Mercer floats new retirement product idea

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There is a need to develop new products in New Zealand’s annuity and decumulation markets according to Mercer’s head of retirement, risk and finance Paul Newfield.  

Wednesday, September 8th 2010, 5:08AM 1 Comment

by Jenha White

He says one in four New Zealanders will be over the age of 65 by 2051 and there will be a 541% increase in New Zealander's over the age of 85.

Newfield says no product or policy in isolation can simultaneously address all the risks faced by retirees.

"This is a complex area with multiple and non-aligned risks which means any solution cannot be a one size fits all simple solution."

He says the knee jerk reaction would be to develop a viable annuity market, however there are supply and demand issues in New Zealand. There are also variable annuities and deferred annuities as decumulation options.

He says NZ Super provides an excellent starting point for an adequate income and he proposes a new product "NZ Super Plus" could be introduced.

Newfield says NZ Super Plus would allow individuals to purchase additional NZ Super from the government and for a lump sum the government acts as the insurer and provides an enhanced pension for life.

He says the government would carry the risk and there would be no liquidity unless there was the ability to exit and receive a lump sum due to reasons such as hardship.

As NZ Super is linked to average wages and wages are linked to inflation, this effectively protects against inflation.

Mercer suggests the government should price NZ Super Plus at a margin above current life expectancies as insurance companies do, but with no profit or further contingency margins which would assist in raising the capital administration system already in place.

"We believe the government may need to make it compulsory for a portion of each individual's KiwiSaver savings to be used to purchase NZ Super Plus, despite the potential unpopularity of such a  move," says Mercer.

Other decumulation options include home equity release, allocated pensions, pooled survival payments and long term bonds.

Newfield says home equity release products could appeal to the vast majority of the retired population in New Zealand

He says with an appropriate policy framework allocated pensions would encourage individuals to spread retirement income over a lifetime, relying less on government-funded support.

He says secondly pooled survival payments would require the development of potential rules around payment schedules.

Lpong term bonds are another option and provide regular, known coupon payments and a lump sum payment at the expiry of the investment. They are the most liquid asset class after cash.

However Mercer says if the government were to issue longevity bonds it would then face a longevity risk of its own if the effect of increasing life expectancy is more than the longevity premium it includes in the pricing of bonds.

"To guard against this risk a macro swap could be entered into to provide a hedge for longevity risk based on the mortality experience of a broad population. It would act in the same way as reinsurance of an insurer's claims liabilities."

Newfield says a challenge for New Zealand is to get KiwiSavers actively involved in retirement incomes which is an issue of engagement and education.

"If you give a person aid you'll feed them for a day, if you teach them how to farm you'll feed them for a lifetime and I think the same principle applies to financial literacy."

Jenha is a TPL staff reporter. jenha@tarawera.co.nz

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