00:00:04
Sean Aylmer: Welcome to the Fear & Greed Daily Interview. I'm Sean Aylmer. There's been a huge focus in the last few years on superannuation, changes to the super guarantee as well as a whole range of super reforms, highlighting poor performing funds has drawn a lot of attention to saving for retirement. But is the focus on performance in the accumulation phase enough? Is there enough focus on the decumulation stage? Adrian Stewart is the CEO of Allianz Life Australia. Welcome to Fear & Greed, Adrian.
00:00:33
Adrian Stewart : Thank you Sean. Thank you for having me.
00:00:36
Sean Aylmer: The hardest question first, Adrian. How much do people need to retire on?
00:00:41
Adrian Stewart : Well, that is a tough question, and of course it's purely subjective to their needs and their lifestyle. And the lifestyle that they're searching for in retirement is a direct correlation to the lifestyle that they've experienced in the accumulation phase. So it's a hard one to put a number on to be honest.
00:01:01
Sean Aylmer: Okay. I mean, I know that as for this association of superannuation funds of Australia, say a couple will need 640,000 in super savings at retirement, singles need 545,000. Is there a problem when you get numbers like that that's what we become a little bit too focused on, hitting a target as opposed to thinking a little bit more holistically about where we're going?
00:01:26
Adrian Stewart : Yeah, I think so. Well first of all, I think in the accumulation phase, it is important to focus on securing your superannuation assets and accumulating assets to the best of your ability so that when you do reach the point of retirement, you have essentially as much money as you possibly can save. But the needs in retirement are different. So of course in accumulation, performance is the key attribute that you're focused on. But once you reach the point of retirement and you realize that the income that you've derived from being an employee stops and you are solely reliant on your accumulated assets, in addition to the potential of some age pension or the full age pension, the focus actually shifts from performance to certainty and income certainty. The big behavioral finance issue at the point of retirement, in retirement is longevity risk, and that is the fear of running out of money. So it certainly shifts from performance to certainty of income.
00:02:44
Sean Aylmer: I mean, I want to get to the retirement income covenant and the fact that the industry is thinking more about that decumulation stage. But before we get there, most people don't run out of money. In fact, I saw a stat recently that said many people end up with the bulk of their funds still invested when they die.
00:03:05
Adrian Stewart : Yes, it's a good point. In fact, 85% of retirees pass away with their super savings intact. And this is a big dilemma. So what the retirement income covenant is seeking to do is to create more solutions for retirees so that when they do retire, they can invest in guaranteed income products. So lifetime guaranteed income products, that provide the certainty so that they can actually spend their savings with confidence. And this goes to the point about longevity risk, where this fear of running out of money, it actually creates this behavior where retirees are living quite a frugal retirement because they really don't have the certainty that their savings will last for their lifetime. And so they tend to spend less. Of course, the outcome of having better innovation and more flexible retirement products is that from a government perspective, this money is actually going into the economy as retirees are spending with confidence. But more importantly, the retirees actually have a better retirement because they're able to live with a lot more certainty around their income being there right through their life stage.
00:04:33
Sean Aylmer: Stay with me, Adrian. We'll be back in a minute.
I'm speaking to Adrian Stewart, CEO of Allianz Life Australia. Okay. So are there enough products available that are focused on income and pay attention to that longevity risk? I mean, I suppose annuities is one such product. Are there enough products available in the market whereby if I'm 65, I can buy a product knowing that whether I live to 75 or 105, I'm going to be earning income?
00:05:09
Adrian Stewart : Well, the short answer is no. And I think this is the key reason that the Deputy Chair of APRA, Helen Rowell in November last year sent a clear message to the industry that they are looking for life companies to innovate in the retirement income sector. If you think about this industry, I mean the superannuation industry in Australia is the envy of the world, and all of the innovation in the last 30 years has been in the accumulation phase. We have this incredibly deep and experienced investment management capability here in Australia, both inside the superannuation funds and external providing services to it.
