Longevity risk calls for hybrid approach

Longevity risk remains the major unsolved problem within the Australian financial services and superannuation arena, according to new analysis from Pimco.

Addressing the issue this week, Pimco's head of Retirement Solutions Tony Hildyard said part of the problem was that growth-biased investment solutions often conflicted with retirees' heightened risk aversion relating to lack of certainty.

"Generally, an asset allocation approach has been followed, (including the use of income funds or asset bucketing, in an attempt to minimise risks of running out of assets before death), but this approach does not fully address longevity risk," he said.

Hildyard said that while the trend to take a lump sum on retirement was "an entirely rational reaction" to this conflict, this would not generally be optimal for the retiree or super fund and an in-fund solution which focuses on retiree needs and risk appetite is required.

"While there are many solutions that attempt to address longevity risk, the only way to guarantee an income for life is through participation of an insurer. A significant retention opportunity exists if funds and longevity providers can provide access to a suitable income and longevity protection product on their platform at a competitive price," he said.

Hildyard said attendees at a Pimco forum had agreed "hybrid" longevity protection solutions seemed to be optimal or preferred.

He described those solutions as being guaranteed, but allowing for accessibility and flexibility and the potential for bequeathing upon death.