Aging workforces, longer lifespans, and deteriorating global economies have placed the future of retirement systems at risk. In this issue of Benefits Perspectives, Wade Matterson spotlights Australia’s superannuation retirement system as he examines reasons government intervention in pension policies are anticipated moving forward.
Here is an excerpt from his article:
Private industry is already in the early stages of evolving to address some of these problems. The market participants are reacting, driven by the need to provide better outcomes for workers and retirees. Whilst embryonic in many cases, examples of these activities include:
• Greater segmentation of members and their needs, e.g., the trend to review one-size-fits-all investment models (or default funds) in place of developing investment strategies that are more focused on individual objectives and that take a holistic view of members financial affairs.
• Offerings that target these segments, including product, advice and distribution, including the development of lifecycle investment options, personalized overlays and other longevity products (e.g., variable annuities), as well as emerging advice models that range from single-issue advice to intrafund and holistic approaches.
• New models emerging such as self-managed and direct investment alternatives. Whilst this trend has arguably come about in part because of the perceived failings of large institutional pension plans, the trend towards greater control and individual tailoring has been established and many funds now appear to be developing the capability to offer similar solutions to the membership.
Improved efficiency, competition, and choice in the retail provision of retirement benefits could further lessen dependency on governments by creating a more educated and informed member. Armed with knowledge about saving, investing, spending and other retirement planning information, members should experience improved decision-making and outcomes (i.e., mitigate behavioral risks that lead to mismanagement of pension assets).
In a recent article in the Australian Financial Review, Sydney-based Milliman Financial Risk Management (FRM) practice leader Wade Matterson argues that market-based private sector solutions are the only effective means to address “longevity risk” in the Australian retirement income system. His comments, in response to aspects of the federal Treasury Secretary Ken Henry’s review of the Australian taxation system, are germane to retirement policy and regulation around the world.
“A mandated solution,” he writes, “where the government makes it compulsory to purchase a particular longevity product—or worse, offers their own—would only hinder the system further.”
Instead, by giving the private sector the chance to innovate solutions, we can address what is essentially a multi-faceted, complex problem. “There are no silver bullet solutions” and the one-size-fits-all approaches that governments tend to favor essentially remove the consumer from the equation.
Government has an important role, however. It can help provide the regulatory environment and healthy long-term bond market that underwrite what the private sector retirement income system needs: certainty.
“Given the right rules, the market will develop retirement products that benefit investors.”
Milliman’s Sydney-based Financial Risk Management (FRM) practice leader Wade Matterson provides some perspective on Australia’s efforts to boost its underdeveloped annuities market, in an article by Anthony Sibilin in the May 20 edition of the Business Review Weekly. The article is about the wide-scale analysis of taxation—the “Henry Tax Review”—currently being conducted by federal Treasury Secretary Ken Henry. One important aspect of the review, of course, concerns pensions and the effect of longevity risk on retirement products, funding, and planning.
The debate focuses on whether government should enter the annuities markets with its own products.
Matterson thinks not, at least as a major provider of annuity products. “It is relatively early days in the whole longevity debate,” he says, noting that it’s premature for government to take responsibility without first giving the private sector an opportunity to develop solutions.
He thinks that the tsunami of Boomer retirees will actually accelerate private sector innovation and product development “with or without a nudge from government.”
The global financial crisis has called into question a lot of commonly held assumptions about retirement planning, especially when it comes to tried and true asset allocation models.
In light of these developments, Andrew Fisher and Wade Matterson of Milliman’s Australian Financial Risk Management practice revisit asset-allocation strategies for defined contribution retirement plans. Their article details some “promising approaches” for fund managers to lessen risk through diversification, hedging, and insurance—framed, respectively, as administration strategies, derivative strategies, and insurance/outsourcing strategies.
The authors examine the types of risk—longevity, market, inflation, health, and behavioral—that affect risk management strategies in light of “the long-term nature of retirement . . . and the fiduciary responsibilities of fund trustees” that complicate traditional insurance-based approaches to risk management.