Allowance needs to be made for future improvements in mortality rates when it comes to pricing comprehensive income products for retirement, according to a new study.
The Actuaries Institute said its report, Exploring Retiree Mortality, comes in response to the Australian government’s decision to stimulate industry development of post-retirement products.
However, it found a shortage of Australian data covering retirement income products because of a historic focus on products such as account-based pensions, where there is no longevity protection.
Instead, the Actuaries Institute analysed data from the UK, where the annuity pool is deep and diverse, and provided some insights for the Australian market.
The analysis confirmed a significant selective effect on mortality rates of voluntary purchase of CIPR products.
“Typically, those who choose to invest in pooled retirement income products have longer life expectancies (lower mortality rates) because those in poor health do not purchase a product that could see them lose their capital on death,” the Actuaries Institute said.
“The data also show a distinct socio-economic effect. Those with larger benefits (funds to invest) have longer life expectancies. This could not be quantified in detail but has important implications because those with larger benefits are more likely to have the ability to devote a portion of their benefit to a CIPR and those with lower benefits will want to ensure they receive fair value.
“Data tables on life expectancy for purchasers of annuities, including voluntary purchasers, are therefore crucial to ensuring fairness for customers and a deep and sustainable annuity market develops.”
Actuaries Institute president Barry Rafe said longevity risk is a very real issue for retirees, especially with increasing life expectancy.
But he said there’s so much conjecture around how much money you need to live well in retirement and, in Australia, the market for these products has been slow to advance.
“Our aim was to find as much data as we could, so that we can help new providers design and price products appropriately,” Mr Rafe said.
“We’d like to see a robust debate around what could be offered, and how those products are offered, so that people are more likely to take them up.”
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