I hope you aren’t getting sick of me citing the Australian Super system and its struggles to provide lifetime retirement income.
Australians do not like annuities, so anyone suggesting that insurers should be involved in managing longevity risk, is in danger of getting whacked over the head with a didgeridoo.
But David Orford who runs Optimum Pensions and bosses my good friend Jim Hennington, is not afraid of challenging the status quo. In this article he argues that where “self-annuitisation” isn’t allowed (and Super’s cannot run their own mortality pools) , they should work with insurers to deliver incomes that marry the market returns Super pensioners expect with the certainty that retirement income will last as long as the pensioner does. You can read the original from this link.
There are plenty of trustees in the UK that would like to manage their member’s pension but are worried about leaving themselves and/or the sponsors of their schemes on the hook if people live on a bit too long. I hope that some of them get a chance to read what David is saying and that the ace-faces in our insurance business (Clara et al) do some thinking here. I am still firmly of the belief that we can operated within the spirit of CDC – working with insurers, indeed I think the mutual model of insurance still works for an occupational scheme. What do you think?
Optimum Pensions urges super trustees to insure mortality risk
BY ANDREW MCKEAN | TUESDAY, 28 FEB 2023 12:47PM
Optimum Pensions has urged super trustees to insure life expectancy and mitigate mortality risk to meet Retirement Income Covenant objectives.
Optimum Pensions’ ‘The difference between insured and uninsured retirement products‘ whitepaper said trustees must be proactive in considering the potential deficiencies and risks of using self-insured pools, such as Group Self-Annuitisation schemes (GSAs).
“There’s a significant likelihood that the actual lifespans of members of the pool are different to the actuary’s assumptions – which results in a ‘hidden’ variability for each person’s future income,” Optimum Pensions said.
“When designing products, it’s important that superannuation trustees and their advisers be aware of the inherent uncertainty when predicting future mortality rates for any group of people. Products that do not insure this risk may add significant instability to the longer-term customer outcomes.”
Self-insured retirement products like GSAs have lower costs but come with inherent risks that trustees must consider, Optimum Pensions said.
When actual lifespans of customers differ from actuarial assumptions, there is hidden variability in future income. The actuary must allocate excess or deficit in pool assets equitably among customers, making income payments more volatile.
Further, a GSA cannot guarantee longevity credits or specify income a customer will receive for life, so trustees must consider potential deficiencies and risks when designing retirement products, the whitepaper said.
Nevertheless, Optimum Pensions managing director David Orford told Financial Standard that many super funds are considering uninsured products.
Trustees of self-insured super funds must be aware of the risks associated with ignoring longevity risk to save costs and ensure that they have the necessary expertise to model them, he said. Failing to disclose how much a customer’s income may change due to variations in mortality experience can also be seen as misleading, a considerable risk for trustees.
Meanwhile, Orford explained that when insured against mortality risk, a manufacturer such as a life insurer or a super fund (although the latter is not allowed by APRA to carry its own mortality risk) can worry less about these risks.
Insuring against mortality risk through partnering with an insurer can help super funds provide stability and absorb the uncertainty in predicting future mortality rates for any group of people. Also, unlike super funds, insurers have wider risk management techniques available that can accommodate different sub-groups of customers and provide guarantees of dollars or units of income per annum paid for life, the whitepaper said.
An insurer’s exposure to mortality experience can also offer valuable insights into setting and monitoring assumption, it added.
As such, Optimum Pensions concluded that super funds should consider the potential benefits of insured products to meet the Retirement Income Covenant objectives and provide better retirement outcomes for their customers
