Revving up retirement

RESEARCH CONDUCTED by Investment Trends found that financial advisers believe that by 2017, they will be servicing more retirees than younger clients.

The survey also found that 32 per cent of advisers believe retirees aged 75 years and over will comprise a greater percentage of their client base by the same year. These findings should not be altogether surprising, given that statistics from the Actuaries Institute indicate Australia will see nearly four million baby boomers transition into the retirement phase over the next 15 years, taking with them a significant proportion of the superannuation savings pool.

And according to recent figures from financial services consulting firm Mercer, the number of Australians over the age of 65 will increase by 75 per cent over the next 20 years, from 3.3 million in 2012 to 5.8 million by 2032. Post-retirement assets will grow from around $300 billion in 2014 to $1.3 trillion by 2032.

For advisers, these numbers undoubtedly represent a challenge, but they are also an opportunity.

The retirement challenge

Where advisers were once preoccupied with helping workers to build wealth in the accumulation phase, they are now steadily experiencing a transition of clients moving into the retirement phase.

For many older Australians, in particular the baby boomers, maintaining a comfortable lifestyle or being able to sustain themselves throughout retirement is at the front of mind.

The inaugural CommBank Retire Ready Index, developed by the Commonwealth Bank of Australia with Rice Warner, reveals that the average single Australian receiving the age pension is only expected to reach personal retirement savings equal to 61 per cent of the amount they need for a comfortable retirement.

The Commonwealth Bank's general manager of retirement, Nicolette Rubinsztein, says this is due to older age groups missing out on the superannuation guarantee during their working lives and also having "less time to achieve adequate retirement savings".

"Recent research found almost three quarters of older workers across Australia are willing to stay in the workforce for longer, with 61 per cent citing financial security as the major reason older workers continue to keep working," Ms Rubinsztein says.

"It is imperative that people of all age demographics gain an understanding of the level of retirement savings they will need today to be able to reach a comfortable level of retirement income to avoid a significant shortfall," she says.

The research also reveals that women are less ready to retire than single men.

After receiving the age pension, the average single woman is expected to reach retirement savings equivalent to 47 per cent of her comfortable retirement needs, compared with the average single man, who would have retirement savings equivalent to 78 per cent of his comfortable retirement needs.

In addition, advisers must be mindful of their client's life expectancy and longevity risk.

According to the 2015 Intergenerational Report, released by Treasury, the average 65-year-old man today is expected to live until 87 and the average 65-year-old woman is expected to live until the age of 90.

In light of the potentially limited pool of money Australians are retiring with, along with longer lifespans and market risk – advisers need innovative strategies and products to keep clients well positioned.

On the hunt for yield

In Australia, the current record-low interest rate environment means that some retirees may no longer be earning the same income on asset classes as they were previously.

"Low interest rates and low interest environments by definition means you are going to be earning less off your capital," Challenger chief executive Brian Benari says.

Lower earnings from investments mean advisers and retirees must focus on how they can maximise their earnings without "leveraging up the risk" in their portfolio, he adds.

Legg Mason multi-strategy portfolio manager Will Baylis says the low-interest rate environment has presented a number of challenges for advisers and investors hunting yield, especially across defensive asset classes such as term deposits and even annuities.

"What that means is term deposits [that have been] used to fund retirees, or even annuity products that rely on income-generating assets but not capital volatility, have fallen and fallen sharply."

In fact, Mr Baylis emphasises that for retirees who depend on regular, sustainable income, growth assets such as equities are "essential providing returns", especially within the current environment.

"To invest for retirement in fixed income would potentially generate returns below the cost of living, have no growth and higher income risk when compared to equity income," he says.

Advisers have had to move away from term deposits, which had paid their clients substantial incomes due to previously higher interest rates, and hunt for income yield through other means while still being cautious of sequencing risk and market volatility.

This is where the chairman of the Financial System Inquiry, David Murray, says comprehensive retirement income products and strategies can play a key role in helping Australians through their retirement.

"Higher income in retirement and a wider range of retirement income products would better meet the varied needs of retirees," Mr Murray said in the FSI Final Report released in December last year.

"Combinations of products enable retirees to balance the three desired features of retirement income products: high income, risk management features and flexibility," the report said.

The industry is currently equipped with retirement income products such as account-based pensions, annuities and hybrid-style products formed from a combination of the former two products.

