For super funds and their advisers

Forget politics, retirement strategies the real battleground

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People talk about the importance of taking the time to build a platform for any endeavour. If that’s the case for developing a commercial mass-market range of retirement solutions, Allianz and PIMCO have given themselves a head start with their platform – Allianz Retire+.

Starting in 2015 in PIMCO’s Sydney office, the notion of putting together the capabilities of the world’s largest fixed income manager, PIMCO, and its global insurance parent, Allianz, was nurtured by a taskforce for nearly two years before being given the light of day. And then, that was only to publicly announce that the initiative was underway, in May 2017.

The taskforce included representatives from Munich, Minneapolis, and Sydney offices. It was overseen by Adrian Stewart, the head of PIMCO for Australia and New Zealand. He temporarily led Allianz Retire+ when it was formally announced in May 2018, while a search for the inaugural chief executive was underway. Matthew Rady, a long-time Macquarie executive director and former global financial markets head for data supplier IRESS, got the job and started in June that year.

When he announced what the taskforce was doing, Stewart described the task at hand this way: “The Australian marketplace has a long list of market failures by entrants who have built and launched products in an attempt to solve the retirement dilemma. Our assessment is they’ve all failed for very different reasons.

“The barriers to entry to manufacture products in this space are extremely high, for all the right reasons, and there are very few groups that will have the scale, expertise, patience and distribution model to be sustainable over the next 25-plus years.

“I know 25 years is a long time horizon to be framing this segment, but we should be thinking about this as a long-term viable solution. If you’re going to be a solutions provider to retirees you have to be thinking in that mindset of 25 to 50 years because these are not short-term commitments… In my view, the financial services industry needs to try harder and take a longer-term perspective when building these solutions.”

Allianz Retire+ launched its first product, ‘Future Safe’, in March 2019 for the retail market. So far, it’s tracking towards $100 million in funds under management. But, the company does much more than provide a product. It provides a customisable financial service for all segments of the retirement market.

Starting with the retail market, the business has been more formally introduced to the institutional market from last year with the recruitment of a retirement specialist, Fintan Thornton, an actuary, in September. He is the head of institutional solutions. Prior to senior superannuation roles at CBA and Colonial, Thornton spent five years at Russell Investments, including as leader of its actuarial department.

Fintan Thornton

PIMCO has a head start with the institutional market in Australia, too. There aren’t many big super funds which aren’t already a client of one or more of its various fixed income strategies. In recent years, the manager has built up a strong presence in the wholesale/retail markets as well, helped by crises such as the GFC prompting many advisers to recommend bond funds for, perhaps, the first time.

Rady, who had spoken to plenty of super fund executives and consultants prior to Thornton’s arrival, is under no illusions about the differences between the advised retail and institutional markets. Allianz Retire+ is not trying to sell ‘Future Safe’ to a big super fund.

“About this time last year, we decided that the time was right to move into that [institutional] market,” he says. “The new retirement income covenant is getting higher up the policy push, along with regulatory push and Government’s superannuation strategy… The covenant is very important for super funds to address.”

A retirement income covenant was first proposed in 2018 and due to come into force in July this year. Its introduction was delayed in December last until July 1, 2022. It will require super fund trustees to consider the needs and preferences of members and ensure retirees have a greater choice in how they take their super benefits in retirement.

Every big super fund already has some sort of annuity or other retirement product for its members, either internally built or outsourced. But it is probably fair to say that most of them are not 100 per cent happy with their offerings.

They know the baby-boomer demographic phenomenon has started and they know their own demographics whereby the net inflow of new members is being eclipsed by the outflow of those entering retirement. A strong retirement income range of strategies will be essential for fund growth into the future.

Rady says: “We can see that the major super funds have been giving a lot of thought to this. The lack of significant progress to date demonstrates that it is not an easy problem to solve.”

One of the issues is that retirees don’t have enough confidence in the system, so they tend to live more frugally than they could. As Jane Hume, the minister for superannuation, has said on more than one occasion, retirees need to look at their superannuation differently, including as a pot of capital to be drawn down.

However patronising as that sounds, if retirees did have more confidence surrounding their nest egg, including that the Government and/or subsequent governments will keep their hands off it, they would probably be more likely to draw down more of the capital.

Rady says: “We support super funds that are having a go. This year we expect to see new products and services that sit alongside traditional account-based pensions. We think there is an opportunity for us to help with that.”

Thornton says that Allianz Retire+ is keen to have a consultative relationship with funds. “We’re not here to say ‘here’s our product’. We can see there’ll be different solutions for different funds. We are just bringing some different ideas to the table,” he says.

“There are about 700 new retirees each day and their combined assets are enormous and growing rapidly. Trustees also have new challenges such as [member] stapling which will cause declining fund memberships.”

While he doesn’t use that (overused) word ‘partnership’, the relationships between super funds and Allianz Retire+ is different to that between the funds and their external managers, not just because it requires a consultative approach. The contracts are, by necessity, longer term, and therefore hiring and firing is not as quick and easy. With the retail product, ‘Future Safe’, the contract is for seven years.

The relationships with funds are more akin to those the funds have with their asset servicing providers or member administrators, which also tend to have different service goals from fund to fund and more and different touch points between the fund and the external party.

In this case, due to the strong insurance component of the value proposition, the members are not as significantly impacted by PIMCO’s relative investment performance as with traditional manager mandates. There are not as many potential surprises, if any.

‘But it is not a decision to be taken as lightly,” Rady says. “We think our experience makes us different. Allianz is one of the biggest insurance companies in the world and its main business is in investment products for life insurance, such as annuities. That’s where we think we can bring the benefits of a combination of PIMCO and Allianz to bear.”

Having one owner – Allianz acquired PIMCO in 2000 – obviates one of the major problems often confronting joint ventures, where the owners have a disagreement on strategy or even tactics.

While ‘Future Safe’ is designed for individual investors, advice is important as it is with most things in relation to retirement decisions. ‘Future Safe’ gives investors a choice of floors under the investment returns, guaranteeing potential investment losses of either 10 per cent or 5 per cent in any one year, with commensurate caps on the upside. The investor is able to reset the parameters every year and can choose between indexed international and Australian shares, or a mix. It is a low-fee product compared with what is currently available in the market, with a flat 80bps charge.

Allianz Retire+ has built a team of nearly 70 people based in separate offices in Sydney and is developing its own culture where there is an exclusive focus on retirement. It is the first co-operative venture of this kind and magnitude between the two companies in the world, although PIMCO manages billions of Allianz fiduciary funds and also some specific insurance products for Allianz Life in the US.

Allianz’s long-term commitment to the Australian market is evident with Dr Günther Thallinger, member of the board of management of Allianz SE, becoming business sponsor since conception of the taskforce.

The board is also a strong one: chairman David Plumb; non-executive directors Bernie Ripoll, the former Labor MP and parliamentary secretary to the Treasurer, and retirement specialist Sally Evans; as well as Allianz SE executive vice president Thomas Naumann, PIMCO’s Stewart and Rady.

“There is a lot of interest globally within the group in what we’re doing,” Rady says. “The aspirations are to launch in multiple markets. Retirement is a key component of the Allianz group strategy.” In fact, it is one of the three pillars of the worldwide business – insurance, asset management and retirement.

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