But there's been very little innovation and retirement products developed in the decumulation phase, and that's really the purpose of the retirement income covenant, and also the call out to life companies who can provide certainty in the form of guaranteed incomes, protection of capital and income certainty. And to the point, right now we have 700 Australians retiring every day and there's $ 55 billion moving across the line from accumulation to decumulation. That goes to $ 200 billion a year in 20 years. So over the next 20 years, we've got this weight of money that's moving that needs really strong solutions.
00:06:40
Sean Aylmer: I suppose the fact that the accumulation stage, while we didn't have a lot of rich retirees, relatively few rich retirees until now, because we didn't have our super system. So presumably there wasn't a great incentive for financial service firms to actually look after retirees. But I think what you're saying is because that big shift in wealth, there's also going to be a financial incentive for financial service firms to do something about it.
00:07:08
Adrian Stewart : Well, that's right. Well, I think there's a couple of factors there. So one is that if you are facing retirement, you might be looking at 30 or 40 years in retirement because obviously we are living longer. And traditional asset allocation and portfolio construction certainly plays a key role in helping sustain those savings, but it doesn't provide the full solution. And so this is where if you anchor a portfolio with a guaranteed income for life, you provide a level of certainty in that portfolio and the income, again allowing for traditional portfolio construction to play its part.
00:07:51
Sean Aylmer: You use the word anchor there but the thing I suppose, income products don't pay or don't return as much. But what you're saying, it's just part of the portfolio. When you're saying anchor, you have an income product which may not return as much, but that's not your only investment. Is that what you mean?
00:08:08
Adrian Stewart : That's correct, yes. I mean, these retirement strategies are part of the solution, and if you are working with a financial advisor or a super fund that's providing advice around retirement, then they're taking a holistic approach to ensure that you've got the right protection, but you also have the right exposure to the market to ensure that you can sustain those investments.
00:08:34
Sean Aylmer: So the upshot of this then, Adrian, is that we'll hopefully end up for people like me who in the next 10 to 15 years will retire, will have greater opportunity or more products really to choose from in that accumulation stage.
00:08:52
Adrian Stewart : That's exactly right, yes. And we are seeing more and more products come to the market. Now, the barrier to entry is high. So on the accumulation side, and we talked about the investment management capabilities that we have, there are hundreds of different investment managers to choose from. On the decumulation side because you're offering a guaranteed income, there's real capital and balance sheet that supports that from a life company. As soon as you mention the word guarantee, you actually have to be able to back that up and deliver on that promise that you're making. And so the barrier to entry is very high. You have to have capital, you have to have balance sheet, you have to have global experience and capability. And so we think that you will see a handful of life companies into this market, but they will develop a suite of products that provide lots of choice for financial advisors and retirees.
00:09:50
Sean Aylmer: Fantastic. One final thing. I don't ever get an inheritance for my parents, which I didn't expect. And I think my kids are expecting one, but I don't see the logic in actually having any money when I die, particularly given that my kids will be in a super system their whole working lives.
00:10:07
Adrian Stewart : Yes, it's a good point. However, there obviously is bequeathing some savings to your children is an important part of retiree's ethos. And I think there is an element of leaving something for your family members. But a good financial planner in planning for your retirement will factor that in, but at the same time, give you that confidence to spend so you can actually achieve both. So instead of leaving 85% of your savings, you might leave 50, but you've enjoyed a better retirement.
00:10:43
Sean Aylmer: I reckon my kids will be lucky to get 50, Adrian. Thank you for talking to Fear & Greed.
00:10:48
Adrian Stewart : Pleasure, Sean. Thank you for having me.
00:10:50
Sean Aylmer: That was Adrian Stewart, CEO of Allianz Life Australia. This is the Fear & Greed Daily Interview. Remember, this information is general in nature and you should seek professional advice before making any investment decisions. Join us every morning for the full episode of Fear & Greed, Australia's most popular business podcast. I'm Sean Aylmer. Enjoy your day.
