MERCER LIFETIMEPLUS ADVISER TOOLKIT CONVERSATION GUIDE FOR ADVISER USE ONLY. Last updated: 4 April 2016

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1 MERCER LIFETIMEPLUS ADVISER TOOLKIT CONVERSATION GUIDE FOR ADVISER USE ONLY Last updated: 4 April 2016 This document is for Adviser Use Only and is not to be distributed to retail clients. The document has been prepared by Mercer Consulting (Australia) Pty Ltd (MCAPL) ABN , Australian Financial Services Licence # MERCER is a registered trademark of Mercer (Australia) Pty Ltd ABN Copyright 2016 Mercer LLC. All rights reserved

2 ABOUT THIS GUIDE Mercer LifetimePlus is the world s only mutually-pooled longevity risk solution. It is designed to be as simple as possible however we appreciate that it is a new concept for most advisers, and certainly, the consumer retirement market. Recognising that there is no precedence for discussing and explaining this kind of investment, we have created this booklet to guide the conversations that you may have with your clients on both longevity risk and Mercer LifetimePlus. The content in this guide draws on the learnings from our extensive market research and customer testing during the development of the investment. This conversation guide is structured into two sections; 1. Discussing longevity risk, and 2. Discussing Mercer LifetimePlus. To support these discussions we have created two corresponding member booklets that you can use with your clients to guide your conversation. These are: Longevity risk booklet To help guide the discussion about longevity risk. This booklet provides information and infographics about longevity trends, expenses in older ages, and the risks of relying on the age pension. Product booklet This booklet contains information and infographics to help guide your discussion with covering the features and benefits of Mercer LifetimePlus, along with a simple step-through explanation on how it works. This conversation guide addresses longevity risk and Mercer LifetimePlus only. It does not address how Mercer LifetimePlus can be used in retirement strategies, nor the broader needs, goals and investment objectives of your client s overall retirement plan. For how Mercer LifetimePlus could be incorporated in advice strategies, please see Module 3 of the Mercer LifetimePlus training program, and Comparing Mercer LifetimePlus with various longevity risk protection products in your adviser toolkit. 1

3 DISCUSSING LONGEVITY RISK Longevity risk is a serious issue facing many people retiring today. Life expectancies are increasing and living expenses continue to rise. Our aging population means that the strain on Australia s financial and public health care system will only increase and thus retirees are expected to become ever more self-reliant; especially if they want to maintain a sense of control over their retirement and their standard of living. When we conducted market research and customer testing, a key trend was revealed; many retirees underestimated their life expectancy as well as underestimated their expenses in retirement, in particular the expenses that they may incur later in life, such as the cost of assistance with daily living and aged care. This no doubt has serious implications. This section of the conversation guide provides you with findings from our research as well as a guide on how to educate your clients about longevity risk and prompting them to think past the first ten years of their retirement. LONGEVITY RISK WHAT CLIENTS THINK Understanding what pre-retirees and retirees think and know about longevity risk will help you to structure the conversations with your clients. In 2014, Mercer commissioned an extensive study into the expectations, perceptions and realities of retiree life with research firm Nature, which surveyed around 1500 respondents. On the back of this research, Mercer published a media release highlighting the gap between expectations and the realities of retirement amongst Australians. This media release can be found in the Media Centre of the Mercer LifetimePlus Adviser Portal. The following table summarises some of our key findings. Topic Understanding longevity risk Concern about longevity risk Strategy for managing longevity risk Life expectancy Desire to work longer Research insights While the term longevity risk is not well recognised, when explained that it is about outliving your savings it easily understood and identified with. 1 in 2 pre-retirees and 1 in 3 retirees are concerned about longevity risk. Most don t have a formal plan to combat it. 2 in 3 pre-retirees plan to live more frugally, 1 in 2 plan to live on the aged pension once their savings run out, 1 in 3 plan to seek advice from a financial planner (particularly if they have assets of around $500,000). Half of respondents underestimated their life expectancy by least 2 years, and women are more likely to underestimate their life expectancy than men. 1 in 4 white collar workers will live around 4 years longer than the average, meaning that they are underestimating their life expectancy by up to 7 years. Only 28% of those currently working believe they will have enough savings to retire when they want. Pre-retirees anticipate retiring at age 68 on average, even though they would prefer to retire at in 5 plan on returning to work. In reality, people retire at age 60 on average and only 1 in 17 retirees have been able to return to work. 2

