retirement income: the future of distribution trends, opportunities and challenges

Retirement Income:The Future of Distribution

Trends, Opportunities and ChallengesA LIMRA Retirement Markets Presentation

Paul S. HenryManaging Director, Retirement Clients & Products

© LL Global, Inc.SM

Agenda

Retirement Income Market State of Retirees and Pre-Retirees Industry Response The Future of Distribution

This presentation is a benefit of LIMRA membership. No part may be shared with other organizations or reproduced in any form without LIMRA's written

permission.


.0

1.0

2.0

3.0

4.0

5.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

47%

69% Non-retireesRetireesPercent retired

41.3 million retirees

Source: LIMRA analysis of U.S. Census Bureau’s Current Population Survey, March 2009 Supplement

Number of Retirees by Age

Over 30 million Americans approaching “Income Phase”

33 million pre-retirees age 55+97 million pre-retirees age 40+

Millions Percent of Retired


Source: LIMRA analysis of U.S. Census Bureau’s Current Population Survey, March 2009 Supplement

Number of Projected Retirees by Age

0.0

500,000.0

1,000,000.0

1,500,000.0

2,000,000.0

2,500,000.0

3,000,000.0

3,500,000.0Millions

41.3 mil-lion 2009

65.6 mil-lion 2025

80.6 mil-lion 2040

The “Income Market” likely to increase 50% by 2025


20%

25%

30%

35%

40%

27%

22%

37%Age 61 to 70

Age 71 & up

Percent Receiving Employment Based Pension

Source: EBRI estimates of data from the Current Population Survey, Department of Labor, 2010

More Americans entering retirement Without Pensions

Median Annual Pension is $12,000


Assets will be Re-allocated as HH’s transition to retirement

Financial Assets by Age and Retirement Status

Source: LIMRA analysis of 2007 Survey of Consumer Finances, Federal Reserve Board, 2009.

<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95+$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5 No one in HH retired

Partially retired HH

All in HH retired

$ trillions

$15.5T

$3.9T

$6.5T

© LL Global, Inc.SM7

Rollover market to exceed $600 billion in 3 years

Sources: Investment Company Institute, The IRA Investor Profile: Traditional IRA Investors’ Rollover Activity, 2007 and 2008 (2010) and LIMRA analysis of Internal Revenue Service, Statistics of Income Bulletins and Bureau of Economic Analysis, NIPA Table 6.11, “Table

6.11D. Employer Contributions for Employee Pension and Insurance Funds by Industry and by Type, years 2001–2007. Figures based on total IRA inflows resulting from rollovers. Includes some IRA-to-IRA rollovers.

IRA Rollovers (in billions)

2 2 2 2 2 2 2

$122

$226 $205

$282

$339

$452

$602


State of Pre-retirees & Retirees


Consistent Need for Income to Cover “Basics”

<$50k $50k-$74.9k $75k-$99.9k $100k+

55% 51% 50% 49%

15%13% 13% 12%

15% 19% 17% 20%

11% 11% 14% 13%

5% 6% 6% 7%

Charities/inheritance Saving for future & emergencies Discretionary expenses Health & long-term care

Basic living expenses

Percent of Retirement Expenses by Household Income

Source: Retirement Income Trade-offs, Implications for Product Development, LIMRA, 2009. Survey based on 1,188 pre-retirees and retirees aged 55 to 75 with at least $100,000 in household current investable assets.


Middle/Affluent Lack Guaranteed Income Sources

<$50k $50k-$74.9k

$75k - $99.9k

$100k+

61%

34%22% 15%

18%

30%32%

21%

79%

64%54%

36%

Other Earnings

Source: LIMRA analysis of U.S. Census Bureau’s Current Population Survey, March 2009 Supplement. Analysis based upon fully retired households.

