Actuarial resources for trustees preparing retirement income strategies

Actuaries and others whose work is associated with the Retirement Income Covenant will find some useful resources on the Actuaries Institute website – most of which have been prepared or updated in the last 12 months.

The Retirement Income Covenant requires trustees to formulate and publish a retirement income strategy by 1 July 2022. It has to set out how they will assist their members to achieve and balance three retirement objectives: maximise income, allow flexible access to funds, and manage stability and sustainability risks, such as investment, longevity and inflation risks.

The legislation requires trustees to decide on three ‘determinations’: those retirees and those approaching retirement who should be covered by the strategy, the meaning of retirement income, and the period of retirement. To do so, they need to investigate the needs of members and use their discretion to offer different options to different cohorts of members.

This legislation is a milestone in the development of more appropriate products and advice for superannuation fund members leading up to and in retirement and fills a major gap. Many members of the Actuaries Institute have been working for some years – within the Institute, for industry participants, and with the government – on various elements that will need to be included in these covenants. Interested parties can find the fruits of some of their labour in the resources below:

Submissions to Treasury on the Retirement Income Covenant position paper and draft legislation

The two submissions include a number of issues relating to products, advice and data collection where the Institute felt that guidance is required, and would be useful in assisting trustees.

Information Note: Innovative Income Streams

This information note (IN) covers the design and risk management of ‘innovative’ lifetime income streams. These share some or all of the investment and longevity risks between members and the life insurer or superannuation fund offering the product.

For retirees who can take the risk, they can be seen to offer better value than guaranteed annuities, because members are not charged for expensive investment or longevity guarantees. They can also be seen as better value than account-based pensions, because they transfer longevity risk from the individual to a pool of members or to an insurance company. People can therefore spend more because there are no ‘unintended bequests’ when people die with unspent balances.

We expect that all trustees will eventually offer members access to some sort of lifetime income streams because they are the most efficient way of addressing longevity risk and maximizing income, once the need for access to contingency buffers has been met.

Letter to Treasury on Innovative Income Streams: legislative issues

This letter covers some outstanding legislative issues that need to be addressed, and which may be of interest to trustees designing such products.

Research Report: Exploring Retiree Mortality

There is very little data on the annuitants’ mortality rates in Australia. This report collects what is available and suggests how data from the United Kingdom might be modified for lifetime income streams.

Information Note: Good Practice Principles for Retirement Modelling

This IN covers the methodology and assumptions for creating retirement income models for use in illustrations and retirement calculations. Models are necessary for product design and financial advice to assist members to make an informed decision about what products to utilise and for the choice of investments. Modelling would be simpler if it were not for the asset test that makes it necessary to collect information about earned income, assets and liabilities not only of members but also their partners. This means that models should be based on the household, not the individual, if they are to take the Age Pension into account.

An important issue is explaining the risks that are involved using alternative strategies, and the IN suggests that this means showing members alternative spending patterns that depend on investment returns and the extent to which longevity risk is insured.

Submission to ASIC on Consultation Paper 351: Superannuation forecasts

The Australian Securities and Investments Commission (ASIC) is against showing more than one projection, believing that such illustrations will confuse rather than inform members. This submission sets out the Institute’s reasons for why more than one projection is to be preferred.

The Dialogue: Developing the retirement income framework

This opinion piece prepared by members of the Institute’s Retirement Income Working Group sets out the advice that we believe to be required by members, suggesting how it can be provided affordably, and the products that should be offered. It also addresses the objections that some in the industry have raised to the introduction of innovative income streams.

Research Note: The Importance of Accurate Life Expectancy Calculations in Retirement Advice

This note points to the most recent Australian Government Actuary life tables and improvement factors.

Research Note: Spend your decennial age

This presentation suggests a rule of thumb for spending an account-based pension to last throughout life. It is offered as a guide to help members spend a sustainable income stream higher than the statutory minimum. It can be considered where no suitable lifetime income streams are available.

It will be apparent from the above that most of the actuaries who have worked on these documents believe that the innovative income streams are an essential element of what funds should offer to retirees. The cohort that will benefit the most are in the middle of the wealth spectrum: retirees who have reasonable balances but not so much that they can live off the investment income – nor so little that they need the whole balance as a buffer for unexpected expenses. Trustees and their advisors who are not planning to offer such products should perhaps consider the arguments made in the Dialogue particularly.

Thank you to members of the Institute’s Retirement Income Working Group, Superannuation Projections and Disclosure Subcommittee and Superannuation and Investments Practice Committee who have contributed to this article and – of course – produced the resources mentioned.

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