Sean Aylmer: Welcome to the Fear & Greed Daily Interview. I'm Sean Aylmer. There's been a huge focus in the last few years on superannuation, changes to the super guarantee as well as a whole range of super reforms, highlighting poor performing funds has drawn a lot of attention to saving for retirement. But is the focus on performance in the accumulation phase enough? Is there enough focus on the decumulation stage? Adrian Stewart is the CEO of Allianz Life Australia. Welcome to Fear & Greed, Adrian.
00:00:33
Adrian Stewart : Thank you Sean. Thank you for having me.
00:00:36
Sean Aylmer: The hardest question first, Adrian. How much do people need to retire on?
00:00:41
Adrian Stewart : Well, that is a tough question, and of course it's purely subjective to their needs and their lifestyle. And the lifestyle that they're searching for in retirement is a direct correlation to the lifestyle that they've experienced in the accumulation phase. So it's a hard one to put a number on to be honest.
00:01:01
Sean Aylmer: Okay. I mean, I know that as for this association of superannuation funds of Australia, say a couple will need 640,000 in super savings at retirement, singles need 545,000. Is there a problem when you get numbers like that that's what we become a little bit too focused on, hitting a target as opposed to thinking a little bit more holistically about where we're going?
00:01:26
Adrian Stewart : Yeah, I think so. Well first of all, I think in the accumulation phase, it is important to focus on securing your superannuation assets and accumulating assets to the best of your ability so that when you do reach the point of retirement, you have essentially as much money as you possibly can save. But the needs in retirement are different. So of course in accumulation, performance is the key attribute that you're focused on. But once you reach the point of retirement and you realize that the income that you've derived from being an employee stops and you are solely reliant on your accumulated assets, in addition to the potential of some age pension or the full age pension, the focus actually shifts from performance to certainty and income certainty. The big behavioral finance issue at the point of retirement, in retirement is longevity risk, and that is the fear of running out of money. So it certainly shifts from performance to certainty of income.
00:02:44
Sean Aylmer: I mean, I want to get to the retirement income covenant and the fact that the industry is thinking more about that decumulation stage. But before we get there, most people don't run out of money. In fact, I saw a stat recently that said many people end up with the bulk of their funds still invested when they die.
00:03:05
Adrian Stewart : Yes, it's a good point. In fact, 85% of retirees pass away with their super savings intact. And this is a big dilemma. So what the retirement income covenant is seeking to do is to create more solutions for retirees so that when they do retire, they can invest in guaranteed income products. So lifetime guaranteed income products, that provide the certainty so that they can actually spend their savings with confidence. And this goes to the point about longevity risk, where this fear of running out of money, it actually creates this behavior where retirees are living quite a frugal retirement because they really don't have the certainty that their savings will last for their lifetime. And so they tend to spend less. Of course, the outcome of having better innovation and more flexible retirement products is that from a government perspective, this money is actually going into the economy as retirees are spending with confidence. But more importantly, the retirees actually have a better retirement because they're able to live with a lot more certainty around their income being there right through their life stage.
00:04:33
Sean Aylmer: Stay with me, Adrian. We'll be back in a minute.
I'm speaking to Adrian Stewart, CEO of Allianz Life Australia. Okay. So are there enough products available that are focused on income and pay attention to that longevity risk? I mean, I suppose annuities is one such product. Are there enough products available in the market whereby if I'm 65, I can buy a product knowing that whether I live to 75 or 105, I'm going to be earning income?
00:05:09
Adrian Stewart : Well, the short answer is no. And I think this is the key reason that the Deputy Chair of APRA, Helen Rowell in November last year sent a clear message to the industry that they are looking for life companies to innovate in the retirement income sector. If you think about this industry, I mean the superannuation industry in Australia is the envy of the world, and all of the innovation in the last 30 years has been in the accumulation phase. We have this incredibly deep and experienced investment management capability here in Australia, both inside the superannuation funds and external providing services to it.