Percent of Essential Expenses by

Household Income

<$50k $50k-$74.9k

$75k-$99.9k

$100k+

55% 51% 50% 49%

15%13% 13% 12%

70% 64% 63% 61%

Charities/inheritanceSaving for future & emergencies

Guaranteed Income Sources by

Household Income



Most Important Source of Retirement Income


Note: Other sources include savings in Mutual Fund/Brokerage, Annuities, Equity in home, Real estate/rental income, inheritance and salary and wages.

Paradigm Shift in Expectations

Co. Pension Plan Savings in Employer Plan & IRA

Social Security Other sources

35%

23%

14%

25%25%

37%

9%

26%

Retirees Experience

Pre-retirees Expectations


0–2 >2–5 >5–10 >10–20 >20–30 >30

$15$24

$44

$76

$140$146

$18$25

$43

$74

$135

$17350s 60s

Job Tenure (years)

Age group

Average 401(k) account balance for plan participants in their 50s and 60s = $77,650

Source: VanDerhei, Jack, Sarah Holden, and Luis Alonso, “401(k) Plan Asset Allocation, Account Balances, and Loans,” Employee Benefits Research Institute (EBRI) Issue Brief No. 335, October 2009.

Challenge: Low Savings

Average 401(k) Balance by Age and Tenure($ in thousands)


Challenge: Manage Timing, Markets & Inflation

Value of PortfolioRetirement age 62, $500,000 initial portfolio 4.05%

initial withdrawals1966-1975

62636465666768697071727374757677787980818283848586878889909192$0

$500,000

$1,000,000

$1,500,000

$2,000,000

1966

1967

1968

1969

19701971 1972

1973

1974 1975

Portfolio value

Note: The portfolio has an asset allocation of 42.5% large company stocks, 17.5% small company stocks, and 40% intermediate-term government bonds and is rebalanced annually. The initial withdrawal amount was $20, 250 or 4.05% of beginning assets; thereafter adjusted based on prior year’s inflation rate.

Age


5-10 years away 3-4 years away 0-2 years away 0-2 years 3-5 years

65%

58%

51%

38%34%35%

42%

49%

62%66%

1-20 years 20 or more yearsIn Retirement

Longevity Expectations


Challenge: Outliving Assets

From Retirement

Pre-retirees Retirees


Challenge: Working Longer

Timing of Retirement

Source: Will Retirement Last a Lifetime?, LIMRA, Society of Actuaries, and InFRE, 2009. Survey based on 1,524 retirees aged 55 to 75 with at least $100,000 in household investable assets.

When planned38%Later

6%

Involuntary24%

Voluntary32%


Value of investments will drop by 25% or more

Become widowed

Lose their current job

Become disabled and no longer able to work

Employer will eliminate pension

19%

12%

12%

9%

9%

39%

32%

23%

27%

17%

Better than 50-50 chance50-50 chance

Percent of pre-retirees

Source: LIMRA survey of 1,000 pre-retirees, February 2010.

Challenge: The Unexpected


<$25K $25K-$49.9K $50K-$99.9K $100K+

14%

24%

29%

44%

Household Income

Only 30% of pre-retirees consider themselves to be very prepared for retirement

Source: LIMRA survey of 1,000 pre-retirees, February 2010.Note: Retirement preparedness measured on a 10-point scale. “Very prepared” based on values 8-10.

No wonder: Pre-Retirees Feel “Unprepared”

“Very Prepared” by Household Income Level


Industry Response to Opportunity:

Product Manufacturers

Distributors


U.S. Individual Annuity Sales

1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12

36.729.2

23.6 21.1 19.3 21.8 21.4 19.4 20.0 21.3 20.3 18.9 18.0

31.0

32.1

31.9 33.0 32.235.2 34.6 38.5 39.5 40.6 39.8

38.0 36.8

$67.7

$61.3$55.5 $54.1

$51.5$57.0 $56.0 $57.9 $59.5 $61.9 $60.1

$56.9 $54.8

Variable Fixed

19Source: LIMRA, U.S. Individual Annuities survey.

Dol

lars

in B

illio

ns


Demand for Income Benefit Driving VA Sales

Q1 2012 VA New SalesIn Billions

Source: LIMRA, Variable Annuity Guaranteed Living Benefit Election Tracking Survey.

