The problem with decumulation products

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Traditional financial products aren’t the solution for retirees, who in many cases would be better off managing the decumulation phase themselves, a superannuation expert says.

Monday, December 3rd 2012, 6:27AM 1 Comment

by Niko Kloeten

MCA principal and Superlife director Michael Chamberlain spoke at a Retirement Policy Research Centre (RPRC) symposium on Friday about the challenges of creating a viable decumulation product in New Zealand.

The lack of products in the marketplace to help people manage the drawing down of funds during retirement has been a talking point even for Commerce Minister Craig Foss.

But Chamberlain said there are big hurdles to overcome to ensure retirees get a satisfactory outcome.

“The fact we are having a symposium on decumulation tells me there’s not a single product or solution… why do we expect a product will be the answer or that government intervention will be a solution?” he said.

“A product in the traditional sense will never be an optimal solution but all retirees do need a solution.”

The optimal solution is a “retiree-centric vehicle” that allows retirees to meet their own decumulation needs; however, “human nature gets in the way”, he said.

“Human nature does not allow us to accept what is realistic.  We are greedy; we want managers to promise us more, we want more risk, we want it easy, we want someone else to do it for us and to do it for free.

“Pandering to human nature is why we get a lot of poor products and bad practices within the industry.”

Chamberlain said buyers of products have to compete with product makers, who have a lot more information than them; they also don’t know how their retirement will pan out.

“We do not know how much income we need and for how long… we do not even know where we will retire to and in which country we will incur our expenditure.”

Fees and costs and tax incurred with products ensure that consumers’ outcomes are low, he said.

“When you look at the margins, retirees would be better to manage their own risk, at least in the early part of the decumulation phase.”

And he said regulation adds to costs by reducing competition in the marketplace.

“The agendas of regulators and companies are in conflict but they all work against retirees.”

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

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