When AC/DC's lead guitarist, Angus Young, took to Sydney's ANZ Stadium last month, his performance not only confirmed he is one the world's most energetic musicians, but at 56, he also showed no signs of slowing down. Clad in his customary school uniform attire, Young maintained that same level of vigour for the entire two-hour performance.

Perhaps rock stars may be forever young, but Young is typical of the baby boomer generation.

He is representative of a generation that continues to embrace life, if research from global actuarial firm Milliman is anything to go by.

A survey from the firm found 61 per cent of people plan to work in retirement.

"We may very well see more and more people continue working beyond the usual retirement age simply because they are healthy and want to stay active," Milliman practice leader Wade Matterson says. 

Life expectancy also continues to grow. The average life expectancy for a woman is 89 and for a man 85.

This increased life expectancy and evolving notion of retirement poses many challenges for Australia's superannuation industry.

A new beginning

"I call it the new beginning," GESB general manager of wealth management Fabian Ross says.

"It is another 30 years of a person's life, but you have got to make sure that you have enough money put away to live the life that you want."

The global financial crisis (GFC) further elevated the urgency of this retirement dilemma.

"Longevity risk is really all about ensuring people have sufficient money to fund their retirement," Equipsuper communications manager Geoff Brooks says.

"The GFC came [after] 16 years of growth. When you have such a long period of growth people tend to forget that at times the markets can be negative. For the older baby boomers that did not have the benefit of saving throughout their lives, they were confronted with a retirement savings shortfall that was exacerbated by the GFC."

Matterson says the GFC also turned the notion of wealth management into a risk management concept, particularly
for retirees.

"Australia was insulated from the major economic downturn over the last 15 years. The double-digit investment returns during the accumulation of superannuation savings was not the right mentality. People are susceptible to a whole range of risks, not just longevity risk; market risk is also a factor," he says.

With members on the cusp of retirement, superannuation funds are now confronting a growing proportion of members who are looking to draw down their retirement savings.

So how are Australia's superannuation funds positioned to grasp this challenge?

"A lot of superannuation funds are not that well positioned in post-retirement," UniSuper marketing executive manager Paul Murphy says.

"We have had an industry that over the last 20 years was focused on the accumulation of retirement savings. A shift to addressing retirement needs of members has changed the game significantly. You are now dealing with a different paradigm. You are dealing with the de-accumulation of a lump sum as opposed to accumulating assets."

The shift towards addressing the retirement needs of members is an opportunity for the superannuation industry, Ross says.

"As baby boomers start to retire in large numbers, this represents an opportunity and a change for Australian superannuation providers," he says. "Baby boomers have changed every life stage they have passed through and retirement will be no exception. Our challenge as an industry is to provide relevant products and services that cater to their evolving needs."

What products are suited to superannuation funds, however, remains the $64,000 question, Murphy says.

"The problem with conventional annuity products is that they are meant to be guaranteed. Not many industry superannuation funds have the shareholder capital to underwrite this guarantee," he says.

AustralianSuper has already created a product team to focus on pension and post-retirement products.

AustralianSuper general manager Noel Lacey admits "there is not a heck of a lot of products in this [retirement] space".

"We found that our investment products were a differentiator for our fund. We saw the retirement market as a growing space and we felt we needed to build product in that area," Lacey says.

At this stage, the fund is at the very early stages of planning and has yet to finalise what sort of products would suit its members, he says.

Recently, however, AustralianSuper introduced an age-based default for its pension product.

Members who have not chosen an investment option will transition from the balanced investment option to the conservative balanced investment option when they reach the age of 75.

The decision to implement an aged-based default option was the result of a review by the fund.

"One of the key findings of the review was that it can be detrimental for members to reduce their investment risk once they retire," AustralianSuper chief executive Ian Silk said at the time.

In its review, the fund factored in long-term investment trends, longevity risk, Australia's age pension and members' risk appetite.

"The review demonstrated that in a default investment option context, members could be significantly better off if they stay with the balanced option well into retirement," Silk said.

The commonly held view at the moment, however, suggests members should move into a lower risk investment option once they reach the age of 55 or 60.

Planning post-retirement products is also being undertaken for UniSuper.

"It is an active research and development activity for us; a very big one in fact. For a fund like us, a large proportion of our members are approaching retirement. There is a lot more focus on retention. I would say the post-retirement market will be the next wave of product innovation," Murphy says.

Ross says products suited to superannuation funds should include different appetites for risk and longer life spans, but without bamboozling members with choice.

He is indifferent to target date funds.

Target date funds essentially reset the mix of assets in a portfolio according to the selected time frame of the investor.

Usually the asset mix delivers returns that are more conservative as the person reaches retirement. "There will be some appetite for target date funds. But Australia is a sophisticated market so I am not sure if these funds are something that will attract people," Ross says.

