Milliman has released comprehensive new research analyzing the current and future state of the retirement income market in the Asia-Pacific region. The report is based on a survey of over 100 insurance companies and financial institutions across eight countries. The results, along with case-studies and in-depth analysis, provide insight into the economic and regulatory factors most affecting Asian retirement income markets, including consumer demand, product development, and opportunities for growth in the industry.
“Across Asia-Pacific, there is the potential for private market providers to complement and fill gaps that exist from government-sponsored retirement systems and employer-sponsored pension arrangements,” said Richard Holloway, managing director for Milliman’s South East Asia and India life consulting practice. “With this report we’re able to gain valuable insight into opportunities that may exist, on a country-by-country basis, and offer perspectives on ways to capitalize.”
“Technology advancements have now made it possible for financial institutions to provide consumers with tailored investment strategies and product solutions to achieve their goals in retirement. The development of robo-advice has begun to gain traction in the superannuation industry in Australia, and we expect the same to occur in Asia in the near future,” said Milliman Australia practice leader Wade Matterson.
Key findings from the report include:
• The vast majority of respondents feel their national retirement systems’ provisions are inadequate – even those traditionally considered to have more advanced systems such as Singapore and Australia.
• Regarding the most important features in a retirement income product, respondents feel consumers would value some type of guarantee, either income or capital protection, with simplicity being a consistent third across most countries.
• When it comes to financial advice, over 60% of participants felt financial advice was needed but 63% cited cost as the primary impediment for consumers.
Interested parties may obtain a copy of the Milliman study here.
Individual investors at or near retirement may have to reconsider their risk tolerances because of a low interest rate environment and increased longevity. This IO&C article quotes Milliman’s Wade Matterson discussing an alternative portfolio risk management approach featuring an insurance scheme.
Here’s an excerpt:
According to Matterson, building insurance into retail investment products can be achieved with minimal cost using derivatives “in some form or another”.
“These strategies are not unfamiliar at the institutional level but retail investors may not have had much exposure to them,” he said.
Matterson said the products essentially aim to keep investors exposed to at least some market growth while putting a floor on downside risks.
“The reality is there is an insurance cost associated with getting protection,” he said. “And that cost might see investment returns lag as the market rises – it’s an opportunity cost – that will be somewhat proportional to how far markets are up.”
Maritime Super, Plato Investment Management, and BetaShares have this year employed Milliman’s Managed Risk Strategy (MMRS), which stabilizes investment volatility and reduces the impact of major market declines by dynamically managing market exposure using derivatives.
The potential to hold onto the returns of growth assets while minimizing the downside has quickly found a receptive market among pre-retirees and retirees that understand the benefit of holding growth assets to protect against longevity risk.
The $4.5 billion Maritime Super fund began offering members a version of its popular Balanced and Growth options with the Milliman overlay in July. The Balanced and Growth “Managed Volatility Process (MVP)” options have already received more than $200 million in inflows from members and defined benefit sub-funds.
“There are some very complex and very expensive ways to minimize volatility and protect members from the severe downturns in equity markets but there aren’t many that can be understood by members, are low-cost, and can be turned on and off by individual members at any time,” Maritime Super chief executive Peter Robertson said.
“A lot of other protection strategies require us to hand over the money to someone else to manage. Milliman’s approach allows us to still invest in the fund managers that we want to use,” Robertson said.
Milliman practice leader Wade Matterson said its overlay is a cost-effective way to manage the risk of a significant market downturn while allowing investors to retain an exposure to growth assets.
“Delivering this process as an overlay allows us to enhance a product that people are already familiar with, and offers a nudge to those that are seeking to manage the risk in their portfolio,” Matterson says. “The power of that structure is that it allows you to combine the best of both worlds: the fund manager’s portfolio construction with Milliman’s specialist risk management expertise and scale.”
The success of retirement-savings products such as variable annuities (VAs) with guaranteed benefits in the United States and Japan—and the ability of these products to stand up to intense market volatility, as we saw in September and October of 2008—has caught the attention of insurance companies and policyholders in the global market. VA guarantee products are now available in various countries across Europe and Asia, and similar products, in the form of retirement savings guarantees, are now being sold in Australia. Local market factors make it unlikely that the U.S. product mix will be exactly replicated the world over; instead, local breeds of products are emerging. The global markets look promising for guarantee products, but navigating these emerging markets requires a clear understanding of the particular factors at work in each country.
A recent Milliman Insight article examines these issues in detail.
How have hedging programs performed during the recent market downturn? Our survey of 16 providers shows financial risk management techniques withstanding volatility as anticipated.