Australian superannuation fund members have high levels of equity exposure by international standards and the collapse of share markets around the world during the global financial crisis (GFC) has smashed the value of retirement savings. This is an issue for all investors, but particularly for those in the so-called “critical zone” – from roughly five years before to five years after retirement. Any setback at this stage can have serious consequences for retirement income levels. Added to the issue of a sudden diminution in retirement savings is the fact that people generally are living longer than previous generations, and face the prospect of having to make capital stretch further. ING Australia says that for a couple aged 60 there is a 50 per cent chance that one will live to be 90 or older. If they retire at age 65, they potentially face at least 25 years in retirement. It’s the conventional wisdom that to generate income for that period of time, retirees need a relatively high exposure to growth assets. But the GFC has underlined one of the obvious potential pitfalls of such a strategy. “You need the engine room to be equities, in order to ensure that the money lasts well into retirement. At the same time, that engine room comes with risk, which is where [you need] that level of protection to ensure you’re locking in your portfolio along the way,” says Barry Wyatt, national manager of business development for AXA. As retirees grapple with investment and longevity risk, demographic factors mean the market for retirement income products continues to grow.
In 2007, roughly 14 per cent of the population was aged 65 or older. By 2047 the proportion will have increased to 25 per cent – of a larger population. Research by AXA has found that 83 per cent of retirees want stable income in retirement, and 72 per cent want protection from market downside. Almost half – 48 per cent – of advisers surveyed said they would recommend “to all or most of their clients” a product that offered these features. ING says 85 per cent of planners would recommend such a product. Clearly, conditions were right for a product solution that addressed retirees’ concerns but which avoided the disadvantages of previous generations of guaranteed income products. To retirement … and beyond The first step towards the new breed of guaranteed income products was arguably AXA’s North product, which offered guarantees on contributions and investment returns, a (limited) choice of investment strategies and access to capital at any time. The product was launched in November 2007 and fired the imaginations of investors and financial planners alike.