The Institute of Actuaries of Australia (the Institute) has today urged the Government to prioritise longevity risk policies, including development of a new generation variable annuities market, to meet the challenges of Australia’s ageing population. In its Federal Budget submission, the Institute’s approach recognises that superannuation will likely provide an inadequate retirement income, due to both market
risk and increasing retiree longevity.
“We urge the Government to prioritise Budget policies aimed at managing Australia’s ageing population, including flexible ‘new generation’ annuities which protect against the risk of outliving your retirement savings and the market risk of losing superannuation capital in retirement,” said Melinda Howes, Institute CEO. She said while Australians had long been warned about the risk of outliving their savings, the Global Financial Crisis had underlined an additional market risk.
The Institute believes new generation annuities should seek to emulate some features of popular account-based products like allocated pensions. While allocated pensions are market-linked and provide no income guarantee, they provide retirees with access to their capital, payment flexibility and potential benefits from a rising share market.
“Account-based products give retirees more control over their income and assets, allowing them to adjust to changing circumstances and to respond to unexpected or ‘lumpy’ expenses’,” Ms Howes said. “However, while retirees enjoyed solid investment returns in these products for the last 20 years or so, the GFC saw many experience significant capital erosion, which they will not be able to recover.”
“Retirees should be able to purchase a product which offers them protection against the two major risks they face, market risk and longevity risk, and they should be able to choose to be fully or partially protected from either or both of these risks, depending on their circumstances.” Lifetime annuities, which provide such guarantees today, are unpopular due to their inflexibility and perceived low returns.
In order for innovation to occur in the annuities market, the Institute believes that:
- Superannuation Industry Supervision Act Regulation 106 must be revised as it unnecessarily prescriptive;
- the unfavourable treatment of annuities under aged care and Centrelink rules must be reversed;
- annuities and deferred annuities should be able to be issued as a component of an account-based pension; and
- the tax rules on deferred annuities should be changed so that, if taken out in the drawdown phase, the product is regarded as a pension (rather than a nonpension) for tax purposes and that there should be be a clear, regulatory regime for variable annuity style products.
In its submission, the Institute notes the superannuation market is still immature and that many people will reach retirement with a sum too small to annuitise (less than $100,000).
“For people with small retirement sums, a deferred annuity may act to deliver additional insurance, through additional income in extreme old age. Or, retirees could be encouraged to live off the superannuation they do have, but defer taking the government aged pension for as long as possible. Such people could be rewarded with a higher age pension, of up to double the standard age pension for a 10-year deferral,” Ms Howes said.
SUMMARY OF FEDERAL BUDGET RECOMMENDATIONS:
- Remove barriers to innovation in the annuity product market, such as the unnecessarily prescriptive SIS Regulations that limit the design of these annuities, and the unfavourable treatment of annuities under aged care and social security rules.
- Allow the age pension to be deferred, so that if someone eligible for the Age Pension keeps working for up to 10 years after Age Pension age, their Government Age Pension increases. This means individuals can fund the first part of their retirement for a known period and rely on a higher Age Pension to manage their longevity risk.
- Encourage workforce participation by removing earned income from the Age Pension means test so retirees are not penalised for working if and when they can.