Funds need to understand better nature of DLAs
Funds and their trustees will need to better understand the nature of deferred lifetime annuities (DLAs) as well as the benefits they potentially offer, according to Frontier Advisors and Milliman.
The report said DLAs might help to ensure funds had an array of options to help their members to choose the products that best suited their needs in retirement as they offered the ability to provide a focus on the longevity problem.
However, industry experts found that Australia was no different than other countries when it came to annuities and not many decided to buy them as people did not want to lock away their funds. Retirees also feared that they would die early and would not get the real value. For those reasons, the majority would prefer the flexibility offered by account-based pensions (ABPs) and this created a growing need to add some flexibility to DLAs.
The authors of the report noted that DLA could be decomposed into a non-income paying investment during the deferment period and a lifetime annuity from the deferment age which altogether would offer different income profiles to retirees.
The simplest alternative to a DLA was a ‘rainy day fund' where funds were set aside until a later date. Also, according to the report, the DLA contained a guaranteed conversion rate to a lifetime annuity at the end of deferral period while the rainy-day fund would be converted to a lifetime annuity at the prevailing rates at the point the lifetime annuity was purchased. Furthermore, the DLA provider needed to accept the risk that interest rates might decline.
However, it was important that the flexibility provided by that rainy-day funds could be a benefit, particularly in low interest rates environment.
Both funds and their members needed to embrace a number of compromises that came with DLAs including cost, flexibility and unfavourable market conditions and improve communications with their members to identify those for whom a deferred annuity or similar structure would yield the greatest benefits.
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