But now, the industry is also looking to innovate and consider alternative investment strategies for retirees.

Taking action

Moran Howlett principal Cameron Howlett – who was named ifa Investment Adviser of the Year at the recent 2015 ifa Excellence in Advice Awards – says he first started taking action in response to the low-interest rate environment two years ago.

Having previously put his retiree clients into term deposits to capitalise on the then higher interest rate, Mr Howlett says he is now on more of a hunt for yield.

"Two years ago, we made the change where we started to move out of term deposits and into a combination of corporate bonds through managed funds and also subordinated notes and hybrids," he says. "The idea behind this is to [be able to increase] the income of the portfolio.

"When we set up portfolios and pension portfolios we are looking for stocks and investments that produce a higher income than what the rest of the market does and again the idea behind that is to make sure there is enough income being paid into the portfolio to ensure the cash flows are there," Mr Howlett says.

The biggest change he had to make within his clients' portfolio was to adjust the asset allocation from term deposits to capture more growth assets through blue-chip equities

"So now, the sort of portfolio that we are putting together is like everyone else – we are on the hunt for yield," Mr Howlett says.

According to Zurich senior investment specialist Patrick Noble, generating income for retirees in any environment is all about having the right diversification in their portfolio. It is very important to find the right balance of defensive asset classes and equities, Mr Noble explains.

"It is thinking about what's the balance between the income that I want from my share portfolio, what type of volatility that I want to get, and that is where the funds that we offer in the market can fill that role in a portfolio," Mr Noble says.

Quantum Financial's principal, Claire Mackay, says her strategies for helping clients are based on ensuring they fully understand how much money they have and how much they can spend.

"The reality is, the basic principles [of retirement planning] are the same," she says. "The products might be slightly different – I know there has been a big push for annuities, which adds certainty – but the reality is, the biggest driver of how long [clients' money] lasts is how quickly they are spending it.

"When I work with clients when planning for retirement, the base principle is: you are spending X amount today, if you keep spending that today, how long will it last," she explains.

"Part of our job is to make sure clients have a realistic expectation of what retirement is going to look like."
However, Challenger's Brian Benari points out there is an interesting trend among Australian investors towards guaranteed income assets and away from growth assets.

"If you take the Australian market, it is a market that has been dominated by account-based pensions with growth assets in them," he says. "If you take the UK market, it is a market that has been dominated by annuities with no growth in them.

"Where you are standing now, the UK are trying to find a mid-point. So they are trying to see less assets or less money rolling into annuities, and more money rolling into growth assets because they can see the benefits of a combination," Mr Benari says.

"Australia is doing the exact opposite – we are going from growth assets to start to include guaranteed incomes as part of the allocation.

"It is interesting to see [that] coming from two different ends of the world and two different perspectives, they are all trying to meet in the same sort of moderated position whereby people's retirement assets are in a bit of both."

With advisers already tackling the issue of retirement planning head-on and seeking to address the low-income environment, many product providers are making moves to capitalise.

Answering the call

In the post-retirement area, innovative approaches are already underway and according to Mercer, a wider range of solutions are beginning to emerge as the industry shifts its focus to providing income in retirement.

"Much of this innovation is focused on assisting retirees manage longevity risk, the importance of which is becoming increasingly well-accepted by the industry," Mercer says.

The fund managers

Among the innovators, fund managers have made a number of inroads, creating channels for investors and advisers to invest money and retrieve adequate returns to fund retirement.

Zurich's Mr Noble says the launch of the Zurich Equities Income Fund has proven to be a valuable tool for advisers and Australians in retirement.

"It has already gone through periods of time where you have gone through the end of a bull market, gone through a bear market," he says. "[This] fund has demonstrated through those market cycles that it has been able to give you downside protection and a high recurring level of income.

"At the highest level, we think it satisfies those ingredients that we were just talking about. In terms of how that product has evolved, it is more that of product development," Mr Noble says.

Legg Mason's Will Baylis says the fund manager has a series of funds that have been able to help advisers achieve reliable income streams and provide protection for their clients.

"We have an equity income strategy which is underweight top 20 and it is in very high income earnings," Mr Baylis says. "That strategy has been around for five years; we have seen good growth in that strategy.

"I would say Australian investors are only just coming to terms with how quickly term deposit rates have fallen."