4 Topic Reasons for retirement Amount needed for desired lifestyle in retirement Expectations for income for life Appetite for lifetime annuities Research insights 40% of respondents retired due to a trigger event that was not within their control, such as ill health or redundancy, while only one third of people retired because they felt they had sufficient retirement savings. On average, $1,000 per week is the income people feel they will need in order to live the way they want to live in retirement. Given this, the Age Pension, which produces only $437 per week 1, certainly fails to meet these high expectations. 94% of retired Australians believe their super should provide an income for the rest of their life. There is a reluctance to give up capital. Only 4% would consider taking up a lifetime annuity for longevity risk protection. Getting your clients to think beyond their first 10 years in retirement Retirement is both an exciting and daunting stage of life for a new retiree. With the newfound time to do things such as travelling, volunteering, renovating the home, and spending time with the family, funding the active years in retirement is usually front of mind. It is certainly important to plan for the short to medium term, but it is also crucial with the increasing trend in life expectancies to also plan for the longer term at the same time. Discussing longevity risk requires a retiree to think out beyond the first 10 years of their active phase in retirement and form a view on their potential longevity and their subsequent financial needs as they reach older ages. Insights from our experience speaking to retirees Supporting the development of Mercer LifetimePlus, Mercer also conducted a series of face-toface customer sessions to test discussion topics and conversation triggers about longevity risk as well as recommending Mercer LifetimePlus as a possible solution to the problem. These sessions were run as individual simulated financial advice consultations with real retirees between ages 60 and 70 who currently have account based pensions. Each session was run by an experienced financial adviser who discussed real life scenarios with each participant their thoughts on longevity risk, their account balances, risk profiles and income requirements. The key insights from this customer testing were: Customers often needed prompting by the adviser to have a longer term view of retirement and consider their needs past the active phase of their retirement. They did not appreciate direct questions like How long do you think you will live? What resonated better was a more structured conversation covering their thoughts about running out of money; their expectations of their life expectancy based on their current 1 Based on age pension payment rates for a single as at 31 March

5 health and the age at which grandparents and parents passed away; and their appetite for living on the age pension once their money runs out. Many thought that their cost of living expenses would decrease dramatically with age as their lifestyle expenses wound back. As such, some believed that the age pension would be sufficient. Tangible examples provided by the adviser on the costs of aged care, assistance and health care expenses (including the need to modify their home to assist their mobility) changed this point of view very quickly. The corresponding longevity risk member booklet provided in your toolkit includes infographics and statistics on life expectancy and expenses at older ages to assist you with these discussions and educating your clients. The following sections provide you with further material highlighting some of the key facts and issues you may want to raise with your clients when discussing longevity risk with them. TRENDS IN LONGEVITY Across much of the world, people are generally living longer and therefore more likely to spend a greater proportion of their lives in retirement than the previous generations. In common with other OECD countries, Australia has an ageing population and in 2012, roughly one in eight of all Australians (14%) were aged 65 or over. The number of people aged 65+ is expected to more than double between now and 2061, and by then they are expected to make up close to onequarter of all Australian residents. The number of Australians aged 85+ is expected to more than quadruple in the next 50 years. There are two key things that combined together make longevity a very real risk to your client s future lifestyle. They are that while we are living longer, our retirement age remains relatively static. The consequence is that the length of time clients have in the retirement phase of their lives is increasing. In Australia, average life expectancies for 65 year old white collar retirees are now around 88 for men and 93 for women. However, we should not consider these figures independently as couples tend to plan for retirement together. The following table shows the likelihood of one member of a couple surviving into their 80 s and beyond. In fact, there is close to a 1 in 3 chance one partner of a couple will survive to age 95. Life expectancy at age 65 for white collar demographic Age Chance of a 65 year old living to age Number of deaths based on age for white collar pensioners Female Male One member of a couple 80 87% 82% 95% 85 71% 64% 85% 90 51% 39% 60% 95 24% 14% 30% 100 5% 2% 8% No. of deaths males females Age Source: Mercer Public Sector Pensioner Mortality Investigation data with future mortality improvements. Source: Mercer Public Sector Pensioner Mortality Investigation 4

