altKristen Paech considers how structured products can aid retirees in falling markets.

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Retirees face a raft of risks in retirement,  not least of which is the risk that they will  outlive their savings.  This so-called longevity risk has been amplified  by the recent sharemarket crash, with many retirees  losing almost half of their wealth in the past 12  months.  Research by the Association of Superannuation Funds of Australia, titled The Age Pension,  superannuation and Australian retirement incomes,  reveals that those who have recently retired will  need to substantially rely on the Age Pension in  their retirement.  Between July 1, 2008 and mid-December, 2008  balanced superannuation funds returned between  minus 10 and minus 15 per cent.  “These negative investment returns have also  impacted on those currently drawing down on their  superannuation savings in retirement,” the report  notes.

“It is clear that most recent retirees will need to  substantially rely on the Age Pension in their retirement and this will continue to be the case for many  years to come.”  Barry Wyatt, national manager business development at Axa, says the near 50 per cent fall in the  Australian equity market has brought to the fore  the challenges facing financial planners and their  retiree clients.

He refers to the five years prior to and after  retirement as the “critical zone”, and says that start-  ing retirement with a year of negative investment  returns puts retirees immediately on the back foot. “In a normal environment, when someone  retires, there’s a one in 20 chance they’ll run out of  money over the next 20 years,” Wyatt says. “If somebody retired a year ago and they had  a balanced portfolio, so a 70 per cent exposure to  equities, their chance of running out of money is now one in two.”

Andrew Barnett, head of structured solutions  at Axa, says drawing a pension in a falling market  can have a huge impact on the value of a retiree’s  assets.  “Retirees may have lost 40 per cent of their  wealth over the last year and they have little or no  ability to rebuild that wealth because they have no  more human capital, they have no more earnings  capacity,” he says.

“That has significant implications for them;  they may need to go back to work, they may need  to lower spending. Potentially they’ll exhaust their  pension earlier than they were planning and then  they will have to move to an Age Pension, which  doesn’t even provide a modest lifestyle in retirement.”


Capital guarantees have a role to play in Australia’s post-retirement market, as they assure the  retiree receives an income over time that is at least  equal to the amount that they’ve saved.  The US pension market has already embraced  the concept with gusto. According to Wyatt, at least  60 per cent of retirement funds in the US are written with a guarantee.  Heady investment markets over the past decade  have muted demand for guarantees from Australian  retirees, with market growth more than making  up for the incomes being drawn from allocated  pensions.

Between 1995, when allocated pensions were  introduced, and the end of the bull market in 2007,  2002 was the only calendar year of negative invest-  ment returns. “For anyone in retirement it was fairly straight- forward; you were taking out your 7 per cent  income, but growth was more than 7 per cent, so  each year your fund was ticking up,” Wyatt says.

“Australians have been living in a false world for  the last 13 years of allocated pensions with just one  negative year. Now we’ve had a rude awakening in  the past 12 months and I think it will change the  way planners look at retirees and how they plan for  retirement in this critical zone. I think guarantees  will play a significant part in planning for that critical zone.”  However, Andrew Robertson, chairman and  managing director of Ingevity, says capital guarantees do not always meet retirees’ income needs.

He says there are a number of barriers to product innovation in the Australian market, one key  barrier being that Australia and its planner commu-  nity have typically adopted an investment focus.  “[It is perceived that] the role of the planner  is to achieve an accumulation goal at the end of a  period of time through asset allocation,” he says.  “In that framework a simple capital protection  at that point in time is the most natural thing for a  planner to get their head around. In actual fact, that  really doesn’t help the retiree all that much.

If you  get capital protection after seven, 10 or 20 years,  given that the retirees’ needs are income needs over  a much longer period of time, that protection is not  very well matched against their needs, so even when  the protection bites, the payout from it is not necessarily going to help them do what they really want  to do, which is fund their income.”  Guarantees are most useful when structured as  an income guarantee, rather than a capital guarantee, Robertson says.  “Then [retirees’] most fundamental need, which  is having at least a core level of income each year,  can be met as a first order of priority,” he says.

“Unlike an annuity, where they need to make  an all or nothing bet on just getting a steady stream  of income, these products allow them to maintain  access to their capital for at least a period of time;  and if markets do well, to maintain access to a  significant pool of allocated pension account-based  capital for a long period of time. They allow retirees  to better trade off their complex set of competing  needs over a potentially long but uncertain lifespan.”

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