Structural problems with retirement products

Product providers are waking up to the aging population, but it could be a while before more products for managing retirement finances emerge in New Zealand.

Thursday, April 5th 2012, 7:04AM

by Niko Kloeten

Mercer has been researching New Zealanders' retirement expectations, and has found the average person will need to spend $40,000 per year post retirement to maintain their desired standard of living, while 20% expect to need $50,000 a year to live on after retiring.

Martin Lewington, head of Mercer in New Zealand, said advisers will play a crucial role in helping people work out how much individuals will actually need: "Who's average?" he asks.

As people retire, advisers will focus more on helping people manage their draw-downs and this, Lewington said, is where product providers can help with tailor-made solutions.

He said Mercer had introduced a product in Australia that helps people manage this process once they reach the age of eligibility, and the company is planning to bring it across this side of the Tasman.

However, Tower Investments chief executive Sam Stubbs said the demand wasn't there yet for many providers to produce products specifically aimed at this market segment.

"In terms of the provision of these products in the long term, supply will beget demand - we'll supply these products as demanded."

He also said there were two "structural" problems that needed to be overcome: the first related to fixed interest.

"With long-term fixed interest you need long-term things to invest in and the biggest problem is New Zealand doesn't have a mature yield curve."

This, he said, was due to the lack of long-term government stock - "You can't accurately price anything for more than five years."

The second issue, Stubbs said, was to do with annuities: "A lot of people talk about this in terms of annuities but there are a number of big hurdles with annuities."

Annuities, he said, are tax disadvantaged relative to other products and only work when they are compulsory.

"What tends to happen with annuities is only people who are going to live a long time take them out and people who are going to die young don't.

"That said, all these problems will likely be cured because there will be enough demand."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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