6 LONGEVITY RISK AND ITS IMPLICATIONS AN OVERVIEW As we have seen with the example base case in the training modules and in the Case Studies document in your Mercer LifetimePlus Adviser Toolkit, a retiree at age 65 with $400,000 in an account based pension drawing on an income of $43,000pa could expect to run out of super by age 87, leaving them on the age pension. A retiree with $400,000 in super and drawing an income of $43,000 pa is likely to run out of money by age 87. But they are likely to live beyond this. Longevity risk Our research has shown that on average, people will outlive their super by five years and one in four retirees will outlive their super by more than 10 years. 5

7 Risks of relying on the age pension: Older retirees living longer, spending longer Many retirees believe their expenditure needs will reduce considerably later in life and as such the age pension will provide adequate income for them to live on. As retirees reach older ages their capacity to take part in activities tends to decrease and therefore their spending requirements change. While older retirees tend to spend less on activities such as entertainment, holidays and transport, they tend to spend more on costs related to care, support and out-of-pocket medical and pharmaceutical expenses. ASFA s latest study Spending patterns of older retirees shows that the net impact of changing spending patterns between a 70 year old and a 90 year old is only a slightly lower level of expenses overall a reduction of only around 9%-11% less in total in the comfortable standard bracket, and less than 4% less in total in the modest standard bracket.* * Spending patterns of older retirees: New ASFA Retirement Standard ASFA, September quarter 2014 ASFA have concluded that the age pension alone will not deliver a comfortable standard of living to older retirees, as per the table below. Modest lifestyle (single) Modest lifestyle (couple) Comfortable lifestyle (single) Comfortable lifestyle (couple) Expenditure per year 70 year-old* $23,489 $33,784 $42,597 $58,326 Expenditure per year 90 year-old* $22,670 $33,744 $37,875 $53,123 Current maximum age pension # $22,721 $34,252 $22,721 $34,252 with own home Source: * Spending patterns of older retirees: New ASFA Retirement Standard ASFA, September quarter # As at 31 March

8 Risks of relying on the age pension: Aged care income needs The period between age 85 and 95 is particularly critical as the need for assistance with daily living escalate. These can have significant demands on income. The graphs below show the relationship between income from super for our base case and the need for aged care and assistance at various ages. Retirees are likely to be entering permanent residential aged care just when their income from super is running out. 80% of people in the age bracket will need some form of assistance. 7

