Approaching the Longevity Problem from an Investment Perspective

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Approaching the Longevity Problem from an
Investment Perspective
3rd International Longevity Risk and Capital
Market Solutions SymposiumTaipei, July 21st 2007
Dr. Wolfgang Mader risklab germany GmbH Phone
49.89.1220 7759
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Agenda

• The Longevity Problem
• The Impact of Longevity on Investment Concepts
• An Alternative Approach to Longevity Risk
• Summary

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The Longevity Problem
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Longevity and Structural Changes in Pension
Systems

• Life expectancy increases steadily and therefore
  more lifetime has to be financed by the
  individual.
• Many future retirees face social security systems
  that are inadequate to fully finance the targeted
  standard of living.
• Defined benefit plans are closed and defined
  contribution plans are set up which entails a
  substantial risk transfer to employees

Potential solutions ? Higher private savings ?
Intelligent asset management products
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The Influence of Longevity on Investment Concepts
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Intelligent Asset Management Products

• Increase in lifetime (to be financed) can be
  translated into asset allocations with higher
  return expectations in order to cover (at least
  parts of) additional expenses with increased
  returns.
• Targeted Profile Increased upside potential and
  limited downside risk

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General Investment Concept
Total return
Additional Return
Market Return

(asystematic)
(bintelligent)
Market Return
Protection and Surplus
Additional Uncorrelated Returns

• Active Bonds
• Active Equity
• Global Tactical Asset Allocation
• Structural Alpha

• Equities
• Bonds
• Alternatives

DSPAbsolute Return
Strategic Asset Allocation(SAA)
Dynamic Asset Allocation(DAA)
AlphaAllocation
DSP stands for Dynamic Strategy Portfolio
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Allianz All Markets Fund Family
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Return Distribution All Markets Dynamic
30
20
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11.44
5.23
5.88
5.22
0
-10
-20
-30
Allianz All Markets Dynamic
MSCI Europe
Mixed Portfolio 70 bonds / 30 equities
JPM EMU
50 range
90 range
mean
Source Historical simulation over the period
1999-2006. Allianz All Markets Dynamic in euros,
gross of fees, including alpha. Bonds Europe (JPM
EMU), Equities Europe (MSCI Europe) and Equities
World (MSCI World) in euros. No guarantee can be
given that past performance will be repeated in
the future. For further information, please refer
to the disclaimer.
Better downside protection and increased return
potential
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An Alternative Approach to Longevity Risk
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Innovation in the German Pension System

• Motivation Old Age Incomes Act
• Introduction of a state-aided (by income tax
  allowance) 3rd pillar (voluntary) pension scheme
  called Rürup-Products
• Products have to pay lifelong annuities and only
  increases in the annuity are possible
• Allowed products to invest in are mutual funds
  and pension insurance policies
• The money paid-in cant be passed over to heirs
• Solution Annuity product based on mutual funds
• Range of mutual funds ? special mutual funds for
  different age groups
• Asset management solution ? no explicit insurance
  components included
• Collective approach ? instead to heirs money is
  passed to other investors and increases the
  annuities by surplus sharing over time
• Integrated risk budgeting approach ? taking into
  account market risk longevity risk

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Integrated Risk Budgeting Approach
Capitalallocated dynamically according to
available risk budgets
Longevity Risk Budget
To cover changes in life expectancy and
realisation of mortality risk
Capital Market Risk Budget
To cover unwanted capital market movements
Risk management techniques increase the
probability that given guarantees can be fulfilled
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Comparison to a Classical Insurance Solution
Increased return potential, attractive minimum
annuities and substantial (expected) surpluses
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Summary
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The Investment Perspective on Longevity

• An increasing life expectancy and substantial
  changes in pension systems require investment
  concepts that are providing an increased return
  potential.
• This can be achieved by capturing equity and
  alternatives risk premia while limiting downside
  risk using risk management techniques and
  diversification benefits.
• Under the German pension system asset managers
  are able to provide innovative products including
  longevity components.
• Nevertheless there is a massive demand for
  longevity derivatives
• Individuals Due to the shift from Defined
  Benefit to Defined Contribution pension plans and
  the changes in the pension system the individual
  is fully exposed to individual longevity. But
  currently hedging (without basis risk) is only
  possible by using insurance products.
• Institutional LDI-Solutions The substantial
  sensitivity of liabilities to longevity requires
  (liquid) hedging instruments in order to
  implement dynamic LDI-strategies for pension
  funds that also address longevity sensitivities.
• Investors The longevity risk premium will bring
  return potential and additional diversification
  to the asset allocation.

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Your Contact

• Dr. Wolfgang MaderHead of Pension Strategies
  49.89.1220 7759wolfgang.mader_at_risklab.de

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Disclaimer

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  use and for information purposes only. Any form
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  legal or a tax advice.
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  profits or losses similar to those shown nor is
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  accuracy of past projects. Hypothetical or
  simulated performance results have certain
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