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Industry funds team up in longevity search

Nine industry funds are working with Frontier Advisors to probe new longevity risk products for retiree members, which could include tweaking account-based pensions.

The working group, which was put together late last year, is expected to present its first findings later this month. It also plans to engage with the Treasury.

"Difference to what we are doing is that it is designed by the fund and is something that [funds] collectively support, rather than designed by the product provider trying to understand what the funds and members want from the outside," Frontier Advisors principle consultant, head of member solutions David Carruthers told Financial Standard.

The working group's key takeaways for product design of a retirement income solution are: primary goal is a stable income via an account-based pension (Frontier is not limiting itself to CIPRs' requirements of guaranteed income), with a longevity element.

Carruthers says currently, retirees are implicitly using about 30% of their account based pension balances as a form of self-insurance/longevity protection by drawing down less when they are in early stages of retirement.

"It's a bit like not insuring your house and holding money back from your day-to-day budget. And economics tells us self-insurance is an inefficient way for [longevity risk]," he says, likening it to ABP withdrawals where retirees draw less in their early years.

"Current system is that a 90-year-old will have higher income than someone who has just retired. Having longevity risk allow you to bring forward that income."

Frontier is agnostic on how funds implement the findings. They could either create a collective pool of all their members to manage longevity risk or they could develop specific products.

Carruthers says funds could go down either path.

"Doesn't necessarily have to be that [industry funds pooling together]. It is more the fact that funds got together to design their features. It may be collectively implemented -- some may want to other may not.

"But it also allows [for] the fact that if it not collectively, here are the features that are important, can the providers come back with solutions that need, rather than the other way around.

"It takes away the risk from product issuers as well," he said.

Read more: Frontier AdvisorsDavid Carruthers
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