9 The facts about the need for assistance are evident: The lifetime risk of requiring aged care for an 85 year old is 80% for females and 62% for males. (Source: Caring for older Australians, Productivity Commission, 2011) There are significant ongoing costs associated with aged care and assistance, requiring retirees to have additional income to supplement these expenses. Super is going to have to cover these costs, as retirees are expected to be increasingly self-funded. The financial burden of aged care in particular is difficult to plan ahead for because government means testing is complex. Regardless of means testing, it is always better to have more income in retirement because it means that retirees will have more freedom to choose care that suits their priorities and expectations for quality of life. The need for assistance can occur quickly and without warning. There can be an accident (e.g. a fall), or a sudden medical condition, or death of a spouse which renders you unable to take care of yourself. Assistance is desirable even if you have a family, as your family might not have the necessary training/expertise to provide appropriate care or may not live close to you (and it s also good if you d like to avoid being a burden on your children). For many of our clients the age pension will not provide for a comfortable life, particularly when they need to consider these expenses. It is fair to say that retirees can end up becoming increasingly vulnerable to the rising cost of care and assistance, and the ongoing changes to the age pension. DISCUSSING LONGEVITY RISK WITH YOUR CLIENTS A SUMMARY In reading this section and undertaking the Mercer LifetimePlus training modules, you will by now be able to appreciate the realities of longevity risk that your clients may face. In summary, and using the information in this document to support you, discussing and educating your clients on longevity risk can be approached in the following way: Get them thinking beyond the active stage of their retirement and ask them how they feel about potentially running out of their savings and living just on the age pension in their twilight years. Provide them with statistics on today s life expectancies (which can be found in the Longevity Risk Booklet) and ask them questions about how they feel about their health and general outlook on their own life expectancy. Do they feel they are better than average, average or less than average? Also, have they got parents still alive? How old did their grandparents live to? It is important to point out that their grandparents generation is also not the same as their generation today, where life expectancies have increased. Help them appreciate that they will continue to have financial needs in their older ages. The nature of these will change from the lifestyle and entertainment related needs to the need for assistance with daily living and other health related costs. The age pension, at the current rate, is not enough for neither a comfortable nor modest standard of living, as according to ASFA. The need for retirees to be financially self-reliant is increasing, especially if they want to have control over their own standard of living. It is not all doom and gloom. The ability to maintain an income above the age pension is now possible with their super fund through Mercer LifetimePlus, even if they outlive their savings. 8

10 DISCUSSING MERCER LIFETIMEPLUS After assessing your client s needs, you recommend an account based pension enhanced with Mercer LifetimePlus to ensure that they are able to enjoy a full and active retirement, with comfort that they can expect an income above the age pension for the rest of their lives. What happens next depends on the client, but let s assume that you will need to explain why you have made the recommendation, how Mercer LifetimePlus works in some detail, and the concept of sharing/pooling. We appreciate that this may be a challenge given the unique nature of this investment. This is why we have researched how to raise and discuss it extensively with real customers and have found that it is not difficult. This section provides you with a step by step guide, backed by our customer testing, to explain Mercer LifetimePlus to your clients. We encourage you to support your discussion about Mercer LifetimePlus with the Mercer LifetimePlus Product Booklet that will be supplied to you by your fund. A sample of this is provided in the Mercer LifetimePlus Adviser Portal. In introducing the concept of Mercer LifetimePlus to a client who is concerned about longevity risk, or when you are recommending the investment, we have found that the conversation in the flow as suggested on the next page was effective, in four simple key messages. This is of course a suggestion only, and you may prefer your own method based on your own experience and preference. 9

11 A SUGGESTED GUIDE TO EXPLAINING MERCER LIFETIMEPLUS KEY MESSAGES: 1 It is an investment option that can provide an income for life. Mercer LifetimePlus is simply another investment option within your account based pension, but one that can provide you with an income for life. By enhancing your account based pension with Mercer LifetimePlus, you can expect an income above the age pension for as long as you live. 2 3 It forms part of your defensive assets in your overall portfolio. It pays three income streams: Investment earnings, living bonus and capital return. The living bonus is income that rewards you as you age and comes from a pool of money left behind by others as they die or withdraw. The older you are the higher share of the pool you get. Your investment in Mercer LifetimePlus represents part of your defensive assets in your overall investment portfolio so it does not affect your overall investment objectives. It behaves like any other defensive investment option providing a stable return on investment, but with added longevity risk protection as you age. Based on your needs and risk profile, I recommend that you put x% into Mercer LifetimePlus. Mercer LifetimePlus will pay you three income streams: 1) Investment earnings, 2) Living bonus payments, and 3) Capital return. Explain to the client the investment earnings and capital return before discussing the living bonus (which is discussed in point 3 below). Longevity risk protection is provided via the living bonus, which are payments to you from a pool of money deducted from other investors as they die or withdraw from Mercer LifetimePlus. This is what we call pooling. You may want to use the infographic in the Product Booklet to visually explain this concept. The payment you get is based on your age, sex, duration of investment and how much you have invested. You will continue to get this payment for as long as you live, and the older you are the higher share of the bonus you will get. 4 You can expect an income above the age pension for the rest of your life. For this benefit, you will need to share a portion of your capital on exit. But, what you share is fair because you can expect to receive more than what you put in. More importantly, you will have super that can last your lifetime. The pooling concept of Mercer LifetimePlus is that to receive the benefit of an income for life, you must be prepared to share a portion of your capital invested in Mercer LifetimePlus on death or withdrawal. What portion you will share depends on your age. Explain to the client the withdrawal deduction rules as outlined in the Product Booklet. Remember, this only applies to your investment in Mercer LifetimePlus, not all your capital. It has been designed so that what you share is fair and you can expect to receive more than what you put in. Use the What do I get vs. What do I share infographic to help illustrate the benefits vs cost of sharing. Mercer LifetimePlus is your opportunity to take care of tomorrow, today, and turn your super into one that will last your lifetime. This means you won t need to live as frugally in your retirement with the confidence that you can expect to receive an income above the age pension for the rest of your life. 10

