Annuities to help counter ‘longevity risk’ in superannuation

The Albanese government is encouraging superannuation funds to create more annuity-style products that are better suited to an ageing population.

The Albanese government has proposed to bear more of retirees’ “longevity risk” – or running out of money in retirement – in an effort to encourage funds to create more annuity-style products that are better suited for Australia’s ageing population.

With about 1.6 million people aged above 65 years of age and many not getting the support or products they need to make the most out of their savings in retirement, the government is also calling on super funds to “do more”.

Treasurer Jim Chalmers said the $3.6 trillion super system was still focused on working people accumulating their super “nest egg” but not on the retirement income phase. He called on funds to improve their understanding of members’ retirement needs and “provide products and services tailored for their retirement”.

“With Australians increasingly living longer, healthier lives, many retirees are naturally concerned about outliving their savings,” he said. “The problem is most retirees do not have access to the appropriate products to help them maximise their super over their lifetime.”

The issue is poised to intensify, with the number of retirees expected to more than double as an additional 2.5 million Australians retire in the coming decade.

More than 80 per cent of retirement savings are held in account-based pensions that don’t manage longevity risk. Only about 3.5 per cent of them are held in annuities that pay an income for life, regardless of how long a person lives.

The number of annuities held by Australians has declined in both absolute terms and as a proportion of total member pension accounts over the last five years.

Worried about outliving their savings, many retirees seek to self-insure against the threat of running out of money in retirement, with half of them withdrawing only the minimum amount possible from their super rather than considering alternative strategies to manage this risk.

In a discussion paper published on Monday, the government is proposing measures to help incentivise lifetime income products, or annuities, and better help retirees, including simplifying the retirement income system and supporting a “better pricing” of longevity risk.

“Options for the government to support in this space could involve … facilitating funds in risk pooling within retirement products,” the paper says.

Another avenue of support could be “directly intervening in the pricing of longevity risk through reinsurance or the selling of longevity bonds.”

These options would help in diversifying mortality risk across the market, “providing assurance for retirees and reducing counterparty risk”.

An example provided in the paper described a “bundled” product that would work with an account-based pension and age pension to get income for life and the government would bear the longevity risk of the products.

The government is also proposing to require super funds to provide general information about both phases of super – accumulation and retirement – and give “free and impartial” guidance for retirees in or approaching retirement, for example through a service similar to the UK’s PensionWise service.

“For many Australians, retirement represents a big and complicated life change,” the paper said.

Issues included understanding the system, combining multiple income sources, considering the needs of partners and dependants, and managing the numerous risks and changes in circumstances.

“Australians need better access to information, advice, and well-rounded retirement income products to help them navigate these challenges,” the document says.

It proposes the development of a standardised retirement product framework that incorporates the objectives of the retirement covenant, which since 2022 requires funds to have a strategy to service the retirement income needs of fund members.

“This framework for a standardised, recommended product could provide retirees with the confidence that a solution will balance key retirement objectives and risks,” it says. “A standardised product would, in turn, promote competition and anchor expectations of how retirees use their superannuation for income.”

Nick Hamilton, chief executive of Challenger, the country’s largest annuities provider, said the company supported “progress to develop a retirement income market in Australia that is on par with our world class accumulation savings system”.

“Developing regulatory settings to support a competitive market will be critical in ensuring the best possible outcome for retirees and future generations,” he said.

Kelly Power, Colonial First State’s chief of super, also welcomed the paper and agreed with the need to help retirees facing what she called an “extremely complex” problem.

“All the research we’ve done as part of our work on the retirement income strategy doesn’t point to product gaps. It points much more to membership confidence and certainty in navigating what is a very complex retirement system,” Ms Power said.

According to a CFS survey, a majority of advised Australians (65 per cent) are more confident they will have enough money to retire, compared to just 44 per cent of unadvised Australians.

About 50 per cent of CFS’s 950,000 members are at or approaching retirement age. The fund offers its members annuities in partnership with Challenger and AIA Australia.

“The reasons why people are not drawing down (retirement savings) … is because they are concerned about longevity risk, particularly when they don’t have an adviser to provide them with the level of reassurance and confidence and the investment strategy that can manage against that.”

Ms Power said the government’s Quality of Advice reforms would go a long way in helping funds do more for retirees as the reforms opened the door for funds to provide advice to members in the lead up to retirement and into the retirement phase.

Originally published as Annuities to help counter ‘longevity risk’ in superannuation