Category Archives: Longevity

Managing Australians’ longevity and investment risks closer to retirement

Reducing an investor’s exposure to growth assets as retirement is approached is common. However, this strategy may increase the chance that an investor will outlive retirement savings. This is a predicament that many Australians face. In his article “Australia’s retirement challenge,” Milliman consultant Wade Matterson offers some perspective on how strategies employing derivatives can help Australians manage longevity and investment risks.

Surviving the longevity “Sharknado”

Matterson-WadeYou’re probably well aware of the Sharknado phenomenon—a straight-to-television disaster movie, where a water spout lifts sharks out of the ocean and deposits them in downtown Los Angeles. The heroes deal admirably with this inexplicable influx of predators and after much bloodshed, emerge victorious.

While the movie was distinctly B grade, the media hype that accompanied it was simply astonishing. It got me thinking about what makes a good/bad disaster movie, given the formulaic approach they tend to adopt:

1. Think of some absurd concept—the crazier the better.
2. Identify with an individual or group fighting to survive.
3. Against all odds, and with much bloodshed, the hero overcomes all.

This is all well and good, but what does this have to do with financial planning? Well, it seems that as an industry we are potentially in the midst of our very own, slow-moving disaster movie—that is, the onslaught of the aging population and the impact of longevity. Now while seeing a great white pointer coming out of a tornado may seem slightly more daunting than a geriatric surfing a tidal wave, the impact of the latter is much more profound, predictable, and likely.

The statistics themselves are simply staggering. By 2050, almost a quarter of the population will be over 65 compared to 14% now. Given that almost 65% of all superannuation assets are held by people between the age of 45 and 54, the amount of money in motion as this group retires will be too large to ignore. As our “Politics of Pensions” thought piece highlights, the implications are broad and will impact on all corners of the Australian community, from business owners and taxpayers through to government policy makers.

When observed through this lens, the impending pressure of longevity has much in common with our traditional disaster movie. It’s no surprise that much of the language adopted by the media and those in the industry attempting to highlight the issues is very similar to what you might find on a movie poster—the “Longevity Tsunami” paper written by the Actuaries Institute (available here) is a good example.

Combine this with the impact of the sweeping reform that the industry has been subjected to, together with rapid technological advances, and the industry is facing a perfect storm (another great disaster epic). The ramifications for the advice industry are immense. Faced with increased demand, regulation, and complexity, there is both a risk and opportunity that presents itself to those up to the challenge.

Fortunately, we’re already seeing potential heroes step up to take on these issues head on. Successful advisers and early movers in this space appear to be taking similar paths, by:

• Retooling their advice proposition to become more strategic in nature, with increasing focus on client objectives
• Developing a hunger for understanding the complexity of the issues and becoming subject matter experts
• Leveraging the latest analytical tools to offer greater insight and value add

From the perspective of this website, both Lonsec and Milliman have set out to accompany you on this mission. As your partners, we intend to provide you with the necessary advice, research, and tools—all in a single and convenient location. We understand that there is not a silver bullet to solve these issues and that ultimately it will be a joint effort.

To this end, this site intends to provide relevant information across the following areas, including:

• Thought leadership
• Research
• Portfolio construction guidance and advice

There are also some exciting plans for the future, including the development of discussion forums and a variety of tools to assist advisers in their implementation of objectives-based advice.

Most importantly, we believe that the subscriber community has plenty to add in this space and that we will all benefit from the sharing of experience. You’re invited to participate in the conversation and we look forward to your comments.

With all this at your fingertips, we’ll help you navigate the challenges and avoid becoming shark bait.

This article first appeared at LonsecRetire.com.au.

Are longevity plans in retirees’ future?

Longevity plans could one day address some of the financial uncertainty associated with longer life spans. The concept is designed to offer retirees a supplemental defined benefit (DB) pension (i.e., a longevity plan) alongside their defined contribution (DC) plan.

This article in Retirement Income Journal (subscription required) highlights the Milliman paper “Longevity Plan,” explaining how such a plan may reduce longevity tail risk while providing retirees sustainable income past 80 years old. Here is an excerpt from the paper outlining the plan’s features:

In order for the DB plan to be viable in its role as a supplementary retirement vehicle, its structure will have to be different from that of the traditional DB plan with which many are already familiar. The DB plan that is being proposed here is essentially a longevity plan. Key features of the proposed longevity plan include:

• Unit-accrual pattern such as in a career-average plan or a plan based on flat dollars per years of service
• Simplistic retirement options: No ancillary death, disability, or early retirement benefits would be offered (other than perhaps a lump-sum death benefit between termination and the pension actually starting)
• Life annuity options only: A single-life option for single participants and 75% joint and survivor option for married participants
• Participants would not begin plan participation before age 45 (although this could be extended to age 50)
• Participants would not commence benefits earlier than age 75 (and this could be extended to age 80 or 85)

Presently, ERISA prohibits employers from postponing pension payouts later than age 65 generally. Bill Most and paper co-author Zorast Wadia were quoted by Retirement Income Journal discussing the rule.

