These help to pay life-long income streams to those that survive beyond 80. Pooling diversifies the otherwise expensive cost of “self-insuring” against the small chance that any particular individual lives much longer than expected. This product allows individuals to draw more income early in retirement (typically 20-40 per cent more) with the comfort that they’ll not run out.

These products are gaining in popularity in the US. In Australia, tax inefficiencies held back the commercial success of early attempts at this product (such as Asteron’s ALIS) – however more recent innovations have integrated the option into ABPs and solve the tax issues. Guaranteed minimum benefit (GMB) riders: These are essentially flexible guarantees that can be attached to ABPs.

Their attraction is that with a simple annual premium retirees can purchase protection against long-term investment risk and longevity risk, while retaining access to equity market upside and account-based liquidity. In the US the most successful of these has been the guaranteed lifetime withdrawal benefit (GWLB), which has been a huge driver of sales in the US variable annuity market (roughly the equivalent of the Australian ABP market). Furthermore, the success has been replicated in many countries around the world (see side-bar GLWB- popular in the US… and spreading globally). In many of these countries, the products have enjoyed such great success that they have shifted the strategic balance of the market – those able to offer the riders (typically international life insurers) have won, those unable to have lost.

Wi ll GWL B work in Australia and what are the risks? Despite the undoubted successes of the GLWB it is not without its drawbacks. These include: • Cost – GLWB fees are typically 1 per cent on top of 2.5 per cent variable annuity expense • Complexity – US products have been stacked with ‘bells and whistles’ • Manufacturing risks – the rider is a complex, long-term, mixed life insurance contract and capital markets option. Manufacturing requires significant balance sheet and risk management capabilities Variants of GWBs have already begun entering the Australian market.

AXA North is the first Australian Guaranteed Minimum Benefit product (albeit without longevity protection). It is also an open secret that several other major retail super funds are at various stages of development of their own GMB riders. Those that are tailored to meet the specific needs of Australian retirees will surely enjoy success. We expect the actual underwriting of guarantees (which requires significant balance sheet capability and financial risk management sophistication) to be dominated by large international providers.