Asset managers and service providers should be looking at what they can bring to market to cater for Australia’s growing post-retirement needs, Russell Investment’s global head of consulting Don Ezra says.
A 35-year veteran of the consulting industry, Ezra says while Australia’s superannuation system has been a world leader in providing for the accumulation phase, it can do more to focus on the needs of the growing wave of retirees.
“Let’s focus on the draw-down and decumulation phase – that’s the way to improve the system,” he says.
“One thing our research is showing is that we need products and services that need to focus on this. On the post-retirement side, the lack of longevity protection is a big gap.”
An easy-to-understand, consumer-friendly annuity product is something that product providers in Australia have been grappling with for some time.
Ezra thinks providing a greater sense of security to retirees that they will not out-live their savings is crucial to assisting individuals to make sound investment decisions and maintain the right risk exposure in the draw-down phase.
Russell Investments research shows that 60 per cent of retirement income is generated from returns from investments in the post-retirement phase.
“What retirees and even professionals don’t realise is that longevity uncertainty is even greater than equity-return uncertainty once you reach 75. So, most people should take out some form of longevity insurance, what the geeks call the ‘right tail’,” he says.
The other component to the post-retirement phase is maintaining the correct risk exposure to generate vital returns in the decumulation phase.
Ezra sees an increasing role for glide-path investment strategies in the Australian system.
This glide path decides the asset mix for a fund as it approaches a particular target date. The asset allocation typically becomes more conservative as a person ages.
However, the underlying liquidity of this asset mix will change if, at a specified target date, an individual wants to purchase an annuity rather than hold onto the fund.
Concerns about the lack of post-retirement solutions were also raised by Towers Watson in its 2012 Global Investment Matters report. It identifies few incentives to encourage Australians to convert superannuation lump sums into annuities or other forms of income stream. It has called on the industry to work with the government to make changes.