Transcript 

Welcome to Relative Return. Get closer to the people, products and strategies shaping Australia's financial services industry. 

Hello, hello and welcome to the Relative Return podcast. Maya here. I am your host today and I am the managing editor here at Momentum Media of advice and distribution. So today on the show with me, I've got Patrick Clarke, who is the general manager of one of Australia's leading investment solutions providers, Generation Life. Welcome to the show, Patrick. How are you doing? 

I'm terrific, Maya. Thanks for having me on. Thank you so much for joining me today. And a little bit of a custom, at least when I'm hosting this show, is to ask our guests to tell us a little bit about themselves. So just in a sort of a short few sentences, do you want to tell us a little bit about yourself, Patrick, and I guess your role at Generation Life? 

Sure. I've been working in financial services for over 33 years now, and a lot of my career has been in product development. And for 30 years of my career, I've actually been helping people save for their retirement. And I've built large super funds at places like BT and ANZ. But I joined Generation Life three years ago with the sole purpose of developing a lifetime annuity, which is designed to help people effectively spend their retirement savings. So I've sort of come full circle, helped people save for their retirement, now I'm helping people enjoy their retirement. 

Well, that's awesome. So Patrick, I guess we're going to start with the question that is probably one of the sort of main points of discussion across many circles across Australia at the moment, and that's the fact that Australia really doesn't seem to be prepared for what's coming, which is 4.2 million baby boomers heading into retirement. What are your thoughts on this? Obviously, you can't give us a solution to this big issue, but I'm sure you have some ideas. 

Yeah, look, I think, you know, as a nation, we've been very much focused on saving for retirement. There's no doubt about it. And, you know, our system is one of the best in the world when it comes to that. But I think it is right that, you know, the evidence that we have before us about how people have used their retirement savings up until now shows us that they're not using those savings effectively. You know, I heard a great phrase the other day that Australians are regarded as the richest in the graveyard. You know, people are passing away with large parts of their superannuation intact, which means that they haven't actually spent their retirement savings. You know, people are getting to age 80 and they've got 80% of their retirement savings still intact. And so, I think, you know, there's actually solutions out there to help with this problem. It's really a matter of helping people become aware of these solutions and use these solutions with other solutions to, you know, optimise lifestyle in retirement so that, you know, rather than living a frugal lifestyle, you can actually live an enjoyable lifestyle free of worry and concern. 

Exactly, Patrick. And obviously, you know, a recent report by ASIC and APRA actually highlighted the lack of progress that super funds have made in providing long-term retirement income strategies for their members, which you just mentioned, obviously, are quite sort of important. But super funds have sort of naturally objected and they've said that, you know, they weren't given enough time. They said that, you know, APRA and ASIC are basing their judgements on a one-year snapshot and that is sort of quite misleading. What are your thoughts on this? And this is obviously off the back of the retirement income covenant, which sort of came into power last year.

Yeah, look, Othalo, having worked in big super fund organisations, you know, in the past, I have sympathy for the super funds view. I mean, you know, this has been telegraphed for a long time that, you know, super funds will need to develop solutions that can help manage the longevity risk as one of the things that they need to take care of. But running a large super fund these days, there is just so much on people's plates. And so, you know, I've had absolutely no doubt the super funds will galvanise and will get there. And I think, you know, having a bit of a pride as has been given by that report will certainly help. There's lots of movement within super funds, people being appointed to roles, so it's becoming an integral part of a superannuation funds leadership structure, having a person that's focused on retirement. The next step is now developing solutions to complement the account-based pension that almost all super funds have today, but also building out the ability to provide advice on how to combine an account-based pension with a longevity solution to optimise people's outcomes.

