Traditional account-based pensions are seriously inhibiting Australian retirement outcomes, according to Optimum Pensions managing director and founder - and long-time lifetime retirement income devotee - David Orford.
Optimum Pensions has just partnered with Generation Life to develop a new market-linked lifetime annuity which will provide retirees and their partners with an income for life that roughly maintains its value in real terms. They expect to launch the product in September.
It’s only since 1 July 2017 that products of this kind have been possible in Australia, after then Minister for Revenue and Financial Services, Kelly O’Dwyer, changed a clause in the Superannuation Industry Supervision (SIS) Act to remove a restriction that inhibited product development of new types of lifetime annuities. The general problem with providing such annuities before then was the costly asset-liability mis-matching risk that an organisation had to take on to provide a guaranteed income for life that could never reduce.
In this case, under the Optimum Pensions’ white label product, Generation Life has partnered with a global reinsurer to reinsure the longevity risk, while the investment risk is borne by the annuitant – in the same way that an account pased pensioner bears the investment risk. The product has been designed so that if a balanced investment option had been selected, the income will fluctuate but should roughly increase over time by at least the rate of inflation.
Annuitants can readily change investment options when they want – just like an accumulation account - so there could be an ongoing role for a financial adviser in order to adapt the annuitant’s investment strategy to current financial conditions.
Generation Life conducted a survey of advisers to discover the appetite for a lifetime annuity and found that overwhelmingly they would appreciate a product of this kind, as they know it is in the best interests of their clients, but in combination with an account-based pension.
Orford says it is almost a compliance necessity for advisers to offer this new product to their retiring clients in order to comply with their ‘best interest’ obligations.
“The account-based pension doesn’t always provide for a client’s best interest whereas this one does. It provides an income for life e.g. of member and partner, which on average over time doesn’t decline in real terms,” he says.
“Our objective is to get 80 percent of retirees taking lifetime pensions or annuities.”
There are four other countries where roughly 80% of new retirees voluntarily purchase lifetime annuities.
Orford founded superannuation software provider Financial Synergy in 1976 which was sold to IRESS, and became IRESS Superannuation, in 2016. With the millions in proceeds of that sale Orford turned to making one of his lifelong passions – a real lifetime pension – a reality by founding Optimum Pensions.
Challenger may be the most well-known annuity provider in the market and potential competitor, but Orford says they are offering different types of lifetime annuities -which still have a role to play for many people. However, he says Optimum are a long way ahead of any other competitors.
“We’ve got intellectual property that it will take them a long time to develop,” he says.
“Generation Life is focussed on this, they can see the potential.”
The fee will be a percentage of assets and Orford says it will amount to much less than the fees on lifetime pension or annuity products produced before 1 July 2017 – which had to charge for costly guarantees e.g. asset-liability mis-matching risk. He expects it to be in the 1.5 to 2 per cent range.
Orford can be scathing of some superannuation funds’ reluctance to consider lifetime income options for retiring members but recognises the sizeable amounts of capital and risk that might be required by super funds to do so.
Fortunately, Generation Life intends to work with super funds to help them provide the lifetime annuity they are working on.
“The super funds have got to invest a large amount of money to manufacture the lifetime pension product. If they can use the Generation Life product, they can put their toe in the water without risking capital – to see if their members value this product.”
The big winner of a high take-up of lifetime annuities would ultimately be the social security department and taxpayers, as there would be fewer retirees relying on the age pension. In addition, longitudinal research from the US shows that retirees with lifetime annuities ought to have better lifestyles and less financial worry in retirement.