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Understanding of DLAs needed
Funds and their trustees will need to understand better the nature of the deferred lifetime annuities (DLAs) as well as the benefits and trade-offs they might potentially present, according to a report by Frontier Advisors and Milliman.
The report said DLAs might help to ensure funds have an array of options to help their members to choose the products that best suit their need in retirement as they offered the ability to provide a focus on the longevity problem.
However, the industry experts found that Australia was no different than other countries when it came to annuities and not many decided to buy them as members did not want to lock away their funds. Also, retirees had fears that they would die early and would not get the real value.
For those reasons, the majority preferred the flexibility offered by account-based pensions (ABPs) and this has put some pressure to create flexible DLAs.
On the other hand, DLAs might offer a potential compromise for those seeking risk protection whilst retaining most of the flexibility offered by account-based pensions, Frontier Advisors and Milliman said.
The authors of the report also noted that DLAs could be decomposed into a non-income paying investment during the deferment period and a lifetime annuity from the deferment age which altogether would offer to retirees different income profiles.
They stressed that facilitating a deferred annuity market was one of the crucial factors in the debate over retirement income and both funds and trustees would have to consider alternatives strategies to understand the costs and trade-offs of each of the solutions.
Both parties would also need to embrace a number of compromises that came with DLAs such as cost, flexibility, and unfavourable market conditions.
Funds would also need to improve communication with their members to identify those for whom a deferred annuity or similar structure would yield the greatest benefits.
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