"A solution for Australia's longevity issue": Q&A with David Orford

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 The Australian Life Tables are always out of date and people generally ignore the past and probable future mortality improvements outlined elsewhere in these Tables.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.

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

Real Lifetime Pensions are purchased for life. They provide the retiree with an income no matter how they long they live. As a new retirement income solution, it has several special design characteristics different to conventional lifetime annuities. It caters to a lower fee structure, is investment-linked to allow it to invest in high performing assets when compared to a conventional annuity and generally keeps ahead of inflation. It also provides the ability to switch between different investment options and is flexible enough to be offered as both an immediate or deferred pension.

The reversionary pension is designed to provide security for a beneficiary such as a spouse. There is no qualifying period when one of these is included as an option for either an immediate or deferred lifetime pension. When the purchaser (retiree) dies the pension will automatically revert to the nominated beneficiary if still alive.
One of the key benefits of the Real Lifetime Pension is its flexibility. It can be established as an immediate and/or deferred income together with the Age Pension, always ensuring a comfortable income for a sufficient account balance at retirement. The percentage of income may vary depending on the choice made at the time of purchase. It may be 100% or lower (e.g. 75%, 50% or some other rate).

The Federal Government has made it clear that a 100% allocation to an account-based pension is not considered an efficient way to provide lifetime retirement income. However, this is a view shared amongst many players in the superannuation industry. In our recent many discussions both with leading superannuation funds and insurance companies there is a growing recognition that a lifetime retirement income has the potential to create significantly better incomes and lifestyles for all retired Australians and has benefits to the super fund by way of member retention and increased Funds Under Management. We are undertaking research to benefit the industry and its players and will welcome any participant who wants to help Australians lead a more comfortable retirement.

The Optimum Real Lifetime Pension is designed for those who are entering the retirement phase (including transition to retirement) or those who are already in retirement. There are not currently set age limits, but it is not envisaged that someone still in the workforce would purchase an immediate real lifetime pension unless they were transitioning to retirement. For those who have already retired, it is not too late to purchase a Real Lifetime Pension, with the advantage the older you are when you purchase it, the better the pension rate will be.

Funds know they need to address how they achieve their Core Purpose and also best retain members when they retire. Lifetime income streams are key to solving that puzzle. As we move into an era of decumulation for the millions of Australians now retiring, this new product offering has the potential to create significantly better lifestyles and peace of mind for all retired Australians.
Getting the retirement phase right will also take pressure off taxpayers. By ensuring Australians make the most of the assets built up via our Superannuation Guarantee (nothing's guaranteed except the contribution rate !!!) system to produce retirement income, we can reduce the total cost of the Age Pension system.

We believe the Real Lifetime Pension has what it takes to meet the needs of retirees looking to secure a lifetime income. Optimum Pensions has designed a longevity product which lets superannuation funds fully insure mortality risk whilst still offering members investment choice. The Real Lifetime Pension has been designed to solve the issues that individuals and their advisers have not liked about traditional lifetime annuities.

We are in discussion with a range of industry players who are actively interested in the Real Lifetime Pension. We hope to be announcing how it will round out a fund offering soon.