AMP has launched a comprehensive suite of retirement solutions that will only be offered through financial advisers. We speak to Ben Hillier about the philosophy behind the design.
Financial services behemoth AMP has launched a new suite of retirement solutions, MyNorth Lifetime, less than four months after the Retirement Covenant came into effect.
The new strategy consists of three options that span the accumulation, transition and retirement phases, consisting of Lifetime Super, Deferred Lifetime Income and Lifetime Income accounts.
Considering the high level of flexibility and complexity, the new strategies will only be available through financial advisers.
MyNorth Lifetime was developed by a team led by Ben Hillier, General Manager, Retirement Solutions at AMP, who was also instrumental in the development of QSuper’s Lifetime Pension option when he was Head of Product and Services at the now merged super fund.
If you make a retirement strategy easy enough for direct consumers to understand and safe to use, then often you end up with a set-and-forget type of solution. But when you do that then advisers are unlikely to use it because a client’s circumstances can change
“If you make a retirement strategy easy enough for direct consumers to understand and safe to use, then often you end up with a set-and-forget type of solution,” Hillier says in an interview with [i3] Insights.
“But when you do that then advisers are unlikely to use it because a client’s circumstances can change. It can be because of death, divorce or inheritances, but retirement is long term and circumstances might change during that time. So a set-and-forget option might not always be in the best interest of clients.
“We have gone through great lengths to provide flexibility to financial advisers so they can guide their clients not just to, but also through retirement.”
Receiving a Bonus
What sets the Lifetime Income option apart from other strategies in the market is that it features a type of reverse life insurance element, which instead of collecting premiums pays out a regular bonus that supplements a member’s income in retirement.
This bonus enables the member to maintain a relatively high level of income and because it enables the account to pay income for life, the client is entitled to generous taxation and Centrelink benefits.
This feature is financed by the client surrendering the remaining balance in the account upon death (after the payment of an optional death benefit), in a similar way a pooled-survival trust might work.
Most retirement income products solve for individual longevity risk, but they don’t always solve for systemic longevity risk. What if the entire pool of members lives far longer than the average life expectancy?
But AMP has underwritten the option through insurer TAL to ensure payments are not subject to the number of people still alive in the option. AMP does not receive any revenue from this exchange of annual bonuses and amounts surrendered at death (the premium payment).
“Most retirement income products solve for individual longevity risk, but they don’t always solve for systemic longevity risk. What if the entire pool of members lives far longer than the average life expectancy? Having an insurer underwrite mortality solves this problem,” Hillier says.
“It also enables us to separate investment risk from longevity risk, since longevity risk is underwritten by the insurer.”
Hillier on Deferred Option
The deferred income option acts as a transition mechanism between accumulation and retirement and there are several reasons why members might choose to put money in this option. Some of them are related to more favourable taxation treatments, while others are about targeting specific objectives in retirement.
Alternatively, this option can be used simply for longevity protection or as a contingency for things like aged care because there is no requirement to draw income, the earnings are tax-free and there is no need to specify in advance when income should commence.
“There are more sophisticated planning outcomes that you can achieve through the combination of making contributions and taking out lump sum withdrawals in a tax-free environment,” Hillier says.
“For example, it allows you to achieve quite specific outcomes when splitting your super with your spouse. You can optimise outcomes under the transfer balance cap or assets test. You could clean out untaxed elements out of the account by redistribution strategies.
It is about maximising the pension balance, but also to optimise their Centrelink and tax outcomes pre-retirement. So there are quite a number of sophisticated strategies that you can do [with this option]. But they tend to be far too sophisticated for the general public, therefore, it needs to be advised
“It is about maximising the pension balance, but also to optimise their Centrelink and tax outcomes pre-retirement.
“So there are quite a number of sophisticated strategies that you can do [with this option]. But they tend to be far too sophisticated for the general public, therefore, it needs to be advised.”
He doesn’t rule out that AMP will introduce a simpler, direct-to-consumer solution over time, but given its heritage in the financial planning industry, launching a more sophisticated strategy first was crucial.
“I had some very clear ideas about what we should develop when I joined AMP and I was wrong on most accounts,” he says.
“When we did the market research and spoke to advisers, it turned out that there was a fair bit of a gap between what I thought was important and what they thought was important.
“But as with any successful product development, you need to listen to your customers and the decision makers, which in this case were two different groups: advisers and members.
“But I think we ended up with something much better.”
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.