Retirement challenges in the era of “New Normal” Dr Michael Heise, Group Economic Research & Corporate Development, Allianz SE Allianz Press Roundtable, Berlin, 22nd September 2010
2
After the financial crisis looms the retirement crisis.
3
Five challenges for retirement markets on the “New Normal” horizon:
Soaring public debt 1
Low growth and interest rates 2
More people live longer in retirement 3
Fewer people of working age 4
Longevity risks transferred to individuals 5
4
Financial crisis put government balances into a nosedive… Domestic sectors’ financial balances, four quarter cumulated sums, as % of GDP
Euro area
Sources: ECB, Bureau of Economic Analysis, Bank of Japan; Office for National Statistics.
USA
Japan UK
1
5
Government debt, including unfunded liabilities, in % of GDP*
…but the real size of the problem is even bigger
*base year: 2005
Source: J. Gokhale, NCPA 2009.
1
6
Modest growth outlook Real GDP growth 2009 - 2020 (%)
Source: Own forecasts.
2
7
10yrs German government yield, in %
20yrs average (1989 – 2008)
100yrs average (1909 – 2008)*
10yrs average (1999 – 2008) 2 std. dev.
* not available: 1914-1923, 1942-1948
Long-term yields exceptionally low
2
Source: Datastream, own calculations.
8
More retirees…
(in mn)
Regional distribution of people 65+
Source: UN Population Division, World Population Prospects, 2008 Revision.
(in %)
People 65+, as % of total population (2050)
3
9 Source: UN Population Division (2009), World Population Prospects: The 2008 Revision.
(in years)
… will live longer
Further life expectancy at the age of 65 (men)
3
USA
Spain France
UK
Italy
Germany
Hungary
Poland
Switzerland
10 Source: UN population division, World Population Prospects, 2008 revision.
Working age population, change 2030 / 2010 in mn
Fewer people in working age…
4
11
Labor force participation rate of women, in %
…but still some hidden potential in Europe.
Labor force participation rate of people aged 60-64, in %
Source: ILO.
4
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Individuals have to bear more retirement risks.
1 Government
Individuals Outliving their assets?
Employer
5
Shifting risks
13
Benefit levels of public pensions, in %
Pension reforms cut future benefit levels.
Source: European Commission, Ageing Report 2009, Appendix.
5
Spain
France
UK
Italy
Germany
Poland
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Aftermath of the financial crisis
Financial assets per capita in EUR, global average
CAGR: 2.8%
Change in financial assets end-2007 to end-2009, in EUR bn
5
- 4250bn
Source: Allianz Global Wealth Report 2010.
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The insurance industry as natural holder of retirement risks
1 Government
Individuals Outliving their assets?
Insurance industry
Employer Lo
ngev
ity ri
sk s
olut
ions
B
ulk annuities
Retirement income products
5
Shifting risks
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Policy actions to address the five challenges
Soaring public debt Consolidate public finances 1
Low growth and interest rates Push for structural reforms
2 More people live longer in retirement
Align retirement age to life expectancy 3 Fewer people of working age
Advance women’s careers 4
Associated risks transferred to individuals Foster financial literacy 5
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USA: Trailblazer for Europe?
18 Source: UN Population Division (2009), World Population Prospects: The 2008 Revision; own calculations.
When baby boomers get old
Population aged 65+, Index, 2005=100
USA
Spain France
UK Italy
Germany
Switzerland
Closing the Retirement Gap Opportunities and risks
Jay Ralph, Member of the Board of Management, Allianz SE Roundtable, Berlin 22nd of September 2010
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Economic crisis is changing retirement expectations.
327
259
0
100K
150K
200K
250K
300K
350K
2009
Account Value
Lower interest rates reduce retirement income - similar outlook for US retirees?
The problem is the same worldwide. However, Switzerland is in a lucky position as it has no implicit state debt, which shows that the state pension is not in danger.
Retirement Income
1985 Hire Date
-21%
23,600
17,600
0
6,000
10,000
14,000
18,000
22,000
26,000
1985 Hire Date
-25%
1985 2009
Interest Credit 4% 2% Annuity Rate 7.2%
6.8%
2009
The Swiss example: 48 year old with starting annual salary of CHF30,000
CHF CHF
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Americans feel unprepared for retirement.