Definitely. And you mentioned, you know, it's very tough on super funds at the moment, especially sort of, you know, super funds, everyone that I've been talking to says super funds were sort of, and we're talking about the objective of super at the moment as well, there's a lot going on in the super space, but they were sort of meant to serve to help us sort of store this money and to build this wealth for retirement. And now there's obviously talk about with, you know, the financial advice space and the quality of advice review, and there is talk about sort of bringing them into that advice environment and allowing them to advise their clients, which would hopefully sort of help their, you know, members spend their money in retirement, but that wasn't really their role ever. You know, it was to be these, you know, storers and, you know, people that we give our money to and they sort of help grow that for us, not the actual, you know, what happens when you reach retirement, they sort of weren't meant to do the handholding, were they? I think it probably didn't occur to super funds that that was their role, but for my way of thinking, it's a natural role for a super fund. I mean, if you're a super fund member and you've been relying upon the super fund to help you accumulate for retirement, then I think it's only natural that super fund members would look towards their super fund to help them use those savings in an effective way. So, but I don't think that's, you know, I think anyone should be pointing a finger of blame or anything. I think it's actually a collective awakening, if you like, that we've got a gap here in our system. You know, we've been brilliant at saving for retirement and, you know, the light bulb's gone on it. You know, some people, the light bulb went on a bit earlier than for others, but now To me, it makes eminent sense that super funds would have a role to play in helping their members use those retirement savings effectively in retirement. So, you know, there's a lot of people that need to be involved, but, you know, the financial planning community needs to be involved. They're perfectly placed to help, but the super fund, you know, I think is perfectly placed to provide solutions to complement account-based pensions. And speaking of those solutions, what are some of the options that are obviously available to super fund trustees at the moment, I guess, to support their members approaching the retirement phase? Do you think they're in a sort of good place to provide these options? Obviously at the moment we are still waiting, as I mentioned earlier, on the quality of advice review and what's going to happen with that, what the government is calling stream two. So there are some, you know, limits to what super funds can do at the moment before any sort of new regulation is introduced, if it is. What can they do at the moment, I guess? So there's two things that you need for a good retirement plan. You need advice. And the second thing is you need solutions. And so understanding the right allocation to solutions, you need advice. So there's two things that need to happen. The first is that solutions that manage longevity risk need to be developed and advice needs to be made far more available in order to help members make the appropriate decision. So on the first part on solutions, I think there's kind of two things that will emerge. The first is a range of longevity solutions. Now these exist today. Longevity solutions have been around for a very long time, but they haven't been very popular. In the last two and a half years, you've actually seen five new entrants or five new products in this space, which in my opinion, go a long way to addressing the reasons why traditional lifetime annuities aren't popular. And so, you know, organisations like ourselves have developed investment linked lifetime annuities, which address a lot of the concerns people had about traditional lifetime annuities. Other organisations like, you know, AMP and QSuper have also developed solutions. So there's starting to be choice out there. At the moment, those choices are generally available through financial planners. And I think what will start to happen is that super funds will look to partner with organisations like ourselves and life insurers to develop their own solutions. So they'll either put solutions like ours on an approved product list and have their advisors, you know, work on that, or they'll start to develop their own solutions. But the second, I think, the second really interesting area is around investment options that are better suited to retirement income. And so what I mean by that are, you know, investment options that, you know, are less volatile, you know, so, you know, there are already investment options out there that offer exposure to equities, but in a way that where there's lower volatility in returns, you know, looking at real return funds that aim to provide the same level of returns as traditional diversified funds, but with lower volatility. And that's really what we've learned in the period of time that we've been talking to our clients and advisors. Clients love the fact that they can get income that grows over time through exposure to gross investments, but volatility is easy to accept on the way up, it's a bit harder to cope with on the way down. Definitely Patrick. And you mentioned those longevity sort of solutions, and we are seeing a lot of them being sort of on the side of media here. I do see quite a lot of news coming through from the funds who are sort of either they're looking at sort of coming up with these solutions, apps and platforms and all sorts of things, or they're already sort of coming out to the market with their own products. Do you think, you know, considering we, at the start of this sort of podcast, we mentioned that it is 4.2 million baby boomers heading into retirement, and we've sort of on the advice front, we've been speaking a lot about the intergenerational wealth transfer, which is obviously happening at the moment as well. Are we a little bit late to the game? Did we leave this, as you mentioned sort of previously, we weren't that concerned about these products. It's really only in the past couple of years that we're seeing these things, and probably, you know, very much in the past year that it's been very sort of quite intense, you know, in that space. Look, I think it would have been better to have been doing this earlier, but I think we can quite quickly catch up. I mean, you've seen the emergence of, you know, five new solutions in two and a half years, which in, you know, financial services is actually quite a, that's quite a rush. And look, you know, I think that there's an element of people being gun shy in this space because, you know, I can go back to, and I'm not going to name the organizations and stuff because they were having a crack, but, you know, I can go back to 2006 and talk about the people that tried to launch solutions, you know, to deal to this, and they weren't successful.