Here’s an excerpt from the article:

This “unit-accrual design” is still just a concept, not a product. But the authors of the paper think the only thing that prevents it from widespread adoption is an outdated ERISA regulation against delaying pension payouts past age 65.

“Everyone’s talking about this and lots of new products has been proposed,” said Bill Most, a Milliman principal who worked on the paper with principals Zorast Wadia and Daniel Theodore and consulting actuary Danny Quant.

“But we don’t need new products, we need changes from government. And the results will hopefully give us something that employers might embrace. We’re not kidding ourselves. We don’t deny that there’s a lot of bad faith toward defined benefit plans. But from a cost perspective, this makes sense.”

…“They’ve relaxed certain rules related to required minimum distributions starting at age 70½, but they have not made changes in the terms of defined benefit plans,” said Zorast Wadia. “If you’re no longer working, you must begin payments from a defined benefit plan no later than age 65. If you’re still working past age 65, they won’t force you to take benefits. But ERISA won’t let the company purposely delay payments beyond 65 if you’re retired.”

For more perspective on longevity plans, click here.

Assessing today’s retirement landscape

Longevity poses a challenge for retirees with defined contribution plans, because there is always risk of someone outliving his or her savings. A new application for defined benefit plans as a supplement to defined contribution plans may help provide longevity protection.

In his new article on MoneyManagementIntelligence.com, Zorast Wadia outlines this approach, known as a “longevity plan.” Here’s an excerpt explaining how such a retirement model would work:

“In order for the longevity plan concept to succeed, it will need to provide annuity protection to plan participants, be relatively easy to understand and administer and be affordable to plan sponsors. To accomplish the goals of longevity protection and cost reduction, some changes will be necessary to current pension laws including allowing employers to limit plan participation to later ages (e.g. age 45 and beyond) and defer benefit commencement to later ages (e.g. age 75 and beyond). To allow for ease of administration while still offering longevity protection, forms of payment would need to be limited to life and joint and survivor annuity options. The longevity plan would also eliminate investment risk since annuitants would receive guaranteed employer-funded benefits from the longevity DB plan. With the longevity DB plan in place, participants would be free to adjust their investment strategy with respect to benefits accruing from their DC plans. Participants with a higher risk tolerance could invest more aggressively with respect to their individual savings accounts.”

For more on this concept, check out another article by Wadia, “Longevity Risk & Retirement,” which first appeared in the spring 2012 issue of the Actuarial Digest.

Previous Milliman Insight articles have also assessed longevity plans. “Saving for retirement: What can employers do?” discusses how a “layered longevity plan can potentially ensure that people do not outlive their retirement balances for an uncertain duration.”

For more perspectives on longevity risk and retirement planning read our four-part retirement landscape series, where our team of Milliman consultants accesses the array of risks facing retirees and plan sponsors, and provides feasible solutions to them.

Can you prosper if you live long?

Live long and prosper, a phrase made popular by the classic sci-fi entertainment franchise, Star Trek, may sound like an oxymoron to some. For many, living a long life could mean running out of retirement money. We’ve written about this before, noting that some people are more afraid of running out of money in retirement than they are afraid of their own demise. Recently we even introduced the concept of a longevity plan as a way to avoid outliving your retirement funds. So this week we’re asking what the best solution is for the “problem” of living too long?

Introducing the longevity plan

Our recent Retirement Landscape Series introduced the idea of a “longevity plan.” What’s that? Here’s a description:

A layered longevity plan is one potential way to ensure that people do not outlive their retirement balances for an uncertain duration—due to the fact that no one knows their precise longevity. In the layered longevity plan scenario, employers would fund a DB plan that is specifically designed for longevity protection. The longevity plan would come into effect later than today’s retirement plans (e.g., age 80) and would provide lifetime income throughout the duration of an uncertain longevity horizon. Because fewer employees would live long enough to claim benefits compared to traditional DB plans, longevity plans would be less expensive to fund. Longevity plans are not allowed today because employer-provided retirement benefits are required to come into effect no later than age 65.2 If the regulations change, the combination of an optimized DC plan for the bulk of retirement with the security of a longevity plan could provide a very attractive retirement solution.

Interestingly, such a scenario would represent a reversal of the historical pattern. DC plans began as a supplement to DB plans and later became the rule rather than the exception. This solution would have DC plans as the main retirement funding model with limited DB plans for longevity protection. The retirement funding challenges facing the aging U.S. population cannot be solved by employers alone, but they cannot be solved without them, either. Creative thinking and an analytical approach are both required if employers are to play a leadership role in the retirement landscape of tomorrow.