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Innovations in Retirement Income Solutions
The headline gave me hope: “Innovative income product now available for retiring Australians”.
It was July 2017. The description of this new product was promising as it was “designed to help Australians more easily and confidently manage their superannuation in the lead up to and during retirement.”
But then, like so many times before … ”[A]n account-based pension that offers a flexible and simple way for people to convert their superannuation into a steady income stream.”
How is that innovative? What is new about an account-based pension? It might have been an adequate product for some in the past and maybe in the future, but more innovation is required to help individuals and society deal with the retirement crisis that is emerging driven by continued increases in life expectancy. For many Australians living to 90 years of age and beyond is becoming commonplace. Funding longer lives is a challenge for individuals, and society.
A good working definition of innovation is ‘fresh ideas that create value’. This is required as more and more people transition from full-time work into the next phase of their lives – a phase that is becoming longer and more complicated to navigate as each year passes.
Let’s take a look at fresh ideas in retirement incomes. Some are too new to know if they will create value, others have come and gone having failed to deliver on their promise. It is important to learn from these failures when developing new solutions.
There have been many innovations in wealth management that have also impacted retirement incomes such as ETFs and robo advisors, but let’s drill down into those offerings specific to retirement and retirement incomes.
Many of us are aware of the retirement income challenges facing society as our population ages — putting a strain on both public and private retirement income finances. Retirement adequacy is a concern for many, and new solutions are required to reflect the changing dynamics.
Innovation in retirement products
For many years, the pension and annuity standards in the Superannuation Industry (Supervision) Regulations were seen as a barrier to innovation in retirement income products. The new standards, introduced in July 2017, removed these regulatory barriers but there has not been a flood of new products into the market.
As with the example described at the start of this article, most of the innovations in retirement income products in Australia have been variations of account-based pensions and offer no longevity risk protection what so ever. This includes applications of the so-called bucket strategy commonly employed by financial planners that have won awards for innovation. This involves dividing assets into different short, medium, and long-term buckets.
Variable annuities have been widely used in North America and Asia for many years. Only a small number of providers have released these products into the Australian market. They have only found a small niche and are not considered as mainstream solutions as they were launched before the regulatory changes mentioned above and had to be adapted to deal with the old rules – which led to complexity.
There have been a number of failed attempts at addressing the longevity risk problem by pooling. These also pre-dated the regulatory changes, and this may have contributed to their failure. There are one or two still on the market but with very small uptake. More recent innovations include a life insurer entering into a group annuity arrangement with superannuation funds.
It is into this landscape that Optimum Pensions has launched the Real Lifetime Pension, an investment-linked annuity that is available as an immediate or deferred annuity and may provide superannuation funds with an efficient way of helping their members manage longevity risk.
Innovation in retirement services
It is widely recognised that helping people navigate the risks and challenges of transitioning from full-time work needs more than just retirement income products. A number of innovations are addressing some of the broader issues facing retirees including behaviour and lifestyle.
There are a number of Australian startups with saving for retirement at the core of their proposition including new superannuation products and digital wealth managers (aka robo advisors).
Two of the latter category that are more focused on the retirement challenges are: OnTrack, a digital retirement planning system that allows the user to build individual retirement plans incorporating financial and non-financial goals and takes into account personal health and lifestyle information; and Retirement Essentials, that offers a digital solution that helps Australians navigate the complexity of the Age Pension.
A successful retirement is much more than financial, and it is great to see innovations addressing the whole person and even whole couple including Changing Gears and Full Time Lives. Both these companies have developed tools and frameworks designed to assist people to make a successful transition from full-time work.
Looking overseas
In the USA, Blueprint Income has built a digital platform to facilitate the purchase of annuities to create a personal pension. The objective is to encourage clients to think about retirement in terms of income, rather than assets.
Emerging technologies are being employed across financial services including helping improve retirement outcomes. A number of digital wealth management platforms are deploying artificial intelligence (AI) in both the planning phase and in the spending phase. Dream
Forward has compiled a Confusion Index based on queries its AI technology fielded from its users covering topics such as understanding the different withdrawal options available in the USA given the individual circumstances of the user.
