Institutional super funds should consider offering longevity risk solutions to retain members and address one of the most complex and challenging risks retirees face, according to attendees at a recent Retirement Income Forum (RIF) convened by leading bond fund manager PIMCO.
The forum, held in Melbourne and Sydney, was the second in the RIF series and attracted 27 leading institutional superannuation funds and asset consultant attendees. Dedicated to solutions-oriented thought leadership on retirement income adequacy, the forum found the consensus fund sector view is for a hybrid longevity risk product. These types of products combine a guarantee and a separate investment product, wrapped as one single offering for retirees, providing a more a cost-effective solution than those currently available in the retail market.
A research paper by Tony Hildyard and Sara Higgins of PIMCO Australia, Addressing Longevity Risk, highlights traditional ways of addressing longevity risk and the Australian market for such strategies. The paper noted that one of the most complex issues retirees face is longevity protection. This is particularly the case for retirees with superannuation savings over $250,000. Those with less have access to the Aged Pension and those with more than $1 million will most likely be able to address longevity risk via an asset allocation strategy, but may still “bucket” a portion of their assets into a true longevity protection product.
“Longevity risk remains the major unsolved problem with growth-biased investment solutions conflicting with retiree’s heightened risk aversion, that is, lack of certainty,” said Tony Hildyard, PIMCO, Head of Retirement Solutions at PIMCO Australia.
“Generally, an asset allocation approach has been followed, (including the use of income funds or asset bucketing, in an attempt to minimise risks of running out of assets before death), but this approach does not fully address longevity risk.”
Mr Hildyard said the trend to take a lump sum on retirement is “an entirely rational reaction” to this conflict. However, this will generally not be optimal for the retiree or super fund and an in-fund solution which focuses on retiree needs and risk appetite is required.
“While there are many solutions that attempt to address longevity risk, the only way to guarantee an income for life is through participation of an insurer. A significant retention opportunity exists if funds and longevity providers can provide access to a suitable income and longevity protection product on their platform at a competitive price,” Mr Hildyard said.
“Forum attendees agreed the ‘hybrid’ longevity protection solutions seem to be optimal or preferred. That is, solutions which are guaranteed, but allow for accessibility and flexibility and the potential for bequeathing upon death,” he said.
It was agreed these hybrid solutions meet the needs of retirees who are typically hyper loss averse, want income certainty and to retain ownership flexibility over their savings.
“In Australia, there are only a few hybrid options available, all of which are retail offerings. Attendees agreed there is an opportunity for institutional superannuation funds to offer a longevity protection option to retirees that could be much more cost efficient for the retiree,” Mr Hildyard said.
Funds in the US have begun to offer these “in plan” solutions, he said.
The Forum concluded with a presentation from a major insurer, involved in the provision of retirement solutions globally, and outlined how an insurer looks at addressing longevity risk and the key components in pricing this risk. This led to an interactive discussion and ultimately confirmed that some form of an institutional longevity protection option was feasible and desirable in Australia.