Communicate benefits of complex products: Tria
Product manufacturers and superannuation funds face the challenge of communicating the benefits of certain complex retirement income products to customers even as they demand simplicity, Tria Investment Partners said.
Partner, Oliver Hesketh, said customers have always opted for simplicity and control over certainty but said certain retirement solutions have to be complex to meet the challenge of transitioning from accumulating capital balances to producing income streams.
"The next challenge will be in communicating the benefits of complex retirement solutions simply, and in some cases managing perceptions of higher costs," he said.
Hesketh said the industry could see more ‘naked' or deconstructed annuity products available in Australia, as product manufacturers decide which retirement income solutions suit their customers.
Under deconstructed lifetime annuities, or naked risk pooling, there is the risk pooling, and the investment strategy, but no guarantee, where a life company is obliged to produce a certain amount of income each year for the rest of the member's life.
Deconstructed variable annuities, or guaranteed lifetime income products, include a hedging strategy where negative investment returns are counterbalanced by gains in derivative contracts but are not seen in the customer's portfolio.
"The difference with deconstructed products is that customers benefit from much of the institutional-grade smarts that life companies deploy, but without the actual guarantee, meaning these products can be more than 150bp cheaper than their guaranteed siblings," Hesketh said.
"Time will tell if customers really value the guarantee that sits across the top of the products' other elements, or if they would rather take the risk themselves."
AUTHOR
Malavika Santhebennur
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