'Paying LIP service'

Retirement Planner, 24th April 2008, by Helen Morrissey.

Mike Tyler talks to Helen Morrissey about the Longevity Income Plan and explains how it takes an innovative approach to help clients fund increasingly longer lives.

How does the Longevity Income Plan work?
The Longevity Income Plan (LIP) is the first product designed to deal directly with the financial issues arising from increasing longevity. The LIP is aimed at clients approaching retirement age and aims to provide a rising income the longer a person lives.

Investors put forward a single premium of anything from £5,000 to £1,000,000 which is invested in one of nine different investment portfolios depending on their attitude to risk. The plan recommends the investment remains in place for at least ten years in order to allow the investment to grow so it can be paid out over a twenty year period. Clients are able to choose whether they wish to receive the income generated between the ages of 75 and 95 or 80 and 100. When plan holders die the original sum of money invested will be returned to their estate.

However, any investment gain is taken and spread among any remaining surviving plan holders. Once the client reaches their designated age (either 75 or 80) a programmed disinvestment begins so that 8% is disinvested at the vesting point. As others die you will get an increased uplift in the income paid out in the form of "birthday units" so by the next birthday the client will get 8.2% and then 8.5% the following year. This grows incrementally until you hit 95 or 100 at that point you get 100% of your fund paid out.

We are basically reinventing mutuality. For those who die early the estate will get the money back they invested but those who need the money most are those who live longest and so they benefit from using this product.

How has the product been received?
We've had a tremendous response from IFAs and there's a great desire to embrace innovation. Typically they've been advising clients probably up to about the age of 80 which up until now has been quite reasonable. However, they need to be aware of a totally new risk - the chance of your client living to 100. They have to relearn the financial planning horizon and advise clients on mitigating this risk.

The second issue is that inflation is a challenge especially for those in retirement as their inflation items are going up faster principally because they are loaded towards labour costs. Care costs and utilities go up faster than these other inflationary products. We had to try and drive a product that would pay out for those older ages and rose much more dramatically than inflation and this is what we have achieved.

How long in development?
We've been working on the idea since the spring of 2006. I think we did it efficiently and quickly because we have some great people working with us. In order to solve this problem we had to reverse a lot of the thinking that exists in traditional products. We had to force ourselves into thinking "Are we only doing it this way because that's how it's always been done?" This is an optimistic product so we made it central to the customer so the annual periods run from birthday to birthday rather then from date of commencement. That's a small thing but I think it highlights that we are always looking to be as client focused as possible.

What's it invested in?
We have nine different portfolios. This is not a vehicle intended for someone to be doing all their elegant fund switching.

However, we had to recognise that people have different attitudes to risk at different stages in their lives. We decided on a limited number of funds under three broad strands - growth for those with a strong appetite to risk. Balanced for those who are more cautious or further advanced in years and a cautious set of funds. There are three separate funds in each category and we were helped by OBSR in the selection of these funds.

It is intended to be complementary to the other retirement products such as pension, annuity products, liquid assets etc and allows you to more efficiently organise your income.

What challenges did you face?
We had to get it through the various regulatory bodies but I would say that we've had fantastic support from them. They were collaborative and engaged with us very early on. We discussed what we were doing and they were hugely helpful.

The interesting challenge was to do with the initial fund raising. We are very happy with our backers JPMorgan, RBS and D. E. Shaw and they have been hugely supportive but when we did our initial round of fundraising we did see a lack of energy to adopt new things among some of the major providers. They thought it was a great idea but were wary. It speaks to a conservative reactionary kind of industry. We have to take our hats off to the investors we have because they recognised the need for the product and could see it solved the problem. They then had the nerve to back their views which was great.

It's going really well. There is a longer lead time in the sales process than we first anticipated but we have had nothing but positive feedback from those we have spoken to. The sales coming in now were of a greater value that we were expecting. It's terribly hard for us to predict all the variables that make up a business plan and we assumed the policies would be below £20,000 but they are currently over £50,000 per policy but the sales process is longer. It's balancing itself out.

What are your ideas going forward for the next six months to a year?
We have a number of plan refinements we would like to work on. We want to work on a product we think will be appropriate to small and medium sized pension schemes to help them to mitigate risk. It's still very much a work in progress but that space has become very popular. The plan will allow those companies to offset a concentration of risk in a way that currently isn't possible.