Australia world’s most concentrated market for annuity products, says Challenger

Retirement income giant Challenger monopolises the annuities sector and yet its chief executive says it desperately needs more competition to provide retirees with better options.

Challenger chief executive Nick Hamilton wants more competition in the annuities sector. Picture: Britta Campion

Australia’s baby boomers are running out of options to secure long-term income solutions just as millions prepare to retire, and wealth giant Challenger says it wants more competition in a sector which it monopolises.

The ASX-listed financial giant stands almost alone in the world of annuities, and chief executive Nick Hamilton said its current market position writing 95 per cent of business in the space was troubling.

Mr Hamilton, who has run the $4.2bn investment management firm for three years, said Australia was the world’s most concentrated market for annuity-style products, and this was difficult for retirees who would exit the workforce in coming years.

Many retirees are poised to transition from accumulating wealth in the $3.9 trillion superannuation system, to enter the drawdown phase of their lives.

But many tap their superannuation savings for only the minimum amount due to a fear they would outlive their savings – something few manage to achieve.

“There are a number of things that need to happen reasonably concurrently,” Mr Hamilton said.

“All of them coalesce around the need to adjust settings to get that system working.”

Mr Hamilton said annuity-style products were a solution for many seeking income security, and that they offered an option to step away from market cycles.

He said the tranche two advice reforms were a “really big step” in helping more retirees access advice.

But Mr Hamilton said more needed to be done to support income products, and that Australia was not an attractive market for life insurers which formed one half of the industry.

“We are not seeing the supply of insurance capital come to Australia,” he said. “Hence why where Challenger is today; we’re 95 per cent of new business.”

But Mr Hamilton said this was not going to happen without an adjustment to the prudential regulation of the life insurance sector.

Christine Cupitt.

Sir Clive Cowdery. Picture: John Feder

The Australian Prudential Regulation Authority sets the rules for the sector, which has shrunk dramatically in the past six years in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Resolution Life executive chairman Sir Clive Cowdery recently lashed out at Australia’s life insurance rules, saying the sector was “very constrained” and that several operators had quit the market because of its capital-intensive nature.

Almost 10 years ago Challenger wrote about 20 per cent of all annuities with eight other players in the market.

Since then competitors have retreated and many have sold their operations to rivals or put books into run-off.

Mr Hamilton said a key constraint was Australia’s valuation requirements for the long-term annuity liabilities.

“If you’re a global insurer operating in the North American market you operate under the same fair value of assets,” he said.

“Whereas in Australia you don’t get that with a liability valuation.”

Challenger chief economist Jonathan Kearns said another constraint to the annuity sector was the short span of Australia’s debt markets.

He said many borrowers seeking debts outside of a three-year time frame had to go offshore for capital. “In other countries it comes through insurers,” Mr Kearns said.

“As a result of the capital standards, we don’t have that demand in Australia. There’s a chicken and the egg problem.”

Council of Australian Life Insurers chief executive Christine Cupitt said the uptake of products was low despite their benefit to customers, and that the current capital rules needed a review.

“These rules should be reviewed to ensure they continue to maintain stability in the financial system but are not overly conservative and take into account market conditions,” Ms Cupitt said.

“APRA understands the issues and CALI is currently discussing them with APRA.”

Originally published as Australia world’s most concentrated market for annuity products, says Challenger