Longevity perceptions and post-retirement products
The super industry has struggled to develop suitable post-retirement products to cater for increases in life expectancy. How would your own investing change if you knew you would live another 30 years after retiring?
How long do you think you’re going to live?
Humans have been on earth for around 100,000 years and of all the humans who have ever lived to age 65, half are alive today. Average global life expectancy has doubled in the past 100 years, and Australia is one of the longest living nations. Right now, your life expectancy is increasing by six hours for every day you live.
Official statistics underestimate longevity
Many of us think we’ll live as long as our grandparents or parents did, which is a major perception problem. We don’t realise how long we’re going to live. In 2010 I co-authored a white paper for the Actuaries Institute called Australia’s Longevity Tsunami. The paper explored longevity and some reasons why we consistently underestimate our remaining years. This excerpt describes the reality:
“The latest ABS data reports the life expectancy at birth for a male as 79 and a female as 84. These figures are reported in the media and most Australian retirees base their views on how long they will live on this information.
The more realistic predicted scenario is much more dramatic. After allowing for mortality improvements on a cohort basis … it’s estimated that retirees aged 65 now (i.e. in 2010) will live until 86 for men and 89 for women …
By 2050 the average life expectancy for people aged 65 is projected to have improved to 92 for men and 93 for women. And this is an average. Many will live longer than this.”
So rather than living 14 years in retirement from age 65, males who have reached 65 are expected to live another 21 years – 50% longer. Similarly, women will be living 26% longer than expected. What does this mean for our retirement planning?
I think these figures could turn out to be conservative considering that we have consistently underestimated the speed of mortality improvements over the past 50 years. My personal prediction is that if the current rate of medical advancements continues then if you are currently 65 and healthy, there’s a 50% chance you will live until 100. If you are in your 20’s now, you could live well beyond 110.
It’s not just the general public that have failed to recognise these trends. It’s also those of us working in the superannuation industry. Are fund executives, product developers, fund trustees and risk managers really thinking enough about the implications of increasing longevity? If we believe a significant proportion of today’s retirees will live until 100, we know they won’t have enough super to last that long. How can we help them to manage the two biggest risks they will face in retirement – investment risk and longevity risk?
Poor acceptance of post-retirement products
Over the past two decades a series of post-retirement products have been launched which attempt to address these risks, but hardly any retirees have bought them. Why is this? There are many reasons, including:
The products (such as lifetime and deferred annuities) are complex and it can be difficult for customers to understand them. We have not yet found a way to simply present the value proposition of these products to a customer.
Interest rates have been low for a long time so it would mean customers are locking in a low rate of return for life and their returns look poor.
We struggle to find natural assets to ‘back’ these products. An ideal hedge would be a long term indexed bond. The lack of suitable assets to match these liabilities increases the risk and therefore the cost.
Fees appear high because they include insurance premiums for the significant protection provided against both market downside and outliving the money. If a customer doesn’t recognise how long they are going to live, this protection seems expensive.
Protection is expensive because the risks are so high. The market downside protection is the most expensive. Longevity protection becomes even more expensive when actuaries are not sure how fast longevity is improving. Longevity risk also exacerbates the investment risk as the longer a retiree lives, the higher the chance they will experience a market reversal.
Retirees want flexibility and do not like the concept of putting their retirement savings into a product which they cannot surrender and access the capital. It also works against their desire to leave a legacy to their family when they die.
Taxation legislation is out-dated and penalises deferred annuities compared with other retirement products. Other legislation (SIS, Centrelink) creates a number of other barriers.
Perhaps we all need to shift our perceptions to help solve these problems. Product manufacturers should design products which are easy to use, able to be understood by customers and present a clear value proposition. Trustees and fund executives need to recognise the importance of offering retiree members protection against the high risks they will face. Individual Australians need to recognise that they are going to live for a very long time, and look at ways to protect against running out of money. And last but certainly not least, governments, regulators and policymakers need to prioritise the removal of legislative roadblocks to allow innovative products to be developed.