Life After Full-time Work Blog

In Australia, QSuper launches a modern version of a tontine

In a February blog post on decumulation I said:

STOP PRESS: I understand that QSuper, a major Australian superannuation fund, will shortly be announcing the availability of a lifetime income product that pools longevity risk without annuity-type guarantees. More details as soon as they’re available.

I’ve now heard that it has indeed been launched. So, here are some of the details, as I understand them.

The product is called QSuper Lifetime Pension. You’ll find the announcement on their website here. My thanks to Brnic Van Wyk and Ben Hillier at QSuper for being such good guys when we met and subsequently. If I’ve got any of the details wrong, it’s my fault, not theirs.

A QSuper member may allocate some amount from his or her accumulated superannuation (i.e. pension, in most countries) assets to purchase this product. There’s no obligation to select this option, and if purchased the purchase price can be any proportion of the member’s total super assets. What the member gets is the following:

• An income stream is paid once every fortnight, guaranteed to last for the lifetime of the member or (if elected in advance) until both the member and the member’s spouse have passed away.
• If that income stream ends before the purchase price has been returned in income payments, a lump sum death benefit equal to the rest of the purchase price is paid to named beneficiaries.
• Meanwhile the purchase price is invested in the QSuper Balanced Option. The investment returns affect the income every year, so the income may go up or down on July 1 each year. But you can guess that the initial amount of the payment is set, via a long-term investment return assumption, at a level that is anticipated to be much more likely to go up than to go down. By the way, fluctuating payments are a feature that Australians are used to, because their annual minimum drawdowns are also volatile (as is the case in other countries too).

One QSuper suggestion is to have spend enough on the Lifetime Pension that, along with Australia’s “Age Pension,” it will cover the essentials of the member’s lifestyle pattern.

There’s a potential “uncapped retirement bonus” for QSuper members. It relates to the release of the reserve for an accrued Australian tax liability.

There’s also a six-month cooling-off period, during which the member can decide to reverse the purchase and receive the full purchase price back, less any income payments received to date, of course, and adjusted downwards in unfavorable market conditions to protect the remaining members from arbitrage.

And finally their material contains a lot of references to Australia’s super system and tax system, which isn’t necessary for me to describe as I’m only trying to describe the basic principles.

Some observations:

• This is not strictly a tontine in the classical sense of that word, because the arrangement is open to new members. Each member’s payments have a theoretical future value based on assumed returns and longevity projections, and the total of these future values is equated to the actual assets once a year, hence providing equity across generations of members.
• This same mechanism is also the way in which “mortality credits” (the theoretical future values held for members who pass away beyond the requirement for the death benefit to be paid) are distributed to living members.
• In effect, therefore, this is a longevity pool which is enabled to pay lifetime income without the need for an insurance guarantee (as traditional annuities have), but also without the need to be restricted to the safe investments that such a guarantee requires.
• My understanding is that the balanced fund focuses on being a diversified growth portfolio, with something like 70-80% in equities and in illiquid “alternative” investments like private equity and private debt.
• Trust in the super fund’s management and its investments is hugely important, for this product to succeed with sufficient purchases. QSuper has been in existence for more than 100 years, having first been established to serve Queensland’s government employees and their spouses, so I’d imagine that that aspect of trust has been long established.

Personally, I think it’s too bad that similar arrangements aren’t more widely available. I’d be happy to purchase a lifetime income from one. Hedging the financial risk of outliving my life expectancy is something I focus on, given my family’s longevity history, and I’d much rather invest in this type of product than buy a traditional guaranteed annuity. So I hope more such products will follow, around the world.

Actually my ultimate preferred product would be a tontine-based deferred annuity, but that’s not part of this particular announcement. That’s not a surprise, even though from a technical perspective it’s easy to add it. Given that this product is described as an “Australian-first,” keeping it simple and transparent is clearly the theme for its launch. In fact one of the designers thanked me on LinkedIn for my “support and guidance along the way.” As I recall, my main contribution was the word “satisfice,” meaning: “Don’t be perfectionists, keep it simple. You can’t solve all the problems, helping to solve some problems is … pretty good!”

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Takeaway

A new lifetime income product pools longevity risk while offering growth-oriented investing. I hope more will follow, around the world.

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