PRODUCT INNOVATION
Structured products can provide retirees with a steady stream of income; a liquid pool of capital from which to draw on; immunisation against poor market performance; and exposure to the upside, should markets perform strongly. Much of the innovation in the post-retirement space is occurring outside Australia, with US life insurance companies developing structured products that provide a put option insurance against market under-performance. Product options are also emerging that allow retirees to pool their longevity risk.
“Another risk is long-term care; both health care – increased costs of pharmaceutical benefits – and increasingly costs of care in home and care in services,” Robertson says. “In the US you have seen for a while the development of products called long-term care insurance products which allow for someone to use an insurance pool to provide for contingent potentially high financing costs of that care.” John O’Shaugnessy, deputy chief executive of the Investment and Financial Services Association (IFSA), says it is important for Australia to understand the challenges at home but also to learn from what’s happening abroad.
“In Australia our ‘in retirement’ focus or offering is somewhat immature compared to the accumulation phase offerings that we’ve got,” he says. “It’s one of the areas where we sit behind other markets who have better developed retirement in- come products. Broadly, the options that we’ve got are moving to a mandated pension system, which is something that we wouldn’t support, or making the market for income-stream products much more competitive. There are perhaps less barriers for competition sitting in that market space.”
To date, most of the product development has been on the back of public policy and regulation which is “a bit aged”, O’Shaugnessy says. “We believe with the tranche of Baby Boomers coming through, the issues of longevity risk, market risk and inflationary risk are something that requires early attention, and it’s fabulous that the Henry Tax Review presents an opportunity to look at [these issues],” he says. The recent market correction may quicken the rate of innovation in Australia, with a heightened degree of risk awareness from consumers likely to filter through to the advisory world.
“Customers are going to start to be much more concerned about those contingent ‘what ifs’,” Robertson says. “That will be a big driver for product solutions because planners won’t be able to solve this by themselves. A typical strategy of a diversified set of long-held assets simply doesn’t do it.” Commonwealth Bank’s Capital Series Australia 2nd series offers capital protection at maturity but does not pay any income stream during the life of the product. Instead of getting a fixed rate of interest, investors receive 100 per cent of the performance of the S&P/ASX 200 Index, up to a maximum return of 80 per cent, over a 5.5-year period.
Suzanne Salter, head of structured investments at CBA, says the bank is yet to develop products in the decumulation phase. The bank’s two core offers fall into the wealth accumulation phase. “We don’t currently have an offer in this space but it’s something that we’re looking to develop, especially as interest rates are coming down,” she says. “For that to be successful it involves the client understanding that we can’t necessarily offer a fixed rate, but it would be a rate indexed to the performance of another asset, let’s say the S&P/ASX 200 or the price of gold, for example.”
FINANCING RETIREMENT
When choosing the right strategy for their clients, financial planners must begin to view the process of retirement planning as one of optimising retirement financing, rather than retirement incomes, Robertson says. “Retirees are exposed to a variety of different risks,” he says. “It’s going to be fundamental for planners to understand the nature of those risks and then start to seek products that help retirees better match their resources against those risks.” Ingevity is working on developing solutions that provide retirees with more income early in retirement, thus minimising the risk of outliving their savings.
This is achieved through a Longevity Insurance concept. Unlike traditional annuity products, the retiree retains more flexible access to their assets and is able to select an investment profile that suits their needs.
“Retirees have a choice; they can provide for all of these risks by choosing to draw their income in a very conservative way and preserve their capital, but obviously that comes at the cost of lifestyle early on in retirement,” Robertson says.
“Alternatively they can enhance lifestyle early but run the risk of running out of money later.
If they are better able to finance the contingent risks later in life, then by protecting against those contingencies cost-effectively (because they’re using a product that only pays when contingency is needed), they can have the confidence to spend more of their savings early in retirement.”
The concept of longevity pooling is something which can also be integrated with an allocated pension, Robertson notes. The customer can allocate a portion of their savings to the longevity pool early in retirement, and should they live longer than expected, the longevity pool distributes additional income back into their pension.
Russell suggests retirees think of their wealth in various buckets: the essentials bucket; the lifestyle bucket; the kids’ and bequest bucket; and the “endowed” bucket.
“The first bucket is: How much do I need in order to maintain what I’d consider the absolute bare minimum tolerable lifestyle?” says Steve Schubert, managing director, Russell Superannuation.
