Institutional superannuation funds should offer longevity risk solutions to retain members, according to delegates at a recent Retirement Income Forum convened by Pimco.
The forum, held in Sydney and Melbourne, found the consensus fund sector view was for a hybrid longevity risk product. These products combine a guarantee and a separate investment product, wrapped as one single offering to retirees, to provide a more cost-effective solution than those currently available in the retail market.
A research paper by Tony Hildyard and Sara Higgins of Pimco Australia detailed traditional ways of addressing longevity risk and the Australian market for these strategies. The paper, Addressing Longevity Risk, identified longevity protection as one of the most complex issues faced by retirees.
"Longevity risk remains the major unsolved problem with growth-based investment solutions conflicting with retirees' heightened risk aversion - that is, lack of certainty," said Hildyard, who is Pimco Australia's head of retirement solutions.
While retirees with superannuation savings of under $250,000 would have access to the age pension, those with more than that amount would have to consider their options, the report stated. Retirees with more than $1 million in superannuation would most likely be able to address longevity risk via an asset allocation strategy, but might still "bucket" a portion of their assets into a true longevity protection product, the report said.
"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," Hildyard said.
Hildyard conceded that the trend to take up a lump sum on retirement was "an entirely rational reaction" to this conflict. However, he cautioned that such an approach would not be optimal for the retiree and super fund. Hildyard called for an in-fund solution which focused on retiree needs and risk appetite.