Pooled investment vehicles and ‘mortality credits’ can protect retirees from outliving their super, says Lonsec – but the devil is often in the details of the product design.
Lonsec and Milliman said in a joint statement that risk pooling products offer “innovative” ways to prevent longer-lived retirees from running out of money by offering features like ‘mortality credits’.
These credits reduce longevity risk by transferring the excess funds of a deceased annuity pool member to remaining members, to “cross-subsidise” their income.
Milliman head of analytics Craig McCulloch explained that while these products reduce the risk of an investor outliving their money, they can be “materially impacted by the extent of product features”.
“The value of mortality credits is heavily affected by product design and can vary depending on whether an insurer provides an explicit guarantee or whether these credits depend on actual pooled mortality experience,” Mr McCulloch said.
This view was shared by Lonsec senior investment consultant Eleanor Menniti, who told InvestorDaily that the potential for benefit from these features would vary from person to person.
“From an individual’s perspective, the value of that mortality credit will vary a lot based on when you die, and [as] you don’t know that in advance, it’s hard to predict beyond making assumptions around life expectancy,” she said.
Mortality credits in funds which offer greater liquidity or make funds available to a deceased member’s beneficiaries will have a lesser value to remaining members so investors need to weigh the risks and benefits.
“Annuities can be powerful and mortality credits can be valuable, but you really need to be aware of the structure of the annuity that you’re investing in,” Ms Menniti said.