So, I think, you know, when you work in a super fund or you work in a commercial enterprise, if you innovate, you've got to hope that that innovation will be successful, you know, that it is viable. So, I think that, you know, there has been, you know, because of the baggage that lifetime annuities have, which is unfair, and sort of the lack of success of previous iterations, I think it's probably not a surprise that people are a little bit cautious. Now, the government's helped us here, like the government has actually helped us. So back in 2017, they came up with some legislation called the innovative income stream legislation. When you read the explanatory memorandum around that legislation, the government's aim was to actually help insurers and super funds develop solutions that meet consumer preferences. And so, it took the industry a little while to get going, you know, I started this job in 2020, you know, and it takes a while to build these solutions, you know, to get them right to make sure that the right combination of benefits, which you're now starting to see momentum, you're now starting to see, yes, I will be great if we were earlier, but you're never too late, right? Yeah, yeah, you're right. And in terms of, again, the longevity products, could white labelling an existing sort of high performing longevity product be part of the solution? And while we're on the topic of longevity product, there's been a sort of a low take up of them. And as such, super funds are generally sort of concerned, like you mentioned, that developing their own product will be economically unviable. So, you know, we just sort of talked about that, but just expanding further, what do you think about the white labelling solution? So two questions, two questions, Maya, so on the white labelling, I think that that's a really sensible option for a number of super funds, you know, organisations like ourselves have made the investment in the registry systems to, you know, manage these solutions. And we've done the work with other organisations to develop the products and make them able to be white labelled. So, you know, we've done a lot of the heavy lifting that the super funds would have otherwise had to do. But we can also, the super fund can remain very much involved from a customer experience point of view and an investment management point of view. So it's certainly a real live option for super funds to do rather than start from scratch. So they can stand on the shoulders of organisations like ourselves that have already, you know, done that work. So that's kind of the white labelling answer that I think there are, you know, organisations that can work with super funds to do that. We're not the only one. On the fact that these products have not been appealing in the past, that's true, that, you know, we're in single digits in terms of the percentage of monies in annuities and particularly lifetime annuities that represent the retirement system. But there's a lot of misconceptions around these products, which really are no longer true. I'd like to share some of those with you if I can. So the first one is that if you put money into a lifetime annuity and you pass away early, there's this myth that your beneficiaries get nothing back. So that, you know, geez, mum and dad did their dough. They put out a grand in, you know, the worst has happened and there's nothing left. That just doesn't happen anymore, right? There is no lifetime solution out there that doesn't return the purchase price back in the form of cumulative income and a death benefit. So that myth is gone. The second myth is that they're risky. Again, and I'm talking about life companies here that offer annuities, no life company that has offered an annuity has defaulted on its payment, right? We're a really heavily regulated industry. And so again, this risk that the provider might default, yes, that could always happen. But I'd suggest if it does happen, the world's probably being hit by a meteor, you know, so that's the other thing. The third one, and this one has, you know, some truth to it, but because of past economic conditions is that lifetime annuities don't offer great value. Now, when, and you've got to understand, well, what do people mean by value? Back in the days when interest rates were very low and the only type of annuity that was available was a traditional lifetime annuity where income is guaranteed for life, but the level of income is also guaranteed. In a low interest rate environment, the return on your investment was not great. It took a long time for you to get your money back in the form of cumulative income. Now, you had the benefit of knowing that that income was never going to fall or would rise with a, but it just took you a long time to get your money back. Now that there are higher interest rates, you know, traditional lifetime annuities are offering better value, but investment linked lifetime annuities, which are the kids on the block, often leave a greater value. Like they have the ability to give you a return on your investment where you get your money back much sooner in the form of cumulative income. And with the right investment strategy, you had an income stream that will outpace inflation over the medium to long-term. The trade-off is of course that there's volatility in the income, but you know, I always think that more income is better than stable income. So those three big myths have, you know, they no longer exist, but I understand that there is still a big psychological barrier of handing over a large amount of money and not seeing a balance. But if you can focus on the fact that you're going to get an income that will last as long as you live, and you know, that article about the woman who is 111, you know, she