Could you qualify for bigger pension?

In 2012 National Treasury, according to Patrick Cairns in Moneyweb, released a paper called “Enabling a better outcome in retirement”. It raised a number of concerns about the retirement annuity market in South Africa, including issues like fees, a lack of proper advice and value for money.

It noted that in in 2011 only around 20% of retirees chose to buy conventional, guaranteed annuities with their retirement savings. The vast majority elected instead for living annuity products.

This is despite conventional annuities being the only products that offered longevity protection. In other words, the 80% of retirees opting for living annuities were accepting the risk of out-living their money.

The paper noted a few reasons for this. One is that brokers can earn up to ten times more commission selling living annuities than they can on guaranteed annuities. Clearly the sales incentive is dramatically skewed towards the former.

It also noted that most people prefer liquid assets and don’t like the idea of locking up their money with an insurer. Many individuals would also take on their own investments as they think they can get higher returns.

A fourth concern, and a key one for Treasury, was that in many cases guaranteed annuities are too expensive. The paper noted that: “Large players in the conventional annuity market rate individual purchasers only by age and sex. As a result, poorer individuals, or those who are ill, may elect not to purchase conventional annuities because they represent relatively poor value.”

The opportunity for enhanced annuities

In simple terms, anyone whose life expectancy is below average has until recently had little reason to consider guaranteed annuities. That is because the established life companies don’t individualise these products beyond the amount of money available and the simple modifiers of age and sex.

Clearly Treasury isn’t satisfied with this, and their statements have made it clear that there is an opportunity here waiting to be tapped. Part of that may be in products known as ‘enhanced annuities’.

These are already widely used in markets like the UK and the USA, and are products based on individual underwriting. The size of the monthly pension one is able to buy is therefore linked to one’s personal circumstances.

“At the moment, everyone is pooled and given the average experience at retirement,” says Deane Moore, CEO of newly-launched enhanced annuity provider Just Retirement South Africa. “But smokers or people with medical conditions who have been taking out life insurance throughout their lives have been underwritten and have had to pay more all that time. Then when they reach retirement, they are treated as ‘standard risks’ and get the same as everyone else.”

By addressing this anomaly, enhanced annuities also tackle one of the structural problems within the guaranteed annuity space.

“National Treasury has now said on a number of occasions that guaranteed life annuities are expensive for the wrong people,” Moore says. “The poor and those in ill health end up subsidising the wealthy and those in good health. That seems to be the wrong direction for redistribution to be taking place.”

Two in five people could be eligible

Moore says that getting a quote for an enhanced annuity is fairly simple.

“At the point of retirement we ask the individual to fill in a questionnaire that covers socio-economic, lifestyle and medical areas,” he explains. “That information is collected in a 20 minute phone call.

“Then, based on our assessment, if someone is expected to live shorter than the average, we will treat them fairly by giving them an enhancement in their income,” he explains. “And that is guaranteed, so even if we expect someone to live for 15 years but they end up living for 45, we carry that risk and carry on paying.”

Moore believes that there is a substantial number of people who would qualify for these products.

“We expect to be able to give a better rate to about 40% of the population, and we expect to enhance their income by between 10% and 30% against standard aggregate pricing,” he says. “We are most competitive in the low to middle income groups where we get quite excited about the fact that we can enhance people’s lives when they don’t have much to start with. We have seen quotes where current income is around R1 500 a month and even a 10% uplift on that is probably a special meal or a bus ticket to visit relatives, which can make a big difference.”

Although anyone who has already purchased a guaranteed annuity cannot change that decision, anyone who currently has a living annuity can still buy a guaranteed annuity with their capital. Moore says that they will underwrite an individual at any time between 55 and 85, so even if a medical event has taken place post-retirement age, one could still qualify.

More focus on enhanced annuities

Just Retirement South Africa is a subsidiary of Just Retirement in the UK, which has been operating in that market since 2004. It is therefore able to draw on that existing experience.

Moore believes that this will enable them to offer competitive products in the local industry and is certain that customers will value the additional choice this offers them at retirement.

“The market has shifted strongly towards living annuities in the last ten years and the guaranteed annuity space hasn’t been that popular, but we can see where Treasury is taking us and the pendulum is swinging again,” he says. “As it works its way through and product providers have to look at how they have designed their products and financial advisers have to think more carefully about what they have considered in making sure customers are treated fairly, there will be more of a focus on this.”