But there's been very little innovation and retirement products developed in the decumulation phase, and that's really the purpose of the retirement income covenant, and also the call out to life companies who can provide certainty in the form of guaranteed incomes, protection of capital and income certainty. And to the point, right now we have 700 Australians retiring every day and there's $ 55 billion moving across the line from accumulation to decumulation. That goes to $ 200 billion a year in 20 years. So over the next 20 years, we've got this weight of money that's moving that needs really strong solutions.
00:06:40
Sean Aylmer: I suppose the fact that the accumulation stage, while we didn't have a lot of rich retirees, relatively few rich retirees until now, because we didn't have our super system. So presumably there wasn't a great incentive for financial service firms to actually look after retirees. But I think what you're saying is because that big shift in wealth, there's also going to be a financial incentive for financial service firms to do something about it.
00:07:08
Adrian Stewart : Well, that's right. Well, I think there's a couple of factors there. So one is that if you are facing retirement, you might be looking at 30 or 40 years in retirement because obviously we are living longer. And traditional asset allocation and portfolio construction certainly plays a key role in helping sustain those savings, but it doesn't provide the full solution. And so this is where if you anchor a portfolio with a guaranteed income for life, you provide a level of certainty in that portfolio and the income, again allowing for traditional portfolio construction to play its part.
00:07:51
Sean Aylmer: You use the word anchor there but the thing I suppose, income products don't pay or don't return as much. But what you're saying, it's just part of the portfolio. When you're saying anchor, you have an income product which may not return as much, but that's not your only investment. Is that what you mean?
00:08:08
Adrian Stewart : That's correct, yes. I mean, these retirement strategies are part of the solution, and if you are working with a financial advisor or a super fund that's providing advice around retirement, then they're taking a holistic approach to ensure that you've got the right protection, but you also have the right exposure to the market to ensure that you can sustain those investments.
00:08:34
Sean Aylmer: So the upshot of this then, Adrian, is that we'll hopefully end up for people like me who in the next 10 to 15 years will retire, will have greater opportunity or more products really to choose from in that accumulation stage.
00:08:52
Adrian Stewart : That's exactly right, yes. And we are seeing more and more products come to the market. Now, the barrier to entry is high. So on the accumulation side, and we talked about the investment management capabilities that we have, there are hundreds of different investment managers to choose from. On the decumulation side because you're offering a guaranteed income, there's real capital and balance sheet that supports that from a life company. As soon as you mention the word guarantee, you actually have to be able to back that up and deliver on that promise that you're making. And so the barrier to entry is very high. You have to have capital, you have to have balance sheet, you have to have global experience and capability. And so we think that you will see a handful of life companies into this market, but they will develop a suite of products that provide lots of choice for financial advisors and retirees.
00:09:50
Sean Aylmer: Fantastic. One final thing. I don't ever get an inheritance for my parents, which I didn't expect. And I think my kids are expecting one, but I don't see the logic in actually having any money when I die, particularly given that my kids will be in a super system their whole working lives.
00:10:07
Adrian Stewart : Yes, it's a good point. However, there obviously is bequeathing some savings to your children is an important part of retiree's ethos. And I think there is an element of leaving something for your family members. But a good financial planner in planning for your retirement will factor that in, but at the same time, give you that confidence to spend so you can actually achieve both. So instead of leaving 85% of your savings, you might leave 50, but you've enjoyed a better retirement.
00:10:43
Sean Aylmer: I reckon my kids will be lucky to get 50, Adrian. Thank you for talking to Fear & Greed.
00:10:48
Adrian Stewart : Pleasure, Sean. Thank you for having me.
00:10:50
Sean Aylmer: That was Adrian Stewart, CEO of Allianz Life Australia. This is the Fear & Greed Daily Interview. Remember, this information is general in nature and you should seek professional advice before making any investment decisions. Join us every morning for the full episode of Fear & Greed, Australia's most popular business podcast. I'm Sean Aylmer. Enjoy your day.
