Real Lifetime Pension
Optimum Pensions has launched the Real Lifetime Pension (RLP), a lifetime income stream solution.
The product is developed for superannuation funds and life insurance companies, and aims to deliver members a solution to longevity risk that can be offered alongside an Account Based Pension.
A member can choose the same, or similar, investment choices that they may already have for their Account Based Pension and the RLP is designed to deliver better returns than those provided by traditional annuities.
Longevity risk is re-insured with one of the world’s largest reinsurers, enabling the Real Lifetime Pension to be paid for life.
How does it work?
When a member invests in a Real Lifetime Pension an ‘annuity factor’ is applied based on their age, whether they have a reversionary beneficiary and whether they choose a death benefit option. Their investment is converted into units of the investment option that they select and their annual pension is determined in units, by dividing this figure by their annuity factor.
A 65-year-old male invests $100,000 and selects the ‘Balanced’ pension option with a current unit price (for example) of $1.75. He also selects the premature death protection option.
His annuity factor is calculated to be (for example) 15.
His starting pension is therefore calculated as follows:
($100,000 / $1.75 ) / 15 = 3,809.53 units per annum
His lifetime pension is guaranteed to be 3,809.53 units per annum for life, no matter how long he lives. In year one this comes to $6,667.
"A solution for Australia's longevity issue": Q&A with David Orford
- Do you consider the longevity issue is being dealt with appropriately in Australia?
In a nutshell – no. More Australians are living longer than ever before and fifty percent of them are outliving their life expectations. This means many people are potentially facing significant reductions in their standard of living and for quite long periods of time during retirement. A key issue here is longevity is being miscalculated with current life tables being used by planners without adjustment. The Australian Life Tables are always out of date and people generally ignore the past and probable future mortality improvements outlined elsewhere in these Tables. Appropriate mortality rates for Australian lifetime pensioners are needed before we can begin to address the issue of longevity and the development of appropriate products. This is why The Orford Foundation has commissioned research with both the Melbourne Business School and the Actuaries Institute of Australia to determine what it will take to influence peoples’ retirement plans, saving patterns and how we better support the industry and all past and future retirees.
- Can you explain why you launched your solution?
With a lifelong career in the superannuation industry I am absolutely committed to helping Australians lead a comfortable retirement. Following the sale of my company, Financial Synergy to IRESS I now can give back to an industry that has given me so much. As life expectancy continues to increase, retiring fund members need more efficient products to optimise their standard of living and give retirees the confidence that their income will remain broadly constant for their and their partner’s lives. A lifetime retirement income can do this, and this is why I launched the Real Lifetime Pension. The Real Lifetime Pension lets superannuation funds offer a product under which assets are retained by the fund and with fully insured mortality risk, whilst still offering members investment choice. It has been designed to solve the issues that individuals and their advisers have not liked about traditional lifetime annuities. We owe it to the fund, its financial planners and members to address this need to improve the quality of their retirements. The superannuation industry must continue to evolve and progress