Platform providers

Among the new product innovators in the retirement planning sector, Colonial First State (CFS) has been one of the most active. Colonial First State's general manager of product and investments, Peter Chun, says one of the first things CFS sought to address was its investments menu.

"A lot of our focus is about how we support financial advisers to deliver retirement advice, and when you have a very large platform our ongoing desire is to continue to evolve the tools and services so advisers can successfully meet the needs of retirees," Mr Chun says. "Historically, our investment menu has been very focused on the accumulator segment, emphasising growth assets, equities and even geared equities".

Mr Chun adds that innovation within CFS has also led to bringing on additional funds to its investment menu to ensure that advisers and retirees are well equipped to handle the challenges of retirement planning.

"Funds that we have added to the menu in recent times include a Franklin Templeton Global Bond Fund; an Arcadian Low Volatility Equity Fund; and a Grant Samuel Global Equity Fund focused on income," says Mr Chun.

"The clear feedback from advisers is that the traditional guarantee products, such as capital protected and structured products, are too expensive and inflexible, they are very hard to get out of, and they are not aligned to how they normally run their financial advice," he adds.

"Rather than typically create a product and then expect the market to use it, we have really looked to design an offering that is complementary to their original advice process."

The desire to be more flexible for advisers led to the launch of a series of equity funds known as the Colonial First State-Sanlam Equity funds, says Mr Chun, noting that these were designed to help retirees achieve the level of income growth they need while guarding them from downside risk.

Along with these developments, Colonial First State has improved access to guaranteed income products.

The asset manager recently announced the addition of Challenger's and CommInsure's annuity products to its FirstChoice and FirstWrap investment platforms.

Annuity providers

With the FSI's call for a greater focus on comprehensive retirement income products, the role of annuities has clearly caught the attention of the industry.

Adding Challenger's and CommInsure's annuity products to CFS' platforms was, according to Mr Chun, a response to David Murray's recommendation that longevity risk among retirees be addressed.

In his report, Mr Murray noted that managing longevity risk "through effective pooling in a CIPR [comprehensive income product for retirement] could significantly increase private incomes for many Australians in retirement and provide retirees with the peace of mind that their income will endure throughout retirement".

Challenger's Brian Benari adds that Mr Murray has been a catalyst for the take-up of annuity products and innovation in this area. For example, Challenger's recently-launched CarePlus product falls in line with the types of innovation occurring in the retirement sector, he says.

In fact, with innovation characterising the development of many retirement income products, research conducted by Investment Trends found that more financial advisers are recommending annuity products than in previous years.

The researcher also found that in addition to this increased uptake, advisers are more open to the idea of using these products, with 59 per cent of planners intending to recommend them in the coming year.

CommInsure has also improved its products and made them more accessible to advisers and retirees.

Recently, CommInsure reduced its minimum investment requirement from $20,000 to $10,000, with head of annuities George Lytas claiming this will present greater opportunities for advisers to recommend CommInsure products.

Forever learning

Retirement planning faces "eternal challenges", according to Zurich's Patrick Noble. Advisers therefore need to be constantly updated and well informed about developments within the sector.

According to Mr Benari, education forms a key part of the innovation that companies such as Challenger undertake.

"All this innovation goes to educating retirees and providing advisers the capability to really explain the importance or the nuances to holding different types of assets," he says.

"Challenger has been incredibly active and continues to be incredibly active [in education] and that is something that we need to make sure we can put back into the industry.

"Adviser sales represent 99 per cent of our sales," says Mr Benari. "They are absolutely critical to us and we recognise very clearly the value that advisers add to this equation – especially when you talk about the complexities in investing for retirement."

As part of its innovation strategy, Challenger has sponsored a specific retirement income course through the University of New South Wales.

"We need to make sure that we put back into that sector by way of initiatives like the one at UNSW, plus more direct initiatives that we are involved in that are a brand of Challenger," he says.

Among the advice community, however, Quantum Financial's Claire Mackay says while the product providers do offer guidance and support, it is very important for advisers to continue their professional development and learn as much as they can about all areas of advice.

"In our business, just because you have finished one thing doesn't mean you shouldn't keep learning and keep studying," Ms Mackay says. "In finance, if you are not learning you are standing still and if you are standing still you are going backwards."