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Innovative solutions for retirement

05 November 2008 Gareth Stokes

On 21 October 2008 global re-insurer Swiss Re released a sigma study to highlight innovative risk management solutions for retirement. The study focuses on recent trends and developments in seven countries, including the US, the UK, France, Germany and Japan. Solutions identified include “annuities, long-term care insurance and reverse mortgages.”

“Innovative solutions can benefit individuals, businesses and governments, whose citizens will be better prepared to cope with the uncertain costs of retirement,” says Swiss Re. The company concludes that reinsurance and capital market capabilities are among the tools to enable companies and insurers to provide such retirement solutions.

Annuities, long-term care insurance and reverse mortgages

South African savers are already familiar with life annuity products. Retirees can opt to purchase a variety of annuity products upon retirement. These products include guaranteed underwritten annuities (which provide a guaranteed level of income for the rest of your life and are usually purchased from the proceeds of a retirement annuity) and living annuities (which provide investment based income). Co-author of the Swiss Re study, Mike Barnshaw, notes the international popularity of such solutions is growing: “Variable annuities have grown in popularity in the US and Japan, mainly because they offer upside market potential and flexibility, which are important considerations for retirees. They are now catching on in Europe and the rest of Asia.”

There is also a distinct trend to insurance products to assist with care in retirement. The report showed that the US, France and Germany currently have the largest long-term care insurance markets; but that there is a strong incentive for such products to be developed and used in other countries around the world. Studies show that approximately 33% of the elderly require nursing home care in retirement.

Apart from retirement savings, the largest asset accumulated by the average saver during a lifetime is their home. This has resulted in a category of mortgage known as the reverse mortgage, popularised in the US and UK. Lukas Steinmann, another co-author of the report notes: “The reverse mortgage allows retirees to monetise the equity in their homes – often the most valuable asset they own – without selling or moving out of the house.” It’s basically a loan against the value of the home and can be repaid by the heirs upon death. Alternatively, the lender assumes ownership of the home.

The state will always play a part

It’s been proven time and again that capital markets offer the best building blocks for a sound retirement. Commenting in the Swiss Re report, David Laster says that “capital markets have the potential to facilitate more efficient ways of managing longevity risk, enabling insurers, pension sponsors and governments to hedge their longevity exposures more effectively.” What we forget is that retirement is about more than just the individual… Insurers and governments have a huge interest in the maintenance of adequate levels of retirement funding too.

In South Africa, government is already playing a big role through its national old age grant (pension). It pays a small monthly allowance to women over the age of 60 and men over the age of 65, with plans in place to lower the age for men to 60 too. “Governments have a clear interest in supporting old age solutions to reduce their need to finance retirement for the elderly,” says Swiss Re. South Africa’s plans for a national social security system – which will address most of the reports suggestions – are already well-advanced.

The report suggests making mandatory enrolment of retirement funding schemes, with an option to opt out. Swiss Re also suggests that governments communicate the difficulty in financing retirement solutions on a regular basis. “Other options that governments might pursue include offering tax incentives on pension savings and limiting the use of pensions’ savings for non-retirement purposes.”

Editor’s thoughts:
The importance of a long-term plan for retirement has been highlighted by recent stock market turbulence. Failure to make an adequate provision over an extended period of time can leave the pensioner exposed. Do you think the private sector retirement solutions available to South African investors are adequate? Add your comments below, or send them to gareth@fanews.co.za

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