Longevity and Retirement Longevity and Retirement FundsFunds

Growing OlderGrowing OlderJeanne Calment122 years 164 daysb. 21 February 1875d. 4 August 1997

Secrets of LongevitySecrets of Longevity (According to Jeanne)

• She took up fencing at 85 and was still riding a bicycle at 100

• She could walk upright until 114• She took up smoking at age 70 and quit at 117• Her secret was olive oil• She enjoyed port wine and at a kilogram of

chocolate a week• She reverse leased her apartment at age 90!

AgendaAgenda

• Tale of two trends

• What trends mean for our funds

• What can be done about it?• Pensioners• Active Members

Tale of Two TrendsTale of Two Trends

LONGEVITY

MORTALITY

OLD

ERYO

UN

GER

LongevityLongevity

This increases by 1 year every 20 years

15

19

Life Expectancy at 65 in Years at 1998

Male

Female

49

51

61

Years2010

2006

1996

MortalityMortality

Decreasing life expectancy at birth due to the effect of AIDS on the young

Tale of Two TrendsTale of Two Trends

BIRTH

0

WO

RK

20

RETIRE

65

DEATH

?

DECREASIN

G

DECREASIN

G

INCR

EASI

NG

Impacts of the Trends

Impacts of LongevityImpacts of Longevity• More benefits needed at retirement– Retirement lasts longer– Exposed to inflation for longer– Increased Medical Costs

• Vulnerability at older ages– Benefits insufficient or depleted

• Increase dependence on alternative support– Work– Family– Government

Increasing Medical CostsIncreasing Medical Costs• Health declines with age• Decline starts earlier for manual workers• More healthcare needed each year

• Twice as much at 70 than at 50 (US data)• Medical schemes limit impact• Medical inflation

• Costs are difficult to predict

Inflation RiskInflation Risk• 83% of pensioners feel their pension

has not kept up with inflation (OMRFS)

• Some pensioners forfeit inflation protection

• Increasing longevity means more people may feel this more keenly

InflationInflation2000

White Bread (700g) R3.12Brown Bread (700g) R2.56Maize Meal (10kg) R25.26Rice (1 kg) R6.63Cooking Oil (750ml) R4.16Full Cream Milk (1l) R2.56Fresh Chicken Whole R11.94Apples (1.5kg) R6.30Onions (per kg) R2.57Potatoes (10kg) R13.55White Sugar (2.5kg) R9.39Ricoffy Coffee (750g) R23.02Total R111.06

TodayR5.79R4.99R47.00R7.99R8.99R6.29R28.00R16.95R5.99R41.99R15.39R51.99R241.36

Incr.186%195%186%121%216%246%235%269%233%310%164%226%217%

p.a.6.4%6.9%6.4%1.9%8.0%9.4%8.9%10.4%8.8%12.0%5.1%8.5%8.1%

InflationInflationIn January 2000 Petrol cost R2.88 per litre and In January 2000 Petrol cost R2.88 per litre and

Diesel cost R2.47 per litreDiesel cost R2.47 per litre

At February 2010 Petrol was R7.85 per litre and At February 2010 Petrol was R7.85 per litre and Diesel cost R6.99 per litreDiesel cost R6.99 per litre

An An increaseincrease of 173% (10.5% p.a.) for Petrol and of 173% (10.5% p.a.) for Petrol and 183% (11% p.a.) for Diesel183% (11% p.a.) for Diesel

Loss of family supportLoss of family support• 23% of pensioners receive family

support (OMRFS)• 27% of working people expect their

children to support them in retirement (OMRFS)

• Families can act as an informal annuity market

• Declining birth rate and AIDS may reduce possibility of support

Impact of MortalityImpact of Mortality

• For every 3 25 year olds in your fund, 1 will die before age 65 and 2 will retire

• Trustees have a duty to protect the interests of all members.

• How do you balance retirement and death benefits?

Impact of MortalityImpact of Mortality

• Reduces the economically active part of the population– Reduces funding for state pensions

• Creates more orphans and dependents– Increases burden on state– Increases burden on pensioners

Impacts – Bomb 1Impacts – Bomb 1Active Members• Current savings achieves less benefits at

retirement (DC)• Current service costs the Employer more (DB)• Higher risk of insufficient retirement benefit– Or benefits being depleted

• Could face reduced state support• Could face increased state taxes

Impacts – Bomb 2Impacts – Bomb 2PensionersPensioners• Whole Life Annuities– Payments not depleted– Pressure on increases means inflation a concern

• Living Annuities– Reduce starting payments– Risk of benefit depleting

• In the Fund– Strain on reserves and active lives as basis changes– Pressure on increases with inflation concerns

Impacts – Bomb 2Impacts – Bomb 2• So pensioners are more vulnerable

• More likely to need support of government and families

• But now faced with having to support families– Grand children

• And government looking to reduce support

Impacts – Bomb 3Impacts – Bomb 3

• Growing burden on the state pension– Growing retired population– Who lives for longer– Increased orphans

• Reducing funding – Large spend versus GDP– Tax pool not growing as fast due to mortality– Poor economy leading to budget deficits (temp)

Managing the Impacts

Pensioners

PensionersPensioners

In the Fund–Keep healthy reserves for future basis increases–Keep close watch on mortality basis–Monitor investments closely• Minimise risk of market losses

PensionersPensioners

Whole Life Annuities• Check the capital strength of the insurers

when outsourcing• Avoid level annuities• Monitor increases and increase expectations

carefully

PensionersPensioners

Living Annuities• Allow for longer life span when calculating

draw down• Monitor investment risk carefully• Control spending, especially in early years

Active Members

1.1. Save MoreSave More2.2. Protect SavingsProtect Savings3.3. Invest WiselyInvest Wisely4.4. PreservePreserve5.5. Empower membersEmpower members

Save MoreSave More• Save for longer• Almost 10% of over 65s earn a salary or run a

business (IES 2005/2006)• Attitudes of employers make it difficult to find work

after 65• A study of over 85s in 1991 found that about 30% of

them only stopped working at or after 70.

• Start earlier!• Increase contributions and savings• 15% of salary for 40 years

Protect SavingsProtect Savings

• There is a need for death and disability benefitsThere is a need for death and disability benefits• But higher cover levels mean lower savings levelsBut higher cover levels mean lower savings levels

• Cap risk benefits and/or move to DC riskCap risk benefits and/or move to DC risk

• Offer flexible risk benefits where membersOffer flexible risk benefits where members• Aim for reasonable replacement ratios on all Aim for reasonable replacement ratios on all

benefitsbenefits• Preserve!Preserve!

• Accumulated credits are also death benefitsAccumulated credits are also death benefits

Invest WiselyInvest Wisely

• Investment returns make up the overwhelming majority of the eventual retirement benefit

• Ensure optimal returns are being achieved• Invest for the long term• Allow for growth assets• Avoid unnecessary switching• Control costs• Monitor performance and strategy• Educate members about their investment choices

PreservePreserve

The typical replacement ratio of the industry is around 30%, when it could easily be

above 80%.

Lack of Preservation is a leading cause of insufficient retirement benefits

Empower MembersEmpower Members

Members should understand• The benefits available to them from their

Fund• The choices they can make• The impact of the choices they make

today on their retirement tomorrow

Thank youThank you

Craig AitchisonCraig Aitchison Managing Director Managing Director OMAC Actuaries & ConsultantsOMAC Actuaries & Consultants caitchison@omac.co.za www.omac.co.za