These issues are fundamental uncertainties – as we will see below, insurance style products can help manage these risks. These products are currently available overseas but are largely absent from the Australian market. All this raises a question of particular interest to the industry fund sector – could it be that properly designed retirement incomes products offer greater member value than expensive ongoing advice?

Ingevity research shows that Australian pre- and post- retirees are very aware of how long they might live. We believe baby boomer retirees have a “hierarchy of needs” – for many basic life-long security comes first, discretionary income early in retirement second, flexibility and the ability to deal with emergencies third and bequest once everything else is taken care of.

The international success of the products we discuss later in this article can be attributed in part to providing baby boomers a little bit of everything. So what ca n funds off er these dema ndi ng Memb ers? Ingevity’s research and experience suggests that the ‘account-based pension’ (ABP) will be the basic framework on which any commercially successful longevity risk management product will be built.

The ABP is an attractive product – tax efficient, flexible and transparent. Its key shortcoming is poor risk management. There are several options for funds that want to add longevity risk management features to their ABP. In this section each option is described separately – in reality they should be viewed as building blocks that can be combined to provide solutions tailored to an individual fund’s member needs.

Optimised Pension Planning: There are two key levers members and advisers can use to adjust a pension strategy – asset allocation and withdrawal level. The question of how to optimally trade-off levels of income early and late in retirement, investment risk exposure and bequest assets is a hot area of academic research. Various methodologies are emerging in the US – the best of which employ dynamic techniques commonly used in institutional asset/liability management programs. These adjust the asset allocation and pension income annually, based on the realised investment performance information as it becomes available.

Several US organisations are beginning to use these tools – but given the slow uptake of even simple Monte Carlo analysis techniques in Australia these solutions seem to be a long way from commercial reality in our market. Longevity Insurance: Longevity insurance works on the basis of pooling – all retirees contribute a premium to a pool, the income needs of those that live longer are funded by the unused premiums of those that pass away early. Typically premiums are contributed between ages 60 and 80 – while a death benefit may be returned to those that pass away early, some funds remain in the pool.