New income stream products in the pipeline
The current economic downturn is creating the right conditions for variable annuity products, with capital guarantees to be introduced widely in Australia.
These types of products have become very successful in the US, especially after the market downturn in 2001.
Milliman practice leader, financial risk management, Wade Matterson said 90 per cent of variable annuity products in the US now have some form of guarantee.
“These range from protection of capital to guaranteed incomes,” he said.
“In Australia, this is a new business that we are seeing financial institutions seriously looking at.”
Milliman is a US-based consultancy specialising in financial services and running hedging programs for such products as variable annuities.
“The market for these products is active in Australia and there is interest in creating products from superannuation funds to life companies,” Matterson said.
“We expect to see some locally developed products available in Australia in the next 12 months.”
It is expected capital protected annuities will be the most common locally sourced product along with some guaranteed lifetime income stream products.
AXA has already launched one capital guaranteed product in Australia.
Matterson said the products would be targeted at investors who are 45 years old or older and want some sort of protected investment for retirement.
“This is the sector most sensitive to market downturns,” he said.
“Therefore, we expect increased interest from this group in light of the current market situation, [which is similar] to the US in 2001, where people wanted to protect their investments.”
The variable annuities do invest in equities, but the investor’s capital is protected, however, they also benefit from any increased returns.
The products are also seen as a hedge against longevity, as there will be a danger of superannuation fund members outliving their retirement savings.
Matterson said a guaranteed income product could provide a top up to falling retirement savings.
“Australians have been focused on the accumulation phase while ignoring retirement incomes,” he said.
“These products will help address issues with retirement incomes and longevity risk.”
Matterson said the more complex variable annuities would need a highly trained sales force to distribute the products, which will provide an opening for financial advisers.
Simpler products will be distributed by superannuation funds to their members.
Milliman is undertaking a web-based survey of investor attitudes towards these types of products and the results will be available before the end of the year.
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