Pooled Contingent Annuity

Australian pension funds are now mandated to develop retirement income strategies, with the trustees having to set out how they assist members to balance objectives across higher income, risk management, and capital flexibility. In the majority of cases, it is expected that funds offer a balanced approach in assistance – ranging from product development & design, tools & calculators, provision of factual information and guidance.

Given the popularity of phased withdrawals (i.e., account-based pensions) and the prevalence of minimum drawdown, and the low take-up in lifetime annuities, a pooled contingent annuity (PCA) would be a valuable and low-cost.

Conceptually, a PCA is layered on top of an account-based pension. It will commence paying lifetime benefits, contingent on the member’s account balance dropping below a threshold – either due to the poor performance of assets and/or due to allowed withdrawals over an extended period. In exchange, fees are charged regularly and paid into a single pool which will be used to fund the contingent benefits. A PCA would, conceptually, provide the lowest cost to protect against longevity and investment risk, albeit with no guarantees.

This paper would expand on existing research on pooled annuity designs (e.g., GSA) and contingent annuities (e.g., contingent deferred annuity). It will set out practical product design considerations and assess retirees’ retirement outcomes against the objectives in the Retirement Income Covenant. It will also consider overall retirement solution suitability by drawing on recent research into retiree’s preferences.

Find the Q&A here: Q&A on 'Lifetime Income Products'