GLB Not Available

5%GLB Not Elected10%

GLB Elected90%

VA GLB Election RatesWhen Any GLB Available

1Q '09

2Q '09

3Q '09

4Q '09

1Q '10

2Q '10

3Q '10

4Q '10

1Q '11

2Q '11

3Q '11

4Q '11

1Q '12

29% 25%15% 17% 17% 17% 18% 16% 17% 22% 27% 26% 23%

55% 59%69% 64% 64% 64% 65% 65% 65% 61% 57% 59% 63%

90% 89% 89% 87% 87% 88% 89% 87% 88% 88% 88% 90% 90%

Hybrid GLB GMWB GMAB GMIB GLWB

20


Fixed Deferred Annuity Sales

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

7.2 8.2 7.5 7.0 7.0 8.2 8.7 8.2 7.1 8.1 8.7 8.3 8.1

7.0 3.52.4 1.5 1.3

1.6 1.8 1.41.4 1.4 1.2 1.2 1.3

19.0

14.1

10.69.5 7.9

8.4 7.46.6 8.5 8.3 6.9 6.2 5.8

$33.2

$25.8

$20.5$18.0

$16.2$18.2$17.9

$16.2$17.0$17.8$16.8$15.7$15.2

Book value

Market value adjusted

Indexed

Source: LIMRA, U.S. Individual Annuities survey.

Dol

lars

in B

illio

ns

21


Indexed GLB election rates

Source: LIMRA, Indexed Annuity Guaranteed Lifetime Withdrawal Benefit Elections Survey.

Industry Indexed Annuity GWLB Election Rates

GLB Not

Available16%

GLB Available -

GLB Not Elected

35%

GLB

Avail-

able -

GLB

Elected65%

22

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012

67%

62%

64%

70%

65%


0%

20%

40%

60%

IRA Non-Qualified Overall

Age of Owner

Percentage of owners taking withdrawals Age 70

Source: Guaranteed Living Benefit Utilization Study – 2009 Data, LIMRA 2011Based on 1,278,547 contracts issued in respective years and still in force at the end of 2009.

Older GLB clients are taking income


Immediate Annuity Sales

1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12

1.9 2.0 1.8 1.8 1.72.1 2.0 1.8 1.8

2.2 2.21.9 1.8

1.6 1.41.3 1.3 1.4

1.5 1.51.4 1.2

1.3 1.31.3

1.0

$3.5 $3.4$3.1 $3.1 $3.1

$3.6 $3.5$3.2

$3.0

$3.5 $3.5$3.2

$2.8

Structured Settlements Fixed immediate Variable immediate

Source: LIMRA, U.S. Individual Annuities survey.

Dol

lars

in B

illio

ns

24Amounts less than $0.5 billion not shown


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q1 2012

322 351 421 478 497 520 519 511 556 620 659 675 683

972 904 8151,016 1,136 1,231

1,397 1,5171,151

1,3891,561 1,593 1,708

$1,294 $1,255 $1,236

$1,494$1,633

$1,751$1,916

$2,028

$1,707

$2,009

$2,220 $2,268$2,391

Variable Fixed

Source: LIMRA, U.S. Individual Annuities survey. 25

Deferred annuity assets have reached high

Dol

lars

in B

illio

ns


2011 (ac-tual)

2012 2013 2014 2015

80 80 86 88 91

158 157 160 165 171

$238 $237 $246 $253 $262

Fixed Variable

Dol

lars

in B

illio

ns

Annuity Sales To grow 2% over next 4 years

CAGR

2%

2%

3%

Source: LIMRA, U.S. Individual Annuities survey. 26


SPIA sales to reach $13b; 10 Days of Rollovers

Source: LIMRA

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

$3.0$3.6

$4.8 $4.8$5.3 $5.3

$6.1$6.5

$7.9 $7.5 $7.6

$8.4

$9.4

$10.6

$11.8$13.0Fixed Immediate Annuity Sales & Forecast

($ Billions)


The Future of Distribution?