12 FREQUENTLY ASKED QUESTIONS At this stage your clients are probably going to have some questions. In this section we have compiled a list of frequently asked questions and suggested responses. It is not designed to cover every question and it is assumed that you have the foundational knowledge of Mercer LifetimePlus through undertaking the training modules. Question Why are you recommending this product? I feel uncomfortable about sharing part of my capital. Why should I give my money to others? Response You are concerned about outliving your retirement savings and having to live on the age pension. This investment provides you with protection against that outcome and provides significantly better value than alternative longevity protection products currently on the market. It also means your super stays in one place (your fund), which allows you to maintain greater control over your own capital if you need it. You are healthy and have a family history of long life. Based on your super balance, you have the risk of outliving your savings and having to rely on just the age pension, which does not afford you a comfortable retirement. By investing in Mercer LifetimePlus you won t need to live as frugally as possible to try and make your own money last as long as you do. This is because others will be sharing their capital with you as income, and vice versa. The amount you share is based on your age and the investment has been designed in such a way that what you share is fair and unlikely to produce a negative outcome: Up to age 75 you will get 95% of your investment back if you exit. If you had invested $100,000 since age 65, you would have received $40,000 by age 75 in investment earnings alone over the 10 years (assuming 4% return pa). Getting back 95% means you are only sharing $5,000 of capital, so you would still be $35,000 better off. After age 75, you get 95% of your investment back and less the distributions you have received from the investment since age 75. This means that you ll be sharing an amount that you have already received as income since age 75, which means you will not be worse off. The concept of sharing, or pooling, is not a new one. Insurance uses pooling as its basic principle. For example, you pay your monthly premiums (which you don t get back) for your car insurance. If you have an accident, the insurer will pay your claim with the money they have collected from everyone s premiums. If you don t have an accident, your premiums are used to pay for other people s accidents. The concept is no different with Mercer LifetimePlus, but with Mercer LifetimePlus you ll likely get back more in income and death benefits than what you ve put in. With insurance, you never get your premiums back, even if you don t have an accident. 11

