Technical Paper: Innovative Income Streams

It takes account of some interesting innovations in lifetime income stream design, which we had not envisaged in earlier versions. We hope it will be especially useful for those wanting to contribute to innovation and changes to regulation. You can view the Technical Paper here.

“Innovative income streams” is not particularly descriptive but covers annuities payable by life insurers and pensions payable by superannuation funds where the benefit is payable for life and depends on investments, mortality experience or “any other relevant factors.”  

As readers will be aware, the regulations are incredibly complex and use a variety of definitions. New products have been introduced that include benefits:

• that depend on pooled investment and mortality experience, where the superannuation fund retains some discretion as to the annual adjustments;
• with a guaranteed link to an investment index, some of which have caps and floors;
• linked to a range of investment options, including to specific assets chosen by the beneficiary;
• that can be deferred until later in retirement; and
• that give a 100% return of the balance on death and so do not qualify for the means test discounts.

We had not envisaged products with the flexibility to choose individual investments that meant that investment portfolios were no longer “pooled”. We have therefore no longer used the word “pooled” to describe the full range of options.^[1]

The original Information Note, before coming a TP, had focused on unit linked products. The introduction of products where the superannuation fund retains some discretion over changes to the benefit raised new questions. For life insurers, these would be classified as participating products with rules for the determination of reserves and protection of policyholders. Similar principles should apply to superannuation funds and may be required by regulators in due course. One new issue raised in the TP is that a single unit price does not permit duration matching as people age, which might be desirable for some members.

The draft of the TP was reviewed by members of the Life Insurance and Superannuation and Investment Practice Committees. One item that led to some refinements was the discussion of discrimination. A particular problem arises because some of the new products are gender neutral, others are not. If trustees and financial advisors have a duty to promote their clients’ best financial interests, then women should be directed to gender neutral products and men to those that differentiate. An industry agreement would make sense here.

Health and socio-economic status can also be used to differentiate in favour of more needy members. In their submissions on the Retirement Income Covenant, the unions are particularly concerned that annuities will offer poor value for money to lower-income members. Occupations with low-income members are routinely charged much more for their life insurance, so it could be argued that the reverse should apply in retirement.

One of the companies has published its guaranteed mortality bonuses for the product. I calculated the implied life expectancy as 24.4 years for a 67-year-old, 1.7 years longer than the female Australian Life Tables with projected improvements of 1.5% pa. This does not seem unreasonable for their high socio-economic target market.

One of the benefits of Technical Papers is that they provide a basis for actuaries to justify policy considerations that may seem unnecessary to other members of product development teams and management. The RIWG would be interested in any comments and suggestions for the 4th iteration – when it becomes necessary.

References

^[1] Although it does remain in some Services Australia forms, where it seems to refer to all “innovative income streams”.

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