North has about $1 billion of funds under management, and continues to grow strongly. Now, AXA has extended the concept of the North product into the retirement income space. And others are following suit – first cab off the rank is ING Australia’s MoneyForLife product, which, while different in some detail to the North product, employs basically the same concepts to achieve the same results. This involves establishing a minimum guaranteed income level, based on the amount of capital invested at the beginning of a guarantee period. Fees for administration and so on are deducted in the normal way, and an additional fee is deducted to cover the cost of the guarantee. Although the guarantee is ultimately supported by the balance sheet of the company, the issuer uses the guarantee fee to offset the cost of its liability to the investor. Upon investment, the investor’s capital is guaranteed – a balanced referred to as a “protected income base”, or something similar. Over the course of the guarantee period, the fund pays a guaranteed minimum income to the investor.
At the beginning of the next guarantee period the guarantee is reset. The guarantee is set with reference to the higher of the previous guaranteed income base or the actual fund balance. Accordingly, if the fund value has increased, the guaranteed minimum income level is reset at a higher dollar figure; if the value of the fund is the same or has fallen, the guaranteed income level remains unchanged. The concept is simple, and readily understood by investors, who can see that their capital is protected, that they stand to benefit from rising markets, that they can rely on receiving a minimum level of income from the fund for the rest of their lives, and their guaranteed income can rise if the fund value rises. Such products remove two of the key risks facing retirees: investment risk and longevity risk. The value of the retiree’s capital cannot fall (other than by the amount of income drawn own, plus fees), and it does not matter how long they live – income is guaranteed.
The GFC in particular The chief executive of INGA, Harry Stout, says the development of guaranteed income products is an inevitable development in the Australian marketplace. “When I first came [to Australia from the US] I did notice that as we looked at the Australian financial landscape there weren’t really solutions aimed at lifetime retirement income,” Stout says. “The country’s done a great job one super…but if you look at superannuation it’s really geared towards accumulation, and hasn’t been geared to providing a lifetime income. “And as individuals live longer…the needs for their retirement, and having a very stable and reasonable retirement income, are becoming more and more important. “When you look at the demographic steamroller that exists in Australia, we’ve got an ageing demographic. We’re going to see a rapid growth in the segment of the population that’s 65 or older. “Along with that, individuals are living longer – so, [we have] a growing, aging demographic that’s going to have to produce real good income out of their retirement savings.