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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 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% -10% What happens here? -20% Dec-91 Aug-92 Dec-93 Aug-94 Dec-95 Aug-96 Dec-97 Aug-98 Dec-99 Aug-00 Dec-01 Aug-02 Dec-03 Aug-04 Dec-05 Aug-06 Dec-07 Aug-08 Dec-09 Aug-10 Apr-93 Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Increase comparison (Annual increases) Pension increase history compares well to competitors Increases based on a 3.5% PRI Increase comparison (Cumulative) 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 * * 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 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% returns PRI% 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 Selection * Pension Portfolio Name Momentum Golden Income With-Profit Annuity Pension Increase Type With-Profit Pricing Interest Rate 3.5% Pension Payable Monthly in Arrear Annual Increase Date 1 April First Increase Proportionate Minimum Capital Purchase R 250 000 Amount 13th Cheque Not Applicable Guaranteed Period 5 Years Spouses Pension, if married Second Life Pension No second life, if not married Second Life Pension Percentage 75% Commission 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 Momentum requires the following information for all new pensioners in The Fund will need to submit to order to comply with the latest requirements from SARS. This is a legal Momentum’s quotes team: requirement without which Momentum will be unable to process new business applications. • Signed quotation; 1. Initials, first two names and surname; • Signed and completed 2. ID Number; (spouse’s ID number where applicable) 3. Passport number and country of issue (where no SA ID is available); application form; 4. Date of Birth; 5. Spouse’s Date of Birth; • Proof of payment of 6. Income tax reference number; 7. E-mail address (where available); purchase amount; 8. Business, cell, home telephone and/or fax numbers; 9. Physical business, postal and residential address; • Member’s take on 10. Directive numbers (where applicable); requirements 11. Bank account details, including: 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’ Receive details of members expected to Fund/Advisor retirement retire in x months and request quotes 1 working day Prepare/request quotes from EB Annuities EB Annuities Retirement packs circulated to members incl. 1) Cover letter After receiving quote 2) Individual retirement quote Fund/Advisor 3) Annuity brochures 4) Annuity application form Accept quote within 3 Quote needs to be accepted within 3 months Member months or we will need to requote 3 months prior to Provide signed annuity quote to quotes team, Fund/Advisor retirement together with signed application form. EB annuity purchase process commences and Post retirement date EB Annuities regular pensions are paid to members * 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 4 Receive signed quote, application quotes with take on requirements Momentum’s Fund’s annuity quotes Retiring administration team member team 2 Send quote 3 Attach letter & 1 working day 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: firstname.lastname@example.org 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 before taking any decision based on this presentation.
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