Retirees are demanding simple products that offer guaranteed income, flexibility, and low fees, according to a Milliman survey of financial institutions across eight Asia-Pacific countries.
Those expectations are creating significant challenges for organisations given many in-demand risk management features, such as capital guarantees, typically come with higher fees or less liquidity.
Firms will need to understand the underlying drivers of retiree needs and more effectively communicate the necessary product feature trade-offs if they are to deliver better retirement outcomes.
Figure 1: What are the most important features in a retirement income product for the consumer?
The survey, which included more than 100 insurance companies and financial institutions across Asia-Pacific, reveals how firms are responding by creating more tailored regional products.
It marks a change from past approaches that typically led to either:
- Low-fee, flexible products that left investors exposed to 100% market risk.
- High-cost, inflexible products that guaranteed income or capital.
However, firms are now starting to offer a range of products with greater investment certainty but without costly and inflexible full-blown guarantees.
Figure 2: Risk mapping by product
Guaranteed products such as annuities remain popular among institutions across Asia-Pacific according to the survey but adoption by consumers has been limited other than in Singapore (through the government-provided CPF LIFE pension) and Australia, where the annuity market is slowly reviving and the government is reviewing structural impediments.
Historic low interest rates, which are keeping payouts low, stand as another roadblock for annuities and other longevity-focused products, according to the survey.
Figure 3: What needs to be done to increase the uptake of longevity products?
But while providers and governments can make longevity-focused products more attractive, there is scope to improve the education of financial planners and consumers about how to implement smarter longevity solutions.
These challenges are consistent across Asia-Pacific because they are fundamentally manifestations of human behaviour.
Longevity solutions tend to struggle to gain traction without a strong incentive model or government support because of factors such as hyperbolic discounting: People are hard-wired to focus on the short-term and struggle to assess the value of distant payouts in the future.
Short-term loss aversion is another behavioural bias that particularly affects retirees—the pain from losing money is far more acute than the pleasure from making money. This has helped underpin the success of products with an element of capital protection or managed market risk compared to long-term annuities and income products.
However, firms are taking on these challenges and beginning to use new technology and approaches to innovate. Large insurance companies, for example, are adopting an agile approach to product testing, building experience rather than attempting to create a perfect product.
The regulatory challenge remains significant with regular changes leading to confusion and a general lack of faith in the stability of the system, according to surveyed companies.
Few countries across Asia-Pacific meet the common financial planning goal of providing 60% to 70% of pre-retirement income in retirement, as the region grapples with rapidly ageing populations. Meanwhile, about half of firms in the Milliman Asia retirement income report said their national retirement income systems currently worked for less than one-third of the population.
However, while this is cause for concern, it also represents an opportunity for private organisations to step in and fill part of the gap.
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