Different Types of

Annuities
Mr. Kenver Regis
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Structure of the talk

What do we mean by annuities?
Distinguishing between annuity payments
and annuity products.
The type of annuity products.
How annuity products can help bridge the
transition from accumulation to payout
phase.
The risks involved (e.g. longevity risk).
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What is an annuity?
An annuity is an amount of money paid to
someone at some regular interval.
Most people think in terms of annuity
products: an agreement or contract for
one person or organisation to pay another
(the annuitant) a stream or series of
payments (annuity payments).
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Annuity payments and products

A public pension is a stream of income
paid at regular intervals.
The pension benefits paid by a definedbenefit pension plan is a stream of income
paid at regular intervals.
An annuity product is a contract, different
from an annuity payment.
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Annuitization
Financial economics: people better off if a
large share of their retirement income is
annuitized (protect against longevity risk)
Until recently people where heavily
annuitized through public pensions and
DB pension plans.
They both provide a constant stream of
income at retirement or annuity payment.
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Relevance of annuity products

Recent changes in public pensions: lower RR.
Shift from DB to DC funded pension plans
Need to buy annuity products to protect
against risks, especially longevity risk (the
likelihood of outliving ones resources).

Relevance of annuity products

Some countries in LA and CEE have
introduced DC personal plans as main source
of retirement income.
At retirement, pension wealth is the form of a
lump-sum. Retirement income is not
annuitized.
Annuity products could help in bridging the
accumulation and the pay-out phase.
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Type of annuity products

There are several dimensions to classified
annuity products.
According to the type of guarantees they
provide.

According to how they financed

Single premium
Flexible premium (e.g. contributions)
Fixed
Variable

According to primary purpose

Immediate pay-out
Deferred (accumulation)

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According to the underlying

investment
According how annuity products create
future value
Fixed: guarantee a return and a specific
payout at retirement.
Variable: returns and payment depend on
how your portfolio performs
Equity-index
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According to the nature of the

payout commitment
The duration of the payout
Life: payout last for the life time of the
annuitant
Fixed-tem or certain: e.g. 10 years
Temporary: payout last for the earlier of the
two
Guarantee: payout last for the later of the two
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According to the providers

Qualified annuities: the provider during
both the accumulation and the pay-out
phases is the same (annuities as vehicles
attached to certain retirement plans,
401(k)s, IRAs)
Non-qualified: providers are separate
entities
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According to
People covered
Single
Joint-survivor

Way annuity is purchased

Individual
Group

Other feature
Enhanced or impaired
Inflation indexed
Tax advantages

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Several dimensions to classify annuities

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Annuity products and guarantees

What distinguishes the different type of
annuity products is the type of guarantees
they provide
These guarantees determine the size of the
risks involved in annuities:
Longevity risk.
Investment risk.
Interest rate risk.
Inflation risk.
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Annuity products and risks

Life, deferred and fixed annuity. This is the
annuity product that replicates a DB plan
1. Impact of LR on the total amount of
annuity payments (liabilities)
(LR: uncertainty regarding future mortality
and life expectancy outcomes)
2.The interaction btw the risks involved
(interest rate and LR): super-additivity.
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The impact of unexpected gains in LEx

Increase in the NPV of annuity
payments to an individual aged
70, 65, 55 and 35 in 2005.
The payment is 10.000 in 2005.
Wages grow at 1.75%, inflation
1.75% and the discount rate is
3.5%
Base case: using current life
tables.
A fund (membership structure 2.5, 10,
Case 1: using projections of
25 and 62.5%)
improvements in life expectancy
at birth of only 1.2 years per
decade.
Case 2: life expectancy at birth
increases a 2.2 years per decade.

Impact of longevity improvements and changes in interest rates on annuity payments

Percentage change in the net present value of annuity payments, 2005- 2090

Interest rates

Improvements in life expectancy

3.5

4.5

5.5

No improvements, latest available mortality table used (2005)

individual aged 65 in 2005

118.6

108.6

100.0

individual aged 25 in 2005

254.6

158.9

100.0

Life expectancy improves by 1.2 years per decade

individual aged 65 in 2005

122.3

111.6

102.4

individual aged 25 in 2005

312.7

192.6

119.8

Source: OECD

Conclusions
Annuity products could help bridge the
transition from the accumulation to the
payout phase.
Several types of annuity products depending
on the type of guarantees provided.
Depending on those guarantees different
impact of risks.
LR non-negligible. Super-additivity effect.
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THANK YOU!
jordanisregis@yahoo.com