The announcement of a partnership between BlackRock and Generation Development Group goes some way to addressing a question that Larry Fink, the CEO of the world’s largest asset manager, pondered in his 2024 letter to investors: how to get retirees to spend all the money they’d saved in their pension plans over the course of their lives.
The answer for BlackRock was product: LifePath Paycheck, a retirement income solution that integrates target-date fund investments with lifetime income annuities. Starting at age 55, a portion of participants’ portfolios is allocated to an asset class BlackRock dubbed “lifetime income,” which can later be converted into a guaranteed income stream upon retirement .
And Fink was ambitious for BlackRock to bring its new retirement nous to the rest of the world.
“We’re talking about a revolution in retirement,” Fink writes. “And while it may happen in the U.S. first, eventually other countries will benefit from the innovation as well. At least, that is my hope. Because while retirement is mainly a saving challenge, the data is clear: It’s a spending one too.”
Now, with the acquisition of a minority stake in Generation Development Group and a commitment to partner with Generation Life to develop new retirement income solutions, it’s preparing to execute on that ambition. The deal was almost a year in the making, and represents a significant shake-up in Australia’s cloistered retirement market.
“Like any relationship, we had a long courtship to make sure we’re a match for one another,” Felipe Araujo, chief executive of Generation Life, tells Investment Magazine. “On both sides it was an overwhelming ‘yes’.”
But it’s not a simple matter of porting LifePath Paycheck to the antipodes, Araujo says. It’s “very successful” in the United States, with more than US$16 billion ($24.7 billion) in assets under management, but “that’s not to say that’s going to be the reality in Australia”.
“Many others have tried to bring something that’s worked in the US and plonk it into the Australian market, but that doesn’t mean it will be successful. It has to be in recognition of local needs,” Araujo says.
“We don’t have a solution yet – we have the ambition to have a solution. Both sides have the roadmap. The Generation Life side knows very well the path of longevity, social security entitlements, what Australians want. The BlackRock side knows what it took to develop LifePath Paycheck and the journey from accumulation to decumulation. We want to play in that space; we want to make sure we aren’t just a lifetime annuity provider but also want to have a greater say in the accumulation of assets.”
Araujo says that the bones of LifePath Paycheck are “very sound” and could form the basis for whatever retirement income solution the partnership produces, but that the local landscape is radically different to the US.
“The US has corporatised 401K plans run by large organisations that offshore and outsource the asset management,” he says.
“In Australia, superannuation funds are responsible for the performance of the investment option.
“The superannuation system is defined contribution schemes; they’ve got a huge part to play, and our social security system is different, and the understanding of those two things is something we want to integrate into whatever we build. Superannuation funds know what their clients want; we want to come in with a proposition that enables and fast tracks that.”
But that proposition probably won’t be the whole solution. A lifetime annuity is no silver bullet for the retirement problem, and what members need is a blend of solutions – including non-super assets and the aged pension – to have a comfortable, secure retirement.
“It’s called an annuity puzzle globally for very good reasons,” Araujo says.
“If you ask academics and actuaries what the solution to longevity and sequencing risk is they’ll tell you that it’s an annuity. If you ask an actuary how much you put in they’ll say ‘100 per cent’. But the reality is very different; people will do what makes them feel good, not necessarily what is right. I think that’s a secret in itself. The reality is that on numerous customer surveys is that what comes through is that members of super funds want to know that they have a diversified income source that will last for life.
“They want to know that with the rising cost of living their income will appreciate, and if possible, they want greater social security access. Those three are easily catered for in a longevity solution. They want access to capital at any point in time, which you can’t do with a lifetime annuity. But if you combine the structures available, you can achieve what we believe to be an optimal scenario.”
The Australian superannuation system is the envy of the world, but its success has mostly come in the accumulation stage. Retirees want – and need – more from their funds, Araujo says.
“While the world is admiring the accumulation system, I think retirees internally are looking at the institutional market and asking for more – greater guidance from accumulation into decumulation, greater assurance that they can use those assets to fulfill their retirement lives, and ensure that they aren’t going to run out of money.
“The government is conscious that Australians unfortunately pass away with a large portion of their superannuation assets untouched. That comes out of fear, not a lack of desire to spend. Our solution will help Australians live the life they want with the certainty that they won’t run out of money.”
