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

12

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

14

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.

15

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

16

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

17

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.

22

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

32

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

33

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.