In the 1960s, French actor Maurice Chevalier quipped that old age isn’t so bad when you consider the alternative. How times have changed.
The financial services industry today seems to believe that the alternative – death – is almost as bad as running out of money in old age. And judging by the multitude of responses to the Financial System Inquiry (FSI), the solution seems to be forcing the public to buy products they clearly don’t want rather than empowering them with education and advice.
Longevity risk – the chance that you’ll outlive your retirement savings – is an undoubted concern. A 65-year-old female today can a expect to live until 89 while 10 per cent will live past 100 years, according to the Australian Government Actuary.
And yet about half of super benefits are paid out as a lump sum. True longevity products, such as deferred lifetime annuities, have never taken off and there’s far more at play here than the fact that their earnings are taxed because they’re not classed as complying income streams under the SIS Regulations.
Companies as diverse as Asteron, AXA (now AMP), Challenger, ING (now ANZ’s OnePath), Ingevity, Macquarie, MetLife and MLC have launched fixed or variable annuities and pooled longevity funds (or tontines) over the past six years.
There has been no lack of product innovation – including by super funds recently launching ‘bucket’ and income-focused strategies – but the lacklustre response by members has been telling.
The reality is that investors heavily discount the value of a product which is potentially only going to pay off in decades – a process known as “hyperbolic discounting”. Just take a look at the UK where annuity sales recently halved the instant retirees were no longer forced to buy such products.
Calls from the financial services industry to mandate the use of longevity products simply smacks of self-interest and laziness but it is one now being considered by David Murray’s FSI interim report.
Among the options it raised to best manage an ageing population are improving access to financial advice (and removing impediments to product development), encouraging retirees to purchase longevity-focused income-stream products, or mandating the use of particular retirement income products.
Any savvy financial planner knows the danger in trying to convince a client that professionals know what’s best for them. Good financial advice acknowledges a client’s circumstances and biases and for most investors, this means a more flexible approach than the one-size-fits-all product mindset.
Building a sound retirement plan has to start with the client’s objectives and work backwards: there are many levers that can be adjusted over the decades a client is likely to spend in retirement which no one-stop default longevity product can cater for. Goals and circumstances naturally change throughout retirement requiring a flexible approach.
Pure longevity products will remain a minor although important part of the retirement landscape and be joined by a wider array of innovative and commercially-viable approaches which better incorporate the behavioural dynamics of customers.
It will extend well beyond flexible and modern annuity products to include dynamic investment and asset allocation strategies that seek to preserve capital, generate income and improve overall sustainability of retiree funds.
And good advice will play the starring role.
This article was first published in Professional Planner.