The best of both worlds

Combining annuities and capital market investments brings liability matching within reach of savers

Robert Merton’s study The Crisis in Retirement Planning didn’t go unnoticed in the financial industry. Merton’s argument, in conjunction with the current depressed yield environment, led Dan Krueger and Kai Wallbaum to cooperate across the Atlantic. With Krueger working for the US insurance branch of Allianz Group and his German colleague Wallbaum working for the asset management branch of Allianz Group – also the publisher of this magazine – both hope to launch a “holistic” retirement income solution.

By combining an investment approach with a deferred annuity, “we have a solution thinking in cash flows,” Wallbaum says. Based on the retiree’s income needs, subdivided into must-haves and nice-to-haves, client and adviser devise an investment strategy that delivers initial retirement income based on capital market returns from the investment vehicles of Allianz Global Investors, PIMCO and selected third parties. If markets perform worse than expected, the annuity could kick in earlier; if markets do better, it kicks in later.

The idea is as much a response to Merton’s study as to current low yields. While cash deposits may have been safe and sufficient in times when returns were 4% or higher, next to no returns on safe assets have workers struggling to grow their retirement nest egg.

Combining longevity protection with a client-individual managed account allows retirees to participate in capital markets while covering the risks relevant during decumulation: market, inflation, liquidity and longevity risk. “Neither annuity nor investment product could address these risks by itself. Together, they do,” says Wallbaum. Following Merton’s argument, the approach ignores volatility and short-term market valuations.

The idea is to design the product to be cheaper than a traditional variable annuity because the holistic approach should reduce the guarantee costs of the concept. “Both aspects could of course be offered separately, but the dynamic allocation between both components makes it possible to offer stable income levels at lower costs than current solutions in the market. The combination makes liability-driven investment available to retail clients with the flexibility to change as their needs evolve,” says Wallbaum.

Yet much of the success of such an approach depends on good advice, including also a regular review of assets and liabilities based on allocation and performance. With investment horizons spanning several decades, digital support tools should enable an efficient setup for customer and advisor.

The best of both worlds

Combining annuities and capital market investments brings liability matching within reach of savers

The best of both worlds

Combining annuities and capital market investments brings liability matching within reach of savers

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