Virtual reality (VR) is another emerging technology that is being piloted by financial advisors. Fidelity Investments has teamed up with Amazon to develop a digital financial adviser, which people can interact with through a VR headset. Another application of VR is to help people ‘play out’ how certain financial decisions will impact them in the future.
There are a number of organisations applying blockchain to the administration of pension schemes and one, TontineTrust, has gone further to combine this new technology with an old product idea and is developing blockchain-secured tontines as an alternative to traditional pensions and annuities. Will this be a viable, practical solution? It’s too early to tell but innovation needs experimenting, failing and learning from these failures.
Everyone is watching the big tech firms and their moves into financial services. Whilst an iPension might still be a fair way off, at the end of 2018 there was an announcement that BlackRock and Microsoft are coming together to ‘Reimagine Retirement’. There are no details yet but expect some interesting innovations to arise from this partnership.
New challenges need new solutions
We are facing new challenges as populations continue to age, life expectancy continues to grow, and the nature of work continues to evolve. The financial services industry must step up to this challenge and design products and services to better meet the needs of all Australians. This will require a range of retirement income products along with a combination of digital and human advice to assist people to make better choices.
Stephen Huppert is the head of engagement for Optimum Pensions.
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You're right Stephen. You could also have mentioned Challenger, which is prospering in this market - without yet getting into the pooled products that I think are more suitable for retirees. It is approaching AMP in market capitalization. Raises interesting questions about what retirees really want
The government's Behavioural Economics Team researched ways to help 3,600 people understand the features of different retirement income solutions. They found that, once people comprehend the issues, over half were willing to choose products with longevity protection.
That's good - because just over half of them will live till somewhere between their life expectancy and the end of the life tables at age 110.
Advisers tell me that traditional lifetime annuities don't sell because clients expect a premium for giving up access to their capital. Whereas the annuity rates on offer don't deliver enough income premium (clients respond with "I could get that from a bank account" and keep their money in account based pensions).
Perhaps the "fresh idea" needed is new products that give both longevity protection AND an enhanced income for giving up access to part of your capital. I know a really good one.
Thanks, Anthony. My article is looking at innovation: "‘resh ideas that create value" as stated in the article. This might be a new method, idea, product, etc.
Whilst Challenger is prospering, I wouldn't call their offerings innovative. That is not to say that their products don't have a place in the retirement income landscape.
Stephen, thank you for the article.
There are a number of problems with the existing solutions to longevity and the regulations,
There is the investment problem that you allude to in reference to the 'bucket' solution - existing longevity solutions entail conservative investment, giving lower returns over what is still a long term, rather than the more aggressive investment allowed by account-based pensions.
And there is the 'forfeiture' problem - to keep the cost of meeting longevity down a sizeable amount of the remaining investment must be forfeited on death - if this is not done then, either, there won't be enough if the retiree doesn't die, or the cost of meeting longevity will be exorbitant. Unfortunately, retirees have been told it is 'their money', and if they die it must be available to be passed on as an inheritance. I think this is contrary to the purpose of superannuation (to provide in retirement) but others obviously think differently.
The new regulations introduced in July 2017 are NOT innovative. They simply encourage the sale of products with particular features (admittedly now a broader range) - they do not encourage innovation but merely accommodate innovation that has already taken place (like now allowing deferred annuities). New products will be constrained to meet the new regulations (which, unless the products clearly meet the requirements, will serve to increase complexity and arbitrariness).
CIPRs similarly won't facilitate innovation - each product making up the CIPR must comply with the regulations.
What is really needed for innovation are principles (for the whole retirement package), within which innovation can take place, not rules (for each product).
Accordingly, it would be interesting to know more about the Optimum Real Lifetime Pension - is it essentially a unitised annuity? If so, it may solve the investment problem, allowing typical unit-linked investments, but not the forfeiture problem, as units would be presumably forfeited on death.
My own solution is a Pure Endowment, paying a lump sum on survival (a bit like a deferred annuity, but paying a lump sum, rather than an income stream), which might then be used to purchase an annuity at then current rates. In addition, it would be:
* with-profits, to allow more aggressive investment; and
* regular premium, so that only premiums paid to date are forfeited on death, not the whole single premium.