With Australians set to spend more than 25 years in retirement, financial advisers must take a leading role in tackling Australia’s longevity risk challenge, says Mercer, a global leading firm for superannuation.
“As baby boomers head into retirement and life expectancies continue to rise, the reality of longevity risk has become apparent and as a result, it is now high on the agenda of policy-makers,” says Ric Lamont, Director of Commercialisation, Mercer Pacific.
The 2014 Financial System Inquiry highlighted the need for government to address the issues of longevity risk, recommending that super funds ‘pre-select’ a comprehensive income product for retirement (CIPR) that addresses longevity risk thereby enabling retirees to afford to live longer. However, this is not only an issue that needs to be addressed by policy-makers; financial advisers are in a unique position to educate their clients about longevity risk and recommend solutions that can provide long term protection.
“Fifty per cent of retirees are likely to outlive their savings by more than five years – and 25 per cent are expected to outlive their savings by 11 years, so a strategic plan to maintain client income deep into retirement has never been more important,” says Lamont. “As clients approach retirement age, financial advisers must start taking a more proactive approach and put in place the solutions that will help individuals in potentially 30 years’ time.”
The solution to longevity risk has proven a difficult nut for product designers to crack. Annuities have typically offered some income protection but high embedded costs and low rates of return have limited their appeal. Taking a new approach to the challenge, Mercer’s LifetimePlus offers a different kind of retirement solution to advisers and clients alike.
LifetimePlus uses longevity pooling where a group of people contribute to a single retirement pool. Unlike an annuity, the longevity protection is provided by these people sharing their longevity risks and not by a life company. It is designed to give the strongest returns when other assets may be running out.
“We believe LifetimePlus is the only investment option in the Australian market that provides retirees with true longevity protection,” says Lamont. “It is the game changer that can help financial advisers take a pro-active approach in tackling longevity risk thereby helping clients to make the most of their retirement.”
“This proposition is different to previous attempts to solve the longevity issue via insurance,” says Lamont. “In fact, it’s an investment option, not an insurance product, and it’s the world’s first group self-annuitisation investment option.”
The result is an income stream that is modest to begin, with the investments targeting CPI + 2.5% p.a., and returns designed to increase and keep increasing through retirees’ late stages of retirement as other super assets deteriorate. Investors also retain access to all or some of their capital for 20+ years.
Dr David Knox, senior partner at Mercer and chief architect of LifetimePlus says, “with one in six Australians now aged over 65, post retirement products that help individuals draw an income from their savings are an essential ingredient in tackling the ageing demographic challenge. LifetimePlus is the solution that offers retirees the confidence they will continue to have income over and above the age pension in their twilight years.”
“With the 100-year life being a reality for many people retiring today, financial advisers have a golden opportunity to help clients plan for a retirement that could last well over a quarter of a century,” added Mr Lamont.
Try out the LifetimePlus calculator, visit www.mercer.com.au/lifetimeplus
Mercer delivers advice and technology-driven solutions that help organisations meet the health, wealth and career needs of a changing workforce. Across the Pacific, organisations look to Mercer for global insights, thought leadership and product innovation to help transform and grow their businesses.
Mercer’s more than 22,000 employees are based in 43 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 60,000 colleagues and annual revenue over $13 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com.au.