Lifetime Pensions – Opportunities and Challenges
As the spotlight on post retirement intensifies following the government’s recent retirement income review Optimum Pensions was invited to participate in an esteemed panel discussing the opportunities and challenges for lifetime pension products at the recent IBR Conferences Post-Retirement Conference.
Our own Peter Rowe joined Grant Hackett, CEO at Generation Life, Nick Callil, Head of Retirement Solutions at Willis Towers Watson and Jenny Dean, from Aon’s superannuation product, smartMonday.
What do retirees really want?
The first issue the panel tackled was identifying the problem trying to be solved by lifetime pensions. The overwhelming conclusion was peace of mind for retirees.
Currently, the majority of superannuation funds’ only retirement income product is an account-based pension that has legislated aged-based minimum drawdown rates. This is not ideal for retirees. It does not offer lifetime income, nor peace of mind. Furthermore, the legislated drawdown rates act as an anchor, and research shows that the majority of retirees drawdown using these legislated rates whether they are appropriate for them or not. This results in inefficient use of retirement savings by many retirees. They either spend too little and have a low quality of life, or spend too much too quickly and are left with limited resources when they may need them most for ongoing care or health concerns.
Nick Callil pointed out that as these drawdown rates increase with age, many retirees are drawing down more in their 90s than in their 60s and 70s. He went on to say that “… a lifetime pension can give retirees peace of mind in retirement arising from the confidence in their retirement income that they wouldn’t have if they just used an account-based pension.”
“The problem we’re trying to solve here is confidence”
said Grant Hackett. “We’re trying to give that confidence back, and if we can give some of the power back to the retiree through some of these product solutions, I think that’s pretty awesome.”
Guidance and advice
One of the challenges discussed at length was related to extending support to members as they approach retirement. Jenny Dean said that the focus of superannuation shouldn’t be about accumulating wealth, but rather living comfortably in retirement. Under the current legislation, retirees are given a lump sum at retirement without the guidance and education to efficiently use their retirement savings. Jenny explained that at smartMonday, they are acutely focused on having ‘behaviour’ conversations rather than ‘financial education’ conversations. She emphasised that transitioning to a retirement product is a new purchase and needs to be treated accordingly under the legislation.
Grant Hackett addressed that retirement is very complicated and that most retirees will be in retirement for approximately 30 to 40 years and circumstances change over this time. The very best financial advisors create a holistic or comprehensive solution to retirement that takes this into consideration and can act as a mentor or coach to help retirees navigate challenges or changes in circumstance as they occur.
Do people understand longevity risk?
The consensus of the panel was an overwhelming “no”.
Nick Callil went straight to the heart of the matter, quoting a lifetime pension product provider:
“When we talk to our customers, they all think they’re going to live forever – until you start talking about buying an annuity and then they think they’re going to die tomorrow.”
Peter elaborated on this, saying that any understanding of life expectancy is based on what retirees might read in the media, or are told by their financial planners. He warned that those numbers are mostly based on outdated life expectancy tables. He explained how the Optimum Pensions Lifespan Calculator helps estimate how long a person should plan for retirement, based on a personal estimate of life expectancy. (Try the calculator here)
An interesting question came from David Williams in the audience, commenting that longevity risk is about personal well-being risk and financial risk, he asked “ Is anyone taking responsibility for explaining and managing the personal well-being risk?” Grant Hackett gave some examples of how financial advisors are doing this, but it does leave us asking the question – how are superannuation funds addressing this for their unadvised members ?
What are the superannuation funds doing?
The two significant drivers of superannuation fund behaviour are:
- demographics – the proportion of members approaching retirement, or in retirement is growing rapidly; and
- legislation – namely the retirement income covenant.
Both Nick and Peter commented that funds recognise this by now having executives responsible for the retirement phase. Previously when you wanted to talk to someone in a superannuation fund about retirement products, you were directed to the investment or marketing team, but many funds now have senior people with ‘retirement’ in their title.
However, they also acknowledged that superannuation funds are constantly dealing with other urgencies and priorities such as legislation and mergers, and, as a result, retirement income products are constantly slipping down the priority order.
Speaking from the perspective of a senior fund executive, Jenny confirmed that offering new retirement products is not at the top of the list, and is at a high cost given the system and process changes required.
The value of lifetime pensions
Increases in life expectancy and the low-interest rate environment have increased the value of some of the innovative lifetime pensions to retirees, but that anyone selling such a product must see it as an emotional interaction rather than merely a rational one, says Grant Hackett.
The entire panel agreed that a lifetime pension is not the silver bullet. Instead, it is one part of a solution that must acknowledge various factors, including What are your family’s needs? What are the needs of your spouse? How are you transferring your wealth? What’s the sort of outcome you’re looking for in terms of an income in retirement? What access can we get to the age pension?
Nick Callil concluded that we need to build products that are simple and streamlined, comparing them to swimming ducks, simple and effortless above water, but behind the scenes paddling furiously. This could be achieved by focussing on human and emotional needs, rather than emphasising the complexities of longevity risk, to guide members into retirement products with a minimum of friction.
It’s all good
The panel concluded that recent innovations in lifetime pensions are welcome and that the financial services industry must continue to do more to help Australians with the transition from saving for retirement to spending in retirement.
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Conference: IBR Conferences Post-Retirement Conference
Moderator: Stephen Huppert
Panel members:
- Peter Rowe, Optimum Pensions
- Grant Hackett, Generation Life
- Nick Callil, Willis Towers Watson
- Jenny Dean, smartMonday
Optimum Pensions was launched in 2017 with a single mission – to help Australians lead a comfortable retirement. The Optimum Pensions innovative retirement income solutions are specifically developed to address longevity risk and provide greater peace of mind for all retirees; no matter how long they live.
The Optimum Pensions, award-winning LifeSpan Calculator builds confidence around personal life expectancy and retirees’ possible retirement planning horizon.
