QSuper leads the way as Australia ups interest in retirement income

QSuper, the Brisbane, Australia-based super fund for Queensland public employees, has gotten a jump on a superannuation industry facing imminent pressure to offer participants at or near retirement new investment options capable of ensuring they won't outlive their savings.

QSuper's Lifetime Pension offering, launched in March, meanwhile, could help tontines — investment pools where participants share longevity risks by distributing the assets of those who die as "mortality credits" — come into fashion Down Under, analysts predict.

Australia's Retirement Income Covenant, set to go into effect on July 1, 2022, will require superannuation fund trustees to develop a retirement income strategy balancing three goals: to help participants maximize their retirement income, to manage investment and longevity risks, and to retain flexible access to their savings during retirement.

A position paper on the covenant issued in July by Australia's Treasury Department, meanwhile, called on funds to develop new investment offerings that can help members achieve and balance those goals.

The paper specifically cites the pooling of longevity risk and the sharing of mortality credits — the building blocks of tontine structures used mainly in Europe over the past three and a half centuries — as one means of balancing the covenant's retirement income objectives.

Australia's Treasury, instead, uses the term "group self-annuitization product," defined as "a retirement income product where members invest capital into a pool and regular income is paid from the pool to surviving members. The income stream is subject to investment risk/performance and the longevity experience of the pool. The product is not capital-backed (not guaranteed)."

Following years of study and development, QSuper modified its product design to overcome some of the biggest psychological hurdles facing investors considering tontines or GSAs, said Brnic Van Wyk, QSuper's head of asset/liability management.

For example, while investments in tontines are irrevocable, with early or premature deaths the source of gains for surviving participants, QSuper guarantees that if clients die before getting back, in income distributions, the amount they invested in Lifetime Pension, the difference will be paid out to their beneficiaries.

"If we didn't have money-back protection, nobody would buy it because for the average Joe, the first question is 'what if a bus hits me tomorrow'" — effectively a fairness question, Mr. Van Wyk said.

"The money-back guarantee is insured via (QSuper's) captive insurer QInsure," noted Nick Callil, Melbourne-based head of retirement solutions, Australia, with investment consultant Willis Towers Watson PLC, in an email. The cost "does result in lower income than would otherwise be payable … but they see it (correctly in my view) as an essential feature for the acceptance of this product," he said.

Beyond that, Mr. Van Wyk said his team's goal was to avoid adding complexity that would come with different cohorts or vintages. Instead, QSuper's offering is an open-ended pool of retirees from 60 on up, with everybody getting the same mortality credit.

At the end of the day, the mortality credit — at maybe 50 to 60 basis points a year — is a fraction of what clients can anticipate in investment returns from QSuper's balanced fund, where the product's assets are parked, Mr. Van Wyk said.

"You want to give people a simple message: This is how much income you get, it gets adjusted every year (in line with actual market returns and whether the number of deaths in the investment pool was more or less than anticipated) and it will last as long as you do," he said.

"It makes intuitive sense," which has helped the strategy get off to a successful start so far, Mr. Van Wyk said.

Over its first six months, QSuper's Lifetime Pension has garnered more than A$70 million ($52 million) from over 300 clients, with an average purchase price of A$220,000, while garnering international recognition — including an innovation award in October at Pensions & Investments' WorldPensionSummit.

The A$70 million might sound like small change for a fund with more than 600,000 members and A$120 billion in retirement assets, but that money has come before the launch of any full-throated marketing campaign. The fund initially opted for a soft launch, flagging the strategy with a limited number of members.

Mr. Van Wyk called that decision a "blessing in disguise" for a fund set up to serve state government employees as opposed to "the person walking in off the street."

Even so, more than 10% of Lifetime Pension's clients have come from outside QSuper's participant base so far — joining the fund "just to buy the pension," he noted.

That soft launch, meanwhile, could be poised to shift into high gear if final regulatory approvals come through for a planned merger in February between QSuper and Sunsuper, a Brisbane-based industry fund with 1.4 million members and A$85 billion in assets of its own.

"The moment we merge, we have direct access to financial planners (at Sunsuper) that can effectively promote the product … to the whole country, not just people in Queensland," he said.

Investment consultants predicted that with Australia's coming Retirement Income Covenant pressuring other super funds to come up with their own longevity solutions, QSuper's precedent will likely cast a long shadow over their deliberations.

"QSuper's stepped up to the plate … and shown the rest of the industry that it's possible," said David Carruthers, senior consultant and head of retirement solutions with Melbourne-based investment consultant Frontier Advisors Pty. Ltd.

"It's a lot of work but it's possible to get something out and members seem to like it so it's a really good sign for the rest of the industry to say 'let's follow their lead,'" he said.

Willis Towers Watson's Mr. Callil likewise sees Lifetime Pensions as a useful data point for imitators. "QSuper has done the heavy lifting," he said, adding "it would make sense for others following this path to consider a similar design."

Some industry funds appear to be on the case.

A spokeswoman for HESTA, the Melbourne-based super fund focused on health-care workers, managing A$60 billion for roughly 880,000 participants, said in an email that HESTA's team is at "the early stages of our development" of a product that pools longevity risks and shares mortality credits and will have more to discuss during the coming year.

Frontier's Mr. Carruthers said a group of 10 super fund clients he worked with last year to think through the issues surrounding launching longevity strategies are moving ahead this year at different speeds. "There are a couple of funds we work with who are keen to do something quicker … (and) we might see one or two funds come out before June with new solutions," he said.

By contrast, Sam Sicilia, the chief investment officer of Hostplus, the A$68 billion Melbourne-based fund focused on hospitality-sector workers, said with his fund's "very young member demographics" — an average age of roughly 36 — "we do not offer any products that pool mortality credits and, at this stage, do not plan any such products."

The fact that more than 10% of Lifetime Pension's clients have come from outside QSuper's member base, meanwhile, could augur a pickup in competition among funds over retirees.

Funds in Australia are really competitive "in the accumulation phase" but at best they have a "retention policy" at the retirement stage, trying to get 70% or 80% or 90% of the members who've built up savings at their fund over a working life of 40 years or so to shift into that fund's retirement offerings, Mr. Carruthers noted.

With more and more money at stake in the retirement segment, there's reason to expect competition there to heat up, and in that context QSuper's strategy getting a material chunk of money from outside the fund's member base "sounds pretty impressive," Mr. Carruthers said.