13 Question Is the income guaranteed? Response No, the income from Mercer LifetimePlus is not guaranteed in terms of the amounts that you will get from the investment. Whilst there is no guarantee, you ll continue to receive investment earnings that target a net Cash + 0.6% pa. Like all other investment options, this will rise and fall in line with market experience. You will also receive 2.5% pa in the capital return payments when you are eligible (have been an investor for 15 years and at least 75 years old) for 20 years. Income from the living bonus will arise from other investors leaving the fund through death or withdrawal. As morbid as it sounds, the one thing that is guaranteed in life is death. Australian mortality rates at older ages are increasing at a relatively stable rate and do not change significantly from year to year. Our modelling suggests only 1000 investors in Mercer LifetimePlus are required to achieve stable living bonus distributions. Is this just in my super fund or with others? How does it impact my Age Pension? What happens if I want to leave? Where is the money invested? Who manages it? This investment combines your money with other investors across many super funds into a pool. The sharing of the pool across funds allows for the pool to have greater living bonus income stability for investors. As Mercer LifetimePlus is an investment option within your account based pension, the social security treatment will apply to your account based pension as a whole. Mercer LifetimePlus will not be treated any differently for social security purposes. It s simple it works like any other investment switch, but will incur a deduction as per the withdrawal benefit rules. You are allowed to withdraw up to 20% once only (before age 75), or all your investment altogether. The money is invested in conservative assets such as term deposits, rolling deposits and absolute return bonds. The investment objective is to achieve a return of cash plus 0.6% pa (net of fees). Mercer LifetimePlus is managed by Mercer Investments. 12

14 Question Who is Mercer? Response In Australia, Mercer help hundreds of thousands of Australians to take the steps needed to control their tomorrow, today and is the consulting firm behind many of Australia s super funds. They are a vocal advocate for a better superannuation system for all, helping to drive the government agenda and improve retirement products available to individuals. One of the biggest challenges faced by the superannuation system has been creating products that help retirees manage the risk of outliving their superannuation savings. Mercer is responding to this challenge by creating Mercer LifetimePlus, the world s first product of its kind. What happens if Mercer defaults? How do I see how much I have in this option? How does it compare with a lifetime annuity? What will it cost me? The assets are in a fully distributing unit trust and are held independently of the company. The trust will therefore be able to continue to exist. In the unlikely event that the trust needs to be wound up, all investors would be paid out their investment in full. You have access to the information on your investment through your account based pension. Affordable It is significantly more affordable as you do not need to pay for expensive insurance premiums that come with an annuity. The investment earnings received from Mercer LifetimePlus also increases/decreases in line with the prevailing cash rate, unlike an annuity where your income amount is locked in at date of purchase (or a higher premium is paid if you want it linked with CPI). Value for money Mercer LifetimePlus is a fully distributing unit trust with no shareholders of a life company to pay dividends to. Hence the investors get all the full share of the living bonus distribution. You don t lose access to your capital Unlike an annuity, you won t be locking up your capital. Your money still stays in your account based pension and you have access to the capital if you wish to withdraw (based on the withdrawal benefit deduction rules). You will always have access to a proportion of your capital assuming you have not already received payments over and above 95% your initial capital amount from the income distributions. Just a single asset based fee like any of your other investment options that I have recommended. (The fee may vary across funds, please refer to your fund-specific PDS for this fee) 13

15 Question Can I get a discount? Do I need to invest in this now? Can I invest later? What if no one dies will there be no living bonus distribution? What if everyone dies? Response No there is no commission attached to this product so no fee rebates are available. You can invest at any time, so long as you have an account based pension. However, the living bonus payments also take into account the duration of your investment. The longer you have been invested, the higher the share of the distribution you will get, and therefore higher income. Also, capital return payments only commence after 15 years of investment. The sooner you invest, the greater the share of living bonus and the sooner the capital return payments commence. If no investor dies in a particular distribution period, then there will be no living bonus to share among investors in that period. However, it is expected that there would still be a positive investment earnings return available for distribution as well as capital return payments (if you are eligible). This outcome is extremely unlikely, although it is theoretically possible. The rules of the fund provide for a wind up and all the assets would be fully distributed to the investors nominated beneficiaries. 14

16 Mercer Consulting (Australia) Pty Ltd ABN AFS Licence # Collins Square 727 Collins Street Melbourne VIC 3008 GPO Box 9946 Melbourne VIC This document is for Adviser Use Only and is not to be distributed to retail clients. The document has been prepared by Mercer Consulting (Australia) Pty Ltd (MCAPL) ABN , Australian Financial Services Licence # MERCER is a registered trademark of Mercer (Australia) Pty Ltd ABN Copyright 2016 Mercer LLC. All rights reserved