Effect of financial downturn:
people follow financial news more carefully people educate themselves about financial products (shows need
for more transparency) people create new priorities for financial products: clear emphasis
on safety and protection of retirement money - long term security people are adjusting to “New Normal”
Median income people say they will need around $60,000 assuming a standard 4% draw, this would require a $1.5 million portfolio.
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American retirees still rely on Social Security as main income source.
Today’s retiree:
John Smith senior (Age 62)
• will spend 18 years in retirement • has an average income of $50,000 • receives 43% of his income from Social
Security • spends approx 10% of his retirement income
in healthcare premium • has an average of $50,000 in debt
Source: The Retirement Income Handbook, 2009; “The Positioning of Assets in Retirement” by LIMRA, 2010
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Pensions, interests and dividends make up the majority of the remaining income and are affected by market yields.
Retirement Income by Source
Social Security
Pension/Retirement Plans
Interests & Dividends
Employment Earnings
Other Income Source Total Income ($ bn)
Per capita1 ($)
Social Security $ 414 $ 21,209
Pension/Retirement $ 247 $ 12,654
Interest & Dividends $ 116 $ 5,943
Employment Earnings $ 111 $ 5,686
Other $ 88 $ 4,508
Total $ 976 $ 50,000
43%
9%
11%
12%
25%
Source: LIMRA Analysis of U.S. Census Bureau‘s current population survey; March 2009; Analysis based upon individual‘s retirement status 1 Calculated as per example John Smith Senior with an average income of US$ 50,000
It does not look too bad, but …
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The basis of a "comfortable retirement" in America has been challenged through recent economic developments.
Under scrutiny Under funded Under stress
… the majority of retirement income is no longer “guaranteed”.
Social Security 1 Company plans (defined benefits/ contribution)
Individual savings (home, investments, 401(k)) 2 3
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Future retiree: John Smith Junior (Age 55 and up) • most expected to keep working and “never retire” • likely to have less than $100,000 of household
investable assets • average debt of $100,000 • will draw less than 28% of his income from Social
Security • most concerned about running out of money, but also
concerned about inflation • hoping to get by on income (Social Security, 401(k)
and pensions, dividends etc.) • likely not to have a financial plan
Source: LIMRA Scaling Pre-Retirement, 2010. Census Bureau, IRI Boomers Nearing Retirement, U of Michigan Confidence Survey
In the future less than 28% of retirement income will be drawn from Social Security vs. 43% today.
American retirees definitely face challenges.
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In addition healthcare costs are exploding and underestimated in retirement planning.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Health Insurance Premiums Workers Earnings Overall Inflation
Source: “Trends in health Care Costs and Spending”, Kaiser family foundation March, 2009.
Cumulative changes in Health Insurance Premiums Inflation and Workers Earnings
$134
$100 $129
$219
Dramatic effect on retirement.
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In the U.S. there is a widespread belief that we have a retirement crisis at hand …
A huge preponderance of Boomers think there is a retirement crisis*
0
10 20
30 40
50
60 70
80 90
100
Total Late 40s Lower Wealth
Somewhat
Absolutely
* Source: Larson Research, The Allianz Reclaiming the Future Study for Allianz Life, May 2010.
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… and Americans fear outliving their retirement income more than death!
Which do you fear most: Death or outliving money in retirement?*
Death
Outliving my money 61%
39%
* Source: Larson Research, The Allianz Reclaiming the Future Study for Allianz Life, May 2010.
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Americans think they are as likely to be hit by lightning as to receive full due from social security.
Social Security is nobody’s security blanket*
52% 48%
Hit by lightening
Get full due from Social Security
* Source: Larson Research, The Allianz Reclaiming the Future Study for Allianz Life, May 2010.
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Aging U.S. population attracted to guaranteed income.
Five most important features people want in an ideal financial product:*
Stable, predictable retirement standard of living
Guaranteed income stream for life
Guaranteed not to lose value
Protect against market downside
Don’t think about it, stable and predictable
*Source: Larson Research, The Allianz Reclaiming the Future Study for Allianz Life, May 2010.
