Longevity annuities could be entering a period where they will see broader use in the U.S. than has already been made possible by the qualifying longevity annuity contract (QLAC).
Department of Treasury rules created QLACs in July 2014 as a retirement income strategy inside of defined contribution retirement plans and individual retirement accounts (IRAs).
Researchers at the global asset management firm Schroders acknowledged the change in a new report on post retirement solutions. But Lesley-Ann Morgan, head of Schroders’ Global Strategic Solutions, predicts that a larger role for longevity annuities lies ahead — in the U.S. as well as worldwide.
Longevity annuities can be used to meet post-retirement needs of the mid-market, Morgan said in an interview with InsuranceNewsNet. This is in addition to the needs of those who have corporate retirement plans.
This can happen if the products are made part of a “packaged” post-retirement solution, Morgan said. The “package” would bring together outcomes-based investing in the early retirement years (for a safe withdrawal strategy) with a longevity annuity kicking in when the client reaches age 80 or so.
This could be structured for use in both the retail and corporate markets, she said.
Many details on how this could work appear in the Schroders report, “Global Lessons in Developing Post-Retirement Solutions.” The report addresses retirement income trends in the U.S. as well as several other countries.
The idea may be of interest to retirement advisors because such a product would provide advisors with a simplified retirement solution to offer mid-market clients, even if they do not have a corporate retirement plan. That could support advisory expansion into this often underserved market.
Such packages don’t yet exist, Morgan said. “But asset managers and insurers in the U.K. are already being asked to come together to create such products for the retail market as well as in the corporate plan market.”
A “blueprint” released this summer by the National Employment Savings Trust (NEST), London, calls for a variation of the approach, she noted.
She sees the approach spreading to the U.S. and many other countries.
The report presents three different approaches but they all boil down to offering a selection of investments tailored for funding withdrawals during the early retirement years, and a longevity annuity that starts its payout stream at age 80 or later.
This may lead to a scratch-your-head moment for American annuity professionals, since many variable annuities with withdrawal or income riders accomplish much of the same purpose. That is, they have investment accounts and riders for guaranteed income streams.
Morgan said she recognizes this structure. However, she said, variable annuities “can be quite complicated since there are so many options.” The mid-market needs “something more simple,” she said. In addition, report said such products are “likely to be less attractive to insurers in the future” because of the capital requirements associated with the guarantees.
She also acknowledged that many advisors do provide counsel to people about reliable retirement investment strategies along with product suggestions. But this advice often focuses on asset allocation, she said. “We’re talking here about outcome-oriented investing, so it will produce a reliable income. This has to do with the skill of the money manager.”
Even when advisors and money managers do provide solutions using outcomes-based investing and guaranteed income solutions, there are problems for the mid-market, she said. Namely, people in the mid-market often cannot afford such advisory services.
By comparison, the packaged product that Schroders envisions would be designed for sale to the “average man in the street” who is seeking a simple post-retirement solution for income.
It needs to be simple
The two parts of the package would be sold together. This needs to be “very straightforward and simple,” Morgan stressed.
What is simple and what is not so simple isn’t always clear, the Schroders researchers conceded.
“In investment terms, ‘simple’ sometimes gets mistaken for ‘easy’, leading to index-tracking strategies being adopted,” they wrote. “As we have seen in pre-retirement investment strategy, a blindly-implemented passive strategy has significant risks for the real-world outcomes that savers and retirees need.”
If simple means “simply communicated,” the risk is that the underlying solution could be complex, and that could open up a potential “mis-selling scandal” later on, the researchers continued.
And if investors have used default retirement plan options during the working years — to simplify their investing, for example — they may not be prepared to choose appropriate investments at retirement, the researchers pointed out. That could undermine efforts to create a retirement income that investors will not outlive.
“Perhaps,” the researchers said, “simple should mean a set of principles that help guide retirees to a suitable post-retirement strategy.” The packaged retirement income solution — which Schroders also terms “hybrid” — presumably would follow such principles.
In the U.S., post-retirement is already complicated, Morgan said. For instance, many people underestimate how long they might live, so they have no certainty about how much income they will need (or receive). In addition, with interest rates being as low as they have been, annuities that guarantee income for life can look like “not a very good deal.”
The hybrid approach would help, Morgan said. It would entail partnerships between providers that create an income solution package. This package would feature: 1) drawdown from an investment account in the early retirement years, running 15 or more years; and 2) a simple longevity annuity for income in the last years, starting when investors reach their 80s, Morgan said.
The investment accounts would be “very diversified, with allowance for inflation, but not too low or too punchy,” she said.
The hybrid strategy could work in corporate plans when a fiduciary is involved, and also in situations with no fiduciary involvement, the report also said.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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