 15 years
•
Children's pension:
o
Provide children's pension up to the age of 18 - can be extended to 25
with proof of study
•
Lump sum death benefit
•
Bonus pension (13th cheque)
Post Retirement Interest Rate
• Maximum PRI is 3.5%
• Consider it the minimum net investment return required to maintain a
pensioners current level of income
• The PRI is the level of investment guarantee provided by the insurer.
• PRI (%) is CHOSEN by the pensioner to meet their needs- once the PRI is
chosen it can’t be changed later on
• Based on the PRI selected a guaranteed regular pension amount FOR LIFE
is calculated e.g.
o High PRI = high initial pension & low increases
o Low PRI = low initial pension & high increases
Product Fees
• Initial Administration Fee: 1% plus R174 during 2012 increasing by CPI
every year.
• Monthly Administration Fee: An amount of R52.50 per pensioner per month,
during 2012 increasing by CPI every year. The monthly fee is in respect of
ongoing administration functions.
• Annual Fee: 1% p.a. and increases by 0.05% for every 0.5% of PRI above
2.5%. For example, for a 3.5% PRI the fee is 1.10%. This covers the capital
charge, expense charge and asset management fee.
Annuity Retailisation
What is Retailisation?
•
ABSA Consultants and Actuaries partners with an insurer to provide a
selected annuity product to retiring members on retirement
•
Selection of an annuity product that is appropriate for most members at
retirement
•
Retiring members have a good starting point for securing their retirement
income
•
Cost effective solution for enable retiring member to achieve financial goals
in retirement
•
The quotes and subsequent processes are streamlined between the insurer
and, typically, the Fund administrator
How can Momentum EBI assist?
•
We are experienced in the annuity retailisation process
•
Transnet and Alexander Forbes are some of our successes
•
We have a range of products to choose from
o With-Profit Annuities
o Inflation-Linked Annuities
•
Flexibility in methods for obtaining quotes
•
If preference for individual advice to members, remuneration can be
fee-based or commission-based
What is required to implement retailisation?
•
Choose the appropriate annuity product and quotation specifications
•
i.e. The financial planners/advisors
•
Discuss and implement the various processes
o Quotation and initial communication
o New business submission process
Example: Fund’s preselected quotation specifications
Criteria
Pension Portfolio Name
Pension Increase Type
Pricing Interest Rate
Pension Payable
Annual Increase Date
First Increase
Minimum Capital Purchase
Amount
13th Cheque
Guaranteed Period
Second Life Pension
Second Life Pension Percentage
Commission
Selection *
Momentum Golden Income With-Profit Annuity
With-Profit
3.5%
Monthly in Arrear
1 April
Proportionate
R 250 000
Not Applicable
5 Years
 Spouses Pension, if married
 No second life, if not married
 75%
 No Commission
* Specifications have been selected as a default. Members may request some changes and we can
quote based on their individual requirements.
Information needed from the Fund’s
administration team for quotations
•
Pre-selected default quote specifications
•
The additional information needed is (can be supplied in an excel form):
o Member’s name and surname
o Gender
o Date of birth
o Date of retirement
o Spouse date of birth
o Capital Purchase amount
Requesting quotes
•
There are three ways that quotes can be supplied
•
The options are:
o Quotation requests can be e-mailed to Momentum's quotes team, who
will respond in one working day web-based quotation system
o Fund administrator login to
o Automated interface - Build IT Webserver interface where Fund’s
administration system seamlessly requests quotation from
Momentum’s quotation system
•
The option selected is driven by expected quotation volumes, Fund
administration system capabilities, administration resources available etc
Momentum Annuity Quotation
Cover letter
•
Fund and Advisor will need
to decide on the detail in the
letter to be sent out with the
annuity quote to the member
Once client has accepted quotation
Take on requirements
The Fund will need to submit to
Momentum’s quotes team:
•
Signed quotation;
•
Signed and completed
Momentum requires the following information for all new pensioners in
order to comply with the latest requirements from SARS. This is a legal
requirement without which Momentum will be unable to process new
business applications.
1. Initials, first two names and surname;
2. ID Number; (spouse’s ID number where applicable)
3. Passport number and country of issue (where no SA ID is available);
application form;
•
Proof of payment of
purchase amount;
•
4. Date of Birth;
5. Spouse’s Date of Birth;
6. Income tax reference number;
7. E-mail address (where available);
8. Business, cell, home telephone and/or fax numbers;
Member’s take on
9. Physical business, postal and residential address;
requirements
11. Bank account details, including:
10. Directive numbers (where applicable);
a. Bank account type;
b. Bank account number (into which the salary, pension or annuity
is paid);
c. Bank Name;
d. Branch name and number;
e. Account holder name; and
f. Account holder relationship (either own, joint or third party).
Retail annuity timeline*
Time
Process
Responsible
Prior to members’
retirement
Receive details of members expected to retire
in x months and request quotes
Fund/Advisor
1 working day
Prepare/request quotes from EB Annuities
EB Annuities
After receiving quote
Retirement packs circulated to members incl.
1) Cover letter
2) Individual retirement quote
3) Annuity brochures
4) Annuity application form
Fund/Advisor
Accept quote within 3
months
Quote needs to be accepted within 3 months
or we will need to requote
Member
3 months prior to
retirement
Provide signed annuity quote to quotes team,
together with signed application form.
Fund/Advisor
Post retirement date
EB annuity purchase process commences and
regular pensions are paid to members
EB Annuities
* Fund needs to decide on the timeline to following
Process flow chart *
5 Forward client’s signed quote, proof of payment,
application with take on requirements
1
Request member
quotes
Momentum’s
annuity quotes
team
4
Receive signed quote, application
with take on requirements
Fund’s
administration
team
2
Send quote
1 working day
3
Retiring
member
Attach letter &
quote & mail to client
Send acceptance letter & contract document
6
* Refer to the retail annuity timeline for timings
Service Level Agreement
•
To be entered into between ABSA C & A and Momentum
•
Clarifies responsibilities and service standards
EB Annuities Quotes Team Contact Details
Quotes, queries and assistance.
E-mail: ebannuities@momentum.co.za
Tel: 021 917-3010
Annuity payment process
•
Once application form with supporting documents are submitted and
purchase consideration paid
•
Annuity payment commences
Communication to annuitants
•
Welcome letter and contract at inception
•
Monthly remuneration advice
•
Annual tax certificates and annual pension increase letters
•
With-Profit Annuity – Feedback Reports twice a year
•
Support by a dedicated administration team
Conclusion
Conclusion
•
Significant value add to retiring member in securing retirement income
•
Low cost option
•
Comfort regarding welfare of retiring members-pursuit of best advice for
financial planners
Disclaimer
•
This presentation
should not be
regarded
as
advice.
Whilst all
reasonable care has been taken in the preparation thereof, MMI Holdings
Limited,
its
subsidiaries,
including
Momentum
Group
Limited
and
Metropolitan Life Limited, and its employees shall not be liable for any loss,
damage (whether direct or consequential) or expense of any nature which
may be suffered as a result of or which may be attributable , directly or
indirectly , to the use of or reliance upon it.
•
We suggest that you consult your financial advisor
decision based on this presentation.
before taking any