Lump sum payments: End of the affair

If the global financial crisis (GFC) has had one long-term impact on the psyche of Australians, it has been to raise serious questions about the consequences of taking a superannuation lump-sum as they exit the workforce.

While many US and European visitors were puzzled at Australians’ enthusiasm for taking lump sums, almost a decade of bull markets and easy investment returns meant there was little downside and, therefore, little incentive to take the more conservative (some would say sensible) option of a commutable income stream.

The degree to which the GFC has caused Australians to shift their thinking has been reflected in the plethora of pension-type products being brought to market by players such as AXA, ING and, of course, Challenger.

There is also the reality that the Federal Government has gradually acknowledged the need to become more accommodating of such products.

It is hardly surprising that one of the most assertive players in the market with respect to pensions has been the financial services house that has made them a specialty — Challenger.

Indeed, it was Challenger that spiced up the retirement incomes debate when it used its submission to the Henry Tax Review to point to the shortcomings of the existing superannuation/retirement regime with respect to longevity risk.

Crucially, it suggested that all Australians should be compelled to take a proportion of their superannuation as an allocated pension.

The essence of the Challenger submission, signed off by its head of government relations and former Federal Labor MP and Keating adviser, David Cox, was the hard evidence that the retirement savings of most Australians (including superannuation) are likely to run out before they actually die.

Challenger, quite rightly, pointed out that as personal retirement savings were exhausted, increasing pressure would be placed on the age pension.

“In the future, many retirees will become more dependent on the age pension as their own retirement savings deplete,” the submission said. “While there is no documented evidence of retirees being anything other than cautious with their retirement savings, the projections for benefits indicate that most people’s private retirement savings will not be sufficient to maintain a modest but comfortable standard of living over their expected lifetime.

“There are two sets of consequences from this lack of focus on longevity in the superannuation pension rules. The first is that many retirees’ private savings will be exhausted and they will become completely dependent on the age pension. The second is that this dependence on the age pension, despite significant tax concessions given to support private retirement savings, has implications for future Commonwealth outlays.”

Neither the Government nor, indeed, the secretary of the Treasury, Ken Henry, have indicated there will be a formal embrace of the Challenger suggestion that Australians be compelled to direct a proportion of their retirement savings to a pension-type product, but there is now no shortage of the products being introduced to the market.

AXA has gained some serious market share via its North product and as recently as last week indicated to journalists that it is planning to expand on the capital guaranteed North range by introducing a product that “offers clients guaranteed income for life”.

AXA flagged that the new product would act like a market-linked or allocated pension (allowing clients to remain invested in the market), while also acting like traditional annuities, which guarantee income for life.

AXA’s decision to flag the launch of the product was impeccable in circumstances where, a day later, ING launched its new pension product, ING MoneyForLife, which its managing director, Harry Stout, said would protect people against bear market risk and also against the risk of retirees outliving their savings.

AXA’s head of structured solutions, Andrew Barnett, acknowledged to Money Management that pension style products had gained traction in Australia due, in part, to the impact of the GFC.

He said while such products had a long track record in Europe and North America, this was probably owed to the fact that investors in those regions had been more dramatically affected by previous downturns.

Barnett said Australians had been comparatively less affected and, therefore, had less appetite for a pension-type products offering — until now.

For his part, in announcing the launch of the ING product, Stout said while