What product is more attractive*?
20%
80%
8% return with possibility of losing value
4% return and guaranteed not
to lose value
What does this mean?
1. Annuities are the only financial product that provide guaranteed lifetime income.
2. There is a new reality for retirement in America.
3. There is an opportunity to change the public perception of annuities.
80%
20%
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Designed to last only 20 years
Investment oriented retirement solutions are important, but not sufficient.
20 year investment income
65 85
0%
25%
50%
75%
100%
84
89
94
Pro
babl
e lif
e ex
pect
ancy
of a
65-
year
old
cou
ple1
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The insurers advantage - pooling of risk
Annuities guarantee an income for life...
Guaranteed lifetime Income
65 100 85
0%
25%
50%
75%
100%
84
89
94
Remaining contract value
paid to beneficiaries
“Unused” benefit fees remain in general account
Guaranteed lifetime income funded by “unused” benefit
fees of those who died early
Source: LIMRA “Retirement Income Reference Book” pg. 71
Pro
babl
e lif
e ex
pect
ancy
of a
65
–yea
r old
cou
ple1
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Portfolio Layers Sources Capital Appreciation Products that can provide capital growth potential from diversified market participation
Liquidity Liquid products that exhibit low volatility and minimum withdrawal penalties
Base Investment, insurance and capital market products that seek to provide a highly predictable and safe income stream
…and form a part of a holistic retirement portfolio
Growth Capital growth
Liquidity
Base Security / Certainty
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Allianz in the U.S. is uniquely positioned in retirement …
Allianz Global Investors Top investment expertise and track
record Strong in wirehouse and large broker
channels Products developed for retail &
institutional clients
Allianz Life Top guarantee product provider Market leader in FIAs Ability to train advisors on retirement
income planning Products designed for retail clients
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… and in Europe and globally as well.
Guaranteed Income: Fixed Indexed Annuities: # 1 Variable Annuities: # 16
Market Rank*
Asset Manager: AllianzGI U.S. Retail: # 3 AllianzGI/PIMCO (Net Inflows): # 2
USA
Germany
Italy
France
Guaranteed Income: # 1 Asset Manager: # 1
Life Insurer: # 3 Asset Manager: Top 5
Individual & Group Life: Top 10 Asset Manager: Top 10
Life Insurer: Top 5 Asset Manager: Top 5 AuM €1420 bn; 3rd-party AuM €926 bn
Worldwide
* For sources please refer to appendix.
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Appendix
Sources for Market Ranks:
1. USA Guaranteed Income: LIMRA Report 4Q2009 Asset Manager: 31/12/2009 AGI U.S. Retail AuM includes P shares assets within non-proprietary.
Strategic Insight data may differ from AGI U.S. Retail’s internal AuM numbers. 31/12/2009 3rd party AuM; sum of PIMCO US, RCM US, AGI Capital
2. Germany: Guaranteed Income: Own estimates and Allianz Global Life Unit Asset Manager: BVI; Total AuM including mutual funds, “Spezialfonds” and other investment
vehicles, as of Q2 2010 (31.07.10), includes ETF 3. France
Guaranteed Income: French Federation of insurers databases
Asset Manager: AFG; Total AuM including UCITs and mandates, as of Q4 2009 (31.12.09) 4. Italy
Life Insurer: ANIA 2009 Asset Manager: Source: Assogestioni; Total AuM including UCITs, discretionary mandates,
pension funds and unit-linked investment vehicle, as of Q1 2010 5. Worldwide
Life Insurer: own source Asset Manager: own source
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Disclaimer
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertain-ties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words "may", "will", "should", "expects", "plans", "intends", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz Group’s core business and core markets, (ii) performance of financial markets, including emerging markets, and including market volatility, liquidity and credit events (iii) the frequency and severity of insured loss events, including from natural catastrophes and including the development of loss expenses, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rates including the Euro/U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures, and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The company assumes no obligation to update any forward-looking statement.
No duty to update The company assumes no obligation to update any information contained herein.