Q1 2012 Fixed Annuity Sales by Distribution Channel

Source: US Individual Annuities, LIMRA

$3.2

$3.1

$0.4 $0.7

$8.5

$1.0 $1.0

BanksCareerDirectIndep. B-DIndependentOtherFull Service Nat. B-D

Dollars in Billions


Banks/Career Agents lead Fixed-Rate Deferred Sales

2007 2008 2009 2010 2011 Q1 20120%

20%

40%

60%

80%

100%

44% 46% 42% 39% 41% 34%

19% 19% 23% 26% 26% 31%

21% 16% 14% 18% 15% 17%

7% 9% 10% 8% 9% 8%6% 6% 8% 5% 5% 5%2% 4% 3% 4% 4% 5%

Banks Career Independent Agents Full Service Nat'l B-DIndependent B-D Direct



Career followed closely by Nat’l B/D in Fixed Immediate

2007 2008 2009 2010 2011 Q1 20120%

20%

40%

60%

80%

100%

26% 32% 34% 32% 31% 29%

12% 10%15% 19% 22% 23%

35% 33% 19% 21% 19% 20%

8% 9% 14% 14% 15% 14%6% 9% 10% 8% 8% 8%5% 5% 6% 5% 4% 4%

Career Full Service Nat'l B-D Independent AgentsBanks Independent B-D Direct

Does not include sales reported through “Other Systems”



Independent Agents Dominate Indexed Annuity Sales

2007 2008 2009 2010 2011 Q1 '120%

20%

40%

60%

80%

100%

4% 4% 7% 7% 6% 6%5% 6% 6% 6% 5% 5%

89% 88% 84% 86% 86% 86%

Independent B-D Full Service Nat'l B-D Banks CareerIndependent Agnts Direct



Advisors are “under-engaged” as clients enter retirement

How Advisors Help Retirees

Source: Will Retirement Assets Last a Lifetime?, LIMRA, Society of Actuaries, and InFRE, 2009. Survey based on 1,524 retirees aged 55 to 75 with at least $100,000 in household investable assets.

80%

48%35%

56%

34%

Percent indicating advisor helps with

Investment related Retirement planning related


0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30$0

$50,000

$100,000

$150,000

$200,000

$250,000 0% SPIA, 100% managed portfolio

10% SPIA, 90% managed portfolio


30% SPIA , 70% managed portfolio


# of Years in Retirement

Portfolio Assets

Retiree Portfolio Longevity with Immediate Annuity

Source: Liquidity and the Value of Annuitization, LIMRA, 2009. Illustration of 1969 to 1998, the worst 30-year period out of 53 possible scenarios since 1926. The portfolio has an asset allocation of 42.5% large company stocks, 17.5% small company stocks and 40% intermediate-term government bonds and is rebalanced annually. An annual payout rate of 6.30% was based on actual single-life immediate annuity quotes with inflation adjustments for a hypothetical 65-year-old male in January 2009. The initial withdrawal amount was 4.5% of beginning assets; thereafter annual withdrawals were adjusted based on the prior year’s inflation rate. The hypothetical portfolio had a 50-basis-point charge assessed annually (following the withdrawals and the investment growth or loss.

Many advisor lack information on role of income products


Buyer preferences based on age and source of money

Non-Quali-fied

Qualified

10%

7%

18%

41%

12%

24%

16%

15%

45%

13%

Age in years <60 60-69 70-74 75-79 80 & above

60% of buyers are age 75 & older

72% of buyers are age 74 or less

Percentage of SPIA Buyers by Age

Source: Guaranteed Income Annuities, LIMRA 2010. The study is based on 55,311 immediate contracts issued in 2008 and 2009.


