Post-retirement products – a work in progress

The times have suited Challenger Limited – the financial services company which has arguably had the most intense focus on the delivery of annuities products into the Australian market. 

The almost exponential improvement in the Challenger balance sheet represents a vindication of the manner in which the company nearly two decades ago astutely interpreted the implications of an evolving Australian superannuation system in combination with the reality of an ageing population. 

Challenger, perhaps more than any other player, recognised that an Australian superannuation system focused on accumulation would, in time, need to adjust to hit the switch to de-accumulation in an effort to meet the needs of an ageing population. 

While Challenger has arguably been the most aggressive participant in the annuities space, the major banks have also had annuity products available to customers. However, the nature of the Australian superannuation regime and the allied tax system did not place annuity-type products front and centre. 

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This contrasts with the United Kingdom where the annuity business of life insurers has always been substantial, with the major reason being UK law which, in the past, has required retirees to take a major portion of their super as a lifetime pension or annuity. 

Hardly surprising then, that the Financial System Inquiry canvassed a more sympathetic approach to annuities and similar products and that the Federal Government’s response spoke of the need to “improve retirement income products by removing impediments to their development”. 

As the Federal Treasurer, Scott Morrison brought down the Budget, the Minister for Revenue and Financial Services, Kelly O’Dwyer said the Government would be removing tax barriers to the development of new retirement income products from 1 July, 2017 by extending the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self-annuitisation products which do not currently qualify for this exemption. 

“This will facilitate the development of new products that could provide more flexibility and choice for Australian retirees, and help them to boost living standards and better manage consumption and risk in retirement,” she said. “We will also clarify how the new retirement income products will be treated under the Age Pension means test ahead of 1 July, 2017.” 

All of which explains why Challenger this year announced to the Australian Securities Exchange (ASX) a record interim operating result boosted by continuing growth in annuities sales. 

It is a measure of Challenger’s strategic approach and the value of fist-mover advantage that the past four years have seen the company initiate partnership with industry funds and become the first non-bank annuities provider to be included on major investment platforms such as Colonial First State’s FirstChoice and FirstWrap. 

In 2015/16 Challenger linked with industry funds Local Government Super, Caresuper, and legalsuper to deliver “retirement income solutions backed by annuities” – all via the Link-owned Australian Administration Services (AAS) administration platform. 

The arrangements with the industry superannuation funds reflected not only the marketing and distribution strategy being pursued by Challenger but also the desire on the part of the industry funds to have products at hand capable of maintaining their relationships with members beyond accumulation and retirement. 

Challenger was arguably not the first financial services company to bring a post-retirement offering to the Australian superannuation market but it has thus far emerged as the most successful, with some previous offerings having chequered histories. 

One such was the RetireSafe product briefly offered by US-based insurer, MetLife and taken up by MTAA Super. 

The MetLife product was brought to the Australian superannuation market in 2013, but was effectively pulled in 2014 with MTAA Super in 2015 formally notifying members that MetLife was no longer prepared to support the product. 

“Regrettably, the Trustee is not able to offer MTAA Super RetireSafe without MetLife providing the investment structure and guarantee on which the product is based,” it said. 

It said the trustee ensured members’ interests were protected by negotiating for MetLife to provide an appropriate financial package for each MTAA Super RetireSafe member. 

“The closure of this product required each MTAA Super RetireSafe member to make alternative arrangements for their investment or be automatically transferred into a new MTAA Super Pension account, invested in the Conservative Option.” 

MTAA Super has since moved on and is offering its members access to pension accounts. 

Deloitte superannuation consulting partner, Russell Mason acknowledges that Challenger has reaped considerable first-mover advantage in the annuities space, but points to an increasing number of competitors entering the sector, particularly the major life insurers. 

He said the Deloitte view was that annuity products were only part of the post-retirement draw-down answer. 

“We believe that for most retirees the solution will be a combination of annuity and draw-down products,” he said. 

Interestingly, a part of the dilemma confronting superannuation funds is the reality that they are seeking to deliver post-retirement options in a low-interest rate environment and in circumstances where the common view is that interest rates will remain lower for longer. 

Mason said that the real challenge in the current low interest rate environment was for retirees to have a retirement strategy which produced adequate income and also addressed the longevity challenge. 

“The reality is that the amount of capital needed today to produce a target income level in retirement will be much more than was estimated 10 to 12 years ago,” he said. “As a result I think many people approaching retirement will now be working full-time longer than they might have previously estimated.” 

“In my view the best current solution is to buy a deferred annuity at, say, 85 and then the remaining capital can then be targeted to last for a fixed period of time. I believe this will result in better retirement investment strategies and a higher likelihood of achieving a targeted post-retirement income,” Mason said. 

He said that where the take-up of annuities is concerned the biggest challenge lay in changing retirees’ mindsets to accept that superannuation is not an estate planning tool and with no guarantee of longevity some people will be winners with deferred annuities and some won’t. 

“Like any form of insurance it is just that: insurance should you live longer than expected and not every-one will,” Mason said. 

 Australasia head of major consultancy, Willis Towers Watson, Andrew Boal reflected a similar view to that of Mason but suggested that flexibility needed to be a key element. 

1. They need to consider how much to have in a liquid bucket for immediate expenses and emergencies. 
2. They need to consider how much to have in a longer term investment bucket with a defined drawdown strategy (call this an Account Based Pension or ABP).  The drawdown will be subject to some regulatory constraints (e.g. a minimum) and also some flexibility for the retiree depending on economic conditions (e.g. the retiree may drawdown less if the market falls and as a result delay some of their spending or use some of their liquid bucket). 
3. They need to consider how much to have in a longevity protection product (e.g. a Deferred Lifetime Annuity or DLA).  Lots of issues come to mind here, including how much total savings the retiree has and the amount of Age Pension (AP) they will be eligible for over time. 

Boal said that a retiree could also draw on income from other assets, potentially including their own home, to supplement their retirement income. 

“These other assets will also have a role to play in meeting any Aged Care needs,” he said. 

Dealing with the related question of Comprehensive Income Products for Retirement (CIPRS), Boal pointed to the choice which needed to be made with respect to defaults versus choice. 

“As retirement income needs are quite heterogeneous, the resulting product mix will vary quite significantly by member.  Thus, any default needs to be quite flexible and easily unwound,” he said. 

Boal said this was the recent he was not an advocate for longevity products forming part of a default CIPR unless there were quite clear arrangements to unwind them, at least in the early years and that such flexibility would come at a cost. 

He said that he regarded, as more likely, the prospect of of superannuation funds utilising an account based pension as the initial CIPR, annexed to a choice option to include (at some point in time) some form of longevity protection. 

“Investing in longevity protection will require an education component and is also likely to involve some form of advice,” Boal said.  “As retirement literacy improves and also as retirees age, this may be an increasingly likely option.” 

Both Boal and Mason are concerned at the degree to which the Government has laboured the point that superannuation should not be used as an estate planning tool, with both pointing to the innate caution of retirees who fear outliving their retirement savings. 

Boal said that while people might be dying with substantial amounts still in their accounts, this was very often the result of their caution in terms of expenditure rather than any notions of estate planning.