On top of this, there remains complex and significant questions around benefit design, pricing, regulation, IT, administration, distribution support and marketing associated with getting this product ‘right’ in Australia. How are issuers of these guarantees copi ng wit h the credit crunch? As mentioned earlier in this article, issuing long-term guarantees requires significant balance sheet capability and – increasingly – sophisticated financial markets risk management techniques. Leaders in the field employ sophisticated hedging techniques – the goal of these techniques is to purchase protection from the capital markets, when markets fall, increasing the value of the guarantee liability the value of the protection should pay-out.

This smoothes the impact on the issuing company’s balance sheet – or at least that’s the theory! So how has the theory held up during the recent turbulence? Several industry surveys have indicated that hedging programs are performing broadly as expected protecting issuing companies from large losses, which is encouraging. The crisis does, however, highlight the critical importance of managing counter-party risk. AIG, a major player in this space, needed to be rescued – not because of these products but because of unrelated bets in the CDS market.

Because Australian funds are likely to outsource the GMB rider, they are well placed to manage counter-party risks by working with a pool of issuers. Why not wait unti l it s proven out? There are three reasons why not – Member best interest: Earlier in this article, we have demonstrated the fundamental mismatch between ABPs (the asset) and members’ lifetime income needs (the liability). Are you comfortable that your fund is meeting its fiduciary obligations in marketing such a mismatched strategy to clients?

Have you considered the risks if you are not? Even if you don’t accept a fiduciary obligation, are you comfortable that ABPs are the best answer for your members? Commercial imperatives: What proportion of your FUM is owned by members aged between 50 and 65 with greater than $150k in their account? These members will increasingly be the targets of aggressive retail funds. International experience has shown that funds that are unable to offer guarantees are at serious risk of churn to those that do.

The current plight of the mortgage fund sector dramatically highlights that the Australian financial services industry is not immune from the risk of large scale flight of capital. Strategic positioning: If you come to the perspective that variants of these products are going to impact the Australian market, then there are strong reasons for fast, flexible action. Taking a leading role allows you to shape the design of products, establish strategic and collaborative relationships that secure your long-term position and, importantly, to move up the ‘experience curve’.