$400

$450

$500

$550

$600

$650

Life Only Guarantee period - 5 years

GP - 10 years

GP - 15 years

GP - 20 years

Cash refundInstallment refund

COLA

CPI (U)

Source: Based on CANNEX top quotes on $100,000 for a 65 year old male as of 12/07/2010

FeaturesLess More

Features in Lifetime Income AnnuitiesMonthly payout

Buyers Weigh Trade-off’s

GP – 20+ years


Clients look for decision-making help when “triggers” occur

Retirement Decision Points

Source: LIMRA, The Retirement Income Reference Book 2009


Confidential and proprietary information – for institutional use only.

38

Clients seek support across a broad spectrum of issues

• Lifestyle budgeting

• Asset allocation

• Social Security timing

• Medicare eligibility and enrollment

• Minimizing taxes

• Long term care

• Survivor income

• Estate Planning


Distribution Hierarchy

Leveraging Contract-Level Data

• Optimize rep productivity by channel, region, firm size

• Track your market share against competitors at the local level

• Use regional results as benchmarks for performance

• Determine channel penetration and areas for growth

Customer

Sales rep Firm 1 Firm Carrier

Contract # NPN EIN NAIC #

LIMRA’s COMPASS: DATA REPORTING INITIATIVE


Collaboration is the best kept secret to success

238

338

213

Lower support

Multi-Advisor/Rep

Higher support

Likelihood of Success (Top Quartile among all Financial Advisors (Indexed to 100)

100

Solo

* Note 1. Based on rep with 250 clients, and Note 2. Success means top quartile performance of all financial services advisors


Guaranteed income solutions must be backed by a highly-rated, financially-strong insurer

Guaranteed income solutions would be more attractive if the guarantees were backed by a federal agency (similar to the FDIC)

Guaranteed income solutions provide benefits beyond what could be accomplished through use of non-guaranteed income solutions

Guaranteed income solutions should be used to cover non-discretionary expenses in retirement

Guaranteed income solutions are too complicated to explain to clients

77%

63%

56%

48%

28%

81%

67%

40%

38%

35%

Guaranteed Income Solution Attitudes

2009

2011

Percent Agree**Percentages based on individuals who "strongly" or "somewhat" agreed with the statement. Source:

Advisor Perspectives on Retirement Planning, LIMRA, 2012.

Education is being directed to the financial professional


Guaranteed income solutions are often well-received by clients

Guaranteed income solutions require significant training and support from product manufacturers

Guaranteed income solutions are integrated in tools that you use

I do not recommend VAs with GLBs because they are too costly

I do not recommend income annuities (SPIAs) because the assets leave the firm and it hurts profitability and assets under management

63%

60%

58%

30%

21%

7%

10%

11%

32%

41%

Guaranteed Income Solution Attitudes*

Agree Disagree

*Percentages based on individuals who "strongly"/"somewhat" agreed or "strongly"/"somewhat" disagreed with the statement. "Neither agree nor disagree" excluded from chart. Source: Advisor Perspectives on

Retirement Planning, LIMRA, 2012.

More than 6 in 10 advisors believe guaranteed income solutions are well-received by clients


Using Social Media to Project & Protect our Message


A Mobile Application that Engages & Educateswww.ready-2-retire.me/PaulHenry


Distribution of the Future?

» Pre-retirees will be more engaged, better informed and prepared to make decisions – new technologies will create consumers who are motivated to seek out solutions

» The retirement income discussion will permeate the relationship product manufactures, service providers and advisors have with DC Plan participants

» Most pre-retirees will continue to fear making a mistake with their single largest financial asset – they will seek out products they can understand and advisors/firms they can trust

» Successful Advisors will embrace the role of product allocators, and deliver a broader array of services to retirees


HARTFORD ATLANTA MIAMI TORONTO LONDON KUALA LUMPUR SHANGHAI HO CHI MINH CITY SEOUL

Your Trusted Source for Retirement Industry Knowledge

Thank you.

Paul S. Henry: 860-285-7878; [email protected]

retirement income: the future of distribution trends, opportunities and challenges

Documents

preretirees age

supplementnumber of

limra analysis of

income phase33

accumulated retirement

agethe income market

future of distribution

financial products