Optimum Pensions has designed and tested an innovative new lifetime income stream, the Real Lifetime Pension (RLP), that may be delivered by superannuation funds to their members to address longevity risk, while providing higher performance than current lifetime annuities on the market.
The RLP will allow funds to offer a range of high performance and compliant comprehensive income products for retirement (CIPRs).
This paper provides some background and insight into Optimum Pension's thinking behind the development of the RLP as a solution to managing longevity risk for Australians.
An objective for every Australian
Start with a clean sheet and state that the objective is to provide every retiring Australian with an income payable for the rest of their and their partner's lives that broadly keeps pace with inflation, and allows them to broadly maintain their standard of living. This was stated many times as a potential Australian government objective by Treasury when the superannuation guarantee was implemented.
Note that it doesn't say to leave money to anyone else on a person's death, nor to take some with you to the afterlife. The government's tax concessions for superannuation should not better enable 'leaving money for others' to be achieved, which is the case now—the government's responsibility is to the person to whom it gave the tax concessions— not people who are their children.
There are several aspects to this objective, as follows.
This is the most important aspect of all. Financial planners, super fund trustees, the government and the fund member themselves have a huge role to play here in attempting to ensure each person has sufficient money at retirement to achieve the above objective. The payoff for all taxpayers is a reduced need to fund the future payment of the Age Pension to those who haven't saved enough themselves.
Protection against inflation
Those who do not receive government pensions or income benefits are not automatically protected from inflation eroding the value of their incomes. Who knows what rates of inflation we'll have in the future? Why would one group, e.g. taxpayers, pay for the inflation protection of another group? Currently, superannuation account-based pensioners who are not on government pensions do not have their incomes protected against inflation, but suffer and enjoy (at different market stages) the investment returns earned on their super accounts.
Longevity risk is the greatest risk faced by retirees, but is currently being poorly managed for the following reasons:
The need to manage longevity risk
- the need for managing longevity risk is under-appreciated or not well understood
- financial plans are being drawn up centered round average life expectancy (a mistake)
- conventional lifetime annuities are not doing a good enough job as they provide too many costly guarantees and the cost of the asset-liability mismatching risk.
Nick Sherry, former Minister for Superannuation, said that solving the longevity problem leads to "the last great reform of the Australian superannuation system". Quite so, as this is what the system is meant to be all about, but we have changed and hopefully improved everything else about the superannuation system, except the way in which retirement benefits can be delivered. Some form of lifetime income stream that roughly keeps pace with inflation is needed.
We need lifetime income streams, so that the recipient receives an income for the rest of their life that roughly maintains its value in real terms. No more and no less.
This means that people do not have to fear either of the two post-retirement major risks:
- dying too early and drawing the minimum incomes and then leaving a relatively large lump sum benefit to their children or others, and risk that they could have had a better lifestyle by consuming more income
- living too long, which we all want to do, but people don't want to run out of money or restrict their consumption.
Each of these is a significant risk at ages where it is impossible to recover.