Two pathways for super funds to address longevity risk

Addressing longevity risk in the Retirement Income Covenant (RIC) is a tougher nut to crack for superannuation funds than its mandate for funds to mitigate investment and inflation risk to retirement savings.

Speaking to Money Management, Challenger’s general manager, institutional partnerships, Simon Brinsmead, said this was because it was the only risk that funds needed to balance that existed outside of the accumulation phase.

“Why this is significant is because you've got around about 700 people retiring every day now, so the floodgates truly have opened,” he said.

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“It really is the toughest nut for these funds to crack because they need to build this and this is where it gets really interesting.”

With the RIC deadline of 1 July getting closer, Brinsmead said funds were realising their grand plans to address longevity risk would instead need to be implemented in baby steps.

“The realisation is that this is complex, and it really is a question of baby steps, get something built, take the first step, get something to market and then it'll be a progression from there.”

The issue for retirees, according to Brinsmead, was that they considerably underspent due to the fear that they would run out of money, driving super funds to look for answers to the question of longevity risk.

“This is where we at Challenger are having quite extensive workshop discussions with the funds and we have been for quite some time,” he said.

Brinsmead said there were two ways that funds could address implementation of the longevity risk requirement, either by working with an insurer to tackle the risk from a product design perspective or by building a pooled capability from the ground up.

“They want to insource the capability, but realistically, in order for the rubber hit the road, they can't.

“The funds can't just create this capability from the ground up on day one, they're going to have to develop a journey and this is where the partnership solutions we work on with funds is to help them get from step one to step two to step three.

“So perhaps step one would be an insurance or an insurance-related solution. And step two to three could be helping them migrate to the internally-created solution.”

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