In recent years, the first of Australia’s baby boomers have hit retirement age. They have done so amid a surge in market volatility. That combination has triggered a renewed focus on the provision of innovative retirement and longevity products that give retirees a stable income, but also address a range of complex risks.
“We’re seeing product innovation in this space and demand is emerging,” says MLC retirement solutions general manager, Andrew Barnett.
But Barnett says that despite innovations and his optimism for growing demand, the retirement product space is still “embryonic” in Australia.
The conventional view is that when it comes to retirement or longevity products, Australia has lagged behind other countries, such as the UK, Europe and United States.
Download the full In Focus report, “Pioneering protection products”, as a PDF.
“Culturally Australia doesn’t have an income-oriented society,” Barnett says.
“In the US, one third of Fortune 500 companies have an open defined benefits schemes. Here, obviously, we have an accumulation mindset with the super guarantee.”
But Barnett says we have witnessed product innovation in both lifetime and variable annuity products.
“Australia now has a complete set of variable annuity products,” he says.
MLC itself offers the Investment Protection products through its MasterKey platform. The products have more than 1300 clients with $470 million under management.
Capital or income can be protected for terms of 10 years, 20 years or for life. Investment Protection offers two types of guarantee: “Protected Income” provides a minimum guaranteed withdrawal value through a specified term; and Protected Capital” provides a minimum guaranteed capital value at the end of a specified term.
The minimum value in both cases may rise with positive market performance.
Innovation
Senior investment analyst at Zenith Investment Partners, Dugald Higgins, agrees that institutions and fund managers are showing innovation (within the limits imposed by regulation).
“Principally, this has been around flexibility in products,” he says.
“Over time, product development has addressed the issues of longevity protection, downside protection and accessibility to these products – people want flexibility.”
Design of longevity products is challenging because of the raft of risks they need to address. The risks most focused on include: sequencing risk, which is the risk of low or negative returns early in the drawdown phase; longevity risk, which is the risk of outliving retirement funds; and investment risk from specific products.
But Higgins says the retirement products may also need to address market risk (the risk of a market downturn); inflation risk, which not all products deal with; credit risk; and benefit risk, which is the risk that benefits won’t be accessible unless a protection event is triggered. Higgins says he doesn’t believe a single product can easily address all issues and risks.
“While product development is seeking to address multiple issues, it is unlikely in our view that a single product can address all risks adequately for all people,” he says.
Higgins says choosing retirement products typically involves a trade-off between income generation, product flexibility and risk management.