would be still getting an income stream. So they are actually, if you can flick behind to look at that, they're an extraordinarily valuable product. Yeah. Well, thanks, Patrick, for that explanation. And obviously we do love to bust myths on this podcast, so well done for that. But just returning to the topic of advice. So Patrick, we obviously recently heard from the government, we saw their IGR and they're saying that they're really sort of worried about the lack of willingness among Australians to spend their retirement, which we sort of talked about earlier, where, you know, a lot of Australians are actually dying with a large portion of their super. So what the government has said is that they're actually going to look into the issue. So they're going to release, I think, a consultation paper soon, and they've hinted that they're also going to sort of canvas the role of financial advice in helping retirees spend alongside other things. I imagine retirement products offered by super funds, but what are your thoughts on this and the role, I guess, financial advice does play in helping Australians, you know, reach that sort of comfort level where they, you know, are happily spending their money in retirement? Look, massive. Like the role of advice in using your retirement savings effectively is massive. You know, saving for retirement's not hard, right? You just save, you know, spend less, save more, invest hard. But drawing down when you don't know how long you're going to live for is a very, you know, there's a lot in that. And so advisors are absolutely critical to not only solving the empirical issue of, you know, what's the right allocation between an account based pension and a lifetime income stream, but also that they're important from an emotional side of things, like they're important from a behavioral side of things. So if you have a retirement plan that has an allocation to an account based pension and a lifetime annuity, the client should actually have more confidence to spend their money, you know, to spend the account based pension. And the reason for that is that where you have an annuity as part of a retirement income portfolio, you've addressed the longevity risk. You've addressed the risk that the person will outlive their savings. They won't because they've invested a portion of their savings into an annuity. And by taking care of longevity risk, you take care of the other risk, which is regret risk. So regret risk is where if you're so heavily focused on longevity risk, and you're so worried about running out of money that you don't spend anything, you're going to get to 80, realize you've still got all your money intact, and you're going to go, gee whiz, I wish I'd done all of those things that, you know, I had on my bucket list. So this is what an advisor can do. An advisor can put together a portfolio. So put a portfolio together that delivers levels of income, the right levels of income at the right time for a person's life, but also give them the confidence to actually spend that income, you know, when they're fit and able. Yeah, definitely. And I guess, you know, when I was younger, we'd always, you know, there'd be a lot of sort of retirees driving very good cars back in the day, you know, there wouldn't be that many Mercedes Benzes on the roads of Sydney, but it would mostly be the retirees that were driving them. So that makes sense. They get to 80, they realize they have all that cash left. Well, this is it. But, you know, when you sort of talk through this with planners, they all acknowledge, they go, yeah, that's exactly right. And, you know, someone of my age, you know, I see that with my parents, my parents' friends, you know, it's a big deal when a person in their 80s buys some new furniture, you know, and they can't. Yeah, they actually can. But yeah, obviously, you know, promoting more financial confidence among retirees can actually unlock untapped capital to support Australia's economy. So that's another sort of side of things, which is, you know, really important. And we have been talking about, and the government's talked about, stalled productivity growth. And we need to get, you know, productivity moving. We need to get the economy moving. Obviously, you know, we've gone through quite a bit over the past few years as the rest of the world, I guess. But, you know, how important is that sort of, you know, it's a flow and effect, isn't it? So you get the financial advice to the retirees, you get them actually spending their super and it is doing good for the economy itself. Oh, look, I think this is why the Treasury and the Treasurer are so keen to unlock this problem. You know, and it sounds a bit corny, but this is actually good for the consumer and good for the country. Right? If you're sitting at home, you're not worried about spending, you know, money, you're going to have an unenjoyable retirement. It's not going to be great for your mental health, you know, better to be out there with your friends and socialising and all this stuff. So, you know, it's better for the retirees, you know, healthier mental health and physical health population. But the flow and effects, as you've just identified, Myra, it's great for the economy. You know, there is spending going on in the economy, you know, hospitality, travel, all of these sorts of sectors benefit because you've got all these people actually spending their money, not sitting at home counting it. That's a very, very good point. Well, thank you. 

We're going to finish on that note, Patrick. Thank you so much for joining me today. Oh, no. Terrific. Lovely chatting to you, Myra. Lovely chatting to you too. And we do hope our audience enjoyed today's podcast. Thank you for tuning in and I'll catch you next time.