When it comes to longevity risk products, members desperately want to know what a product will look like and what it will cost, Brooks says.

"One of the hurdles for annuity products has been their cost. We need to know a lot more about them before we get members enthused," he says.

Matterson says that while products can be built from the bottom up, partnerships will be crucial for superannuation funds.

Choosing the right partner

"Superannuation funds do not have the balance sheets to manufacture such risk products. We will most likely see partnerships between companies in the private sector and the industry superannuation fund market that are similar to arrangements in the group insurance market," he says.

Murphy says a lot of industry funds deal with death and total and permanent disability products that they outsource to insures.

"So in theory there is nothing stopping funds from partnering with an external insurance or life company," he says.

He notes there could be a move to United States-style variable annuity products that mitigate the risks of a person losing their entire capital if they die early, unlike traditional annuity-type products.

"Capital guarantee products are also an option but such products can be very expensive," he says.

Ross says GESB is currently looking at a combination of an annuity-style and capital guaranteed product.

"As long as you have a low-cost retirement income product that has a diversified portfolio plus an annuity-style product, then there is no reason why you can't have 15-20 per cent of a certain income with the rest of the product market linked," he says.

"In my view that is where the market will head."

Ross is currently assessing the potential for GESB partnering with external providers.

But he says whatever product is developed, it will be consistent with the fund members' interests.

"All these things [products] come at a cost. You really have to make sure you are doing it in the members' best interests and not the fund managers'," he says.

Given the scale of Equipsuper, the fund is eyeing partnerships with providers and other funds in delivering its post-retirement offering, Brooks says.

"We are a relatively small fund. For post-retirement products you will need the critical mass to offering such a product. A large quantum of members is also needed in order to spread the risk. We will have to undertake any product development in conjunction with other funds," he says.

When it comes to product providers, however, crucial to any partnership is counterparty risk, Murphy says.

"The concern for a fund, particularly after the GFC, is you have to be careful with who you form deals with," he says, citing the failure of a large insurance company as a case in point. He says an attractive option could be having a company such as Milliman run a brokerage business where it packages a program that includes a panel of external providers.

"That way funds are not beholden to one counterparty," he says.

Lacey also sees similar risks.

"A lot of annuity issues need to be provided through insurance arrangements. Even investment products will need product alliances. With joint product arrangements comes lack of control for both the product and assets. If these products don't perform, then there is a reputation risk attached for the fund," he says.

As this article goes to print, the industry is still facing the outcome of the Henry review, which includes an examination of the post-retirement market.

Association of Superannuation Funds of Australia chief executive Pauline Vamos said in a recent Investor Weekly interview that a big concern regarding post-retirement products is the cost.

"We have to remember that there are already products in the market that meet longevity risk. These products are not popular because of the costs," Vamos said.

"We have to look at ways for the private market to provide products where the cost of capital and tax inefficiency is reduced. We believe that the private industry, if properly regulated, is the much better option to provide these products."

Murphy says: "The Henry review was certainly a catalyst for the industry to focus on retirement incomes policy."

However, with no preliminary findings released, the landscape remains uncertain in terms of product development.

Brooks adds, however, that now is the time to introduce a longevity risk product or structure.

"People still have the recent experience from the market turmoil and therefore will be more susceptible to risk management," he says.

The question of advice

As superannuation funds face another raft of product innovations, the role of financial planning has already emerged as a critical issue.

"Research shows that 60 per cent of retirement income actually comes from investment returns generated during retirement," Ross says.

"This will result in a much larger pool of members needing advice on and access to the most appropriate investment selections for them all the way through retirement, ensuring they can maximise their returns."

Crucial to the take-up of post-retirement products will be education, Brooks says.

"Whether legislation may mandate for longevity risk products or whether they are simply offered by the private sector, one thing is certain and it is that there needs to be an enormous education campaign behind it," he says.

Murphy says there is a huge role for financial planning that will go beyond traditional asset allocation.

"There is no doubt that financial planners are going to pay a huge role in all of this. A lot of financial planners have traditionally advised about asset allocation and getting the risk right. While these products may be about set-and-forget strategies, equally advice will be about building wealth outside superannuation," he says. Superannuation, however, must remain an attractive savings vehicle if the government is serious about addressing the longevity risk.

The government's decision to reduce the concessional caps on superannuation was not supported by the industry, with associations and superannuation funds calling the measure short-sighted.

"As most people don't think about retirement until they are closer to age 50, if they need to accumulate $500,000 or so in the next few years, they can't do that under the current system," Ross says.

The government's decision to wind back the concessional caps points to a deeper and more immediate issue: that of changing super rules.

Shifting rules in superannuation legislation is in fact one of the major concerns among members of Equipsuper.

Ross calls this legislation risk.

"Legislation risk is just as important as longevity risk. We can't have governments continuing to tinker with the system. Any government change should be about supporting savings for retirement," he says.