Australians have grown accustomed to having their super accounts and pensions entirely linked to the investment markets, but insurance-based products hold out the promise of more predictable outcomes.
ANDREW ROBERTSON, of longevity risk specialist Ingevity, answers some commonly asked questions about this new breed of offerings. In these turbulent economic times, longevity risk is rapidly moving towards the top of the agenda for many progressive super funds. In a survey conducted by Ingevity earlier this year (before the worst of the market correction) only 7 per cent of Australian middle-class pre- and postretirees were “very confident” that they would not outlive their savings.
Over the last four years, Ingevity has spent significant time helping its Australian super fund clients understand longevity risk and develop products to manage it. In the course of that work, several questions and issues are posed time and again. In the interests of building awareness and encouraging debate, this article responds to these FAQ’s. What is longevity risk? The simplistic answer is that it is the “risk of outliving your savings”. Customer focus groups, however, reveal more complex issues including:
• Avoiding “living poor dying rich” • Providing for “emergency” lump sum needs (eg health, accommodation, care) • Protecting at least a minimum basic level of income. These findings suggest longevity risk should be defined more generally – for instance as “the financial risks of funding retirement needs and wants, as and when they arise”. Clearly investment market risks, life-length uncertainty, income planning, inflation and health events all contribute to the longevity risk retirees are exposed to. Isn’t it the ad viser’s job to ma nage longevity risks?
Certainly advisers can play a valuable role in helping retirees manage these risks. In particular, research suggests that they strongly influence the “framing” of income level expectations. Of course, for many retirees the adviser also plays a significant role in selecting an asset allocation appropriate for the retiree’s risk profile. We are concerned, however, that the Australian superannuation industry – advisers, trustee boards and politicians – suffers from a dangerous blind faith in the long term power of the markets.
We often hear “don’t panic, superannuation is a long term investment and performs in the long term”. Simple analysis shows that the adage “time in the market cures all ills” is patently not true for retirees. In fact the volatility and risk of markets is poorly matched with retiree’s primary liability – the desire for a relatively stable income stream over an uncertain life length. No matter how good the adviser, they can’t know firstly how the market will perform in the future, or secondly how long their client will live.