Longevity products’ low demand creates quandary

Meredith Booth

By

11/04/2018

The superannuation industry is split on whether Comprehensive Income Products for Retirement should be defaults as concerns remain high for the success of longevity products.

There has been a slow release of Australian retirement products ahead of the CIPR framework and poor uptake of longevity products such as annuities and pooled investments, executives told a session at the 2018 Investment Magazine Post Retirement Conference, held in Sydney on March 20.

UniSuper head of product Ian Lorimer said members had shown no demand for longevity products in the 30 years the fund had provided a defined benefit or annuity and that this would continue without government-driven incentives.

“Why are we developing anything that, for the meantime, our members aren’t going to use” Lorimer said. “What drives incentive will be changes from DSS [the Department of Social Security]. We don’t want to dive in and launch something now with 40-year contracts then [have it change so] we’re maintaining massive legacy books for business.”

Asked by moderator Jon Allen, Columbia Threadneedle head of distribution, Asia-Pacific, if Mercer’s new Lifetime Plus longevity product was a failure due to lack of demand, Mercer partner Richard Boyfield said the framework delay was a challenge.

Boyfield said Mercer’s Lifetime Plus longevity product, a pooled investment fund launched in 2014, was redesigned to allow access through a variety of providers but “part of the challenge is everyone’s waiting a bit to press the go button”.

“I think the Lifetime product is being successfully distributed,” he said. “We’ve redesigned from the original launch…We’ve certainly, in recent weeks, been looking at other members coming in a different way so that people from defined-benefit funds can share in the pool.”

Without regulation, super funds have been “waiting for the other to make the first move” on retirement products, Boyfield said.

“The CIPR framework will be a catalyst to move things forward…We don’t know a lot of the products yet that might survive in this framework. The DSS means-testing is an important factor…We’re getting some clarity, being able to defer annuities helps. I do think there needs to be a longevity element within CIPR, from a means-testing point of view, there needs to be a little edge for people to get into those products.”

Boyfield said longevity protection, just like car or life insurance, should be something people can expect to pay for at retirement, and could come in the form of the age pension, annuities or group superannuation.

Too big to solve alone

Nerique Paterson, senior consultant of super advisory firm Rice Warner, said CIPR should have a compulsory aspect, such as pooled investments for longevity protection, while giving members flexibility.

If pooled investments are voluntary, people who expect to live longer will “self-select” these products, posing a problem for providers that need a spread of life expectancies in the pool, Paterson said.

A good-size pool has at least 10,000 members, which means funds need to work together, she argued.

“No fund on its own will be able to solve the longevity problem…There needs to be some level of compulsion to get things going but there [must also] be opt-out options,” Paterson said. “What we’ve been modeling is allocating 15 per cent of your accumulated balance to this type of CIPR that is a longevity-protected…Then you’ve got 85 per cent you can use for growth assets – you’re not going to touch for a long time – and having a proportion in cash you can access immediately.”

Meanwhile, advisers want retirement products that are simple to understand, provided by organisations with proven stability, because there has been “a lot of consolidation” in the industry, she said.

QSuper head of asset/liability management Brnic Van Wyk said CIPR is a silver bullet that shot down the fund’s own longevity pool product, which it had been designing for two years before the government announced a “prescriptive and limiting” CIPR.

“I’m not saying regulation, per se, is bad – quite the contrary,” Van Wyk said. “Everything in Australia that’s lauded is based on participation, contribution and preservation rates, and is mandated and compulsory,” Van Wyk acknowledged. “I would suggest that anything that’s good with our system is mandated and compulsory.”

Nonetheless, he said CIPR was a “double-edged sword” for providers that don’t like its prescriptive nature.

“Our trustees are great believers in the powers of default but we were pretty keen to have an opt-out default,” Van Wyk said. “Some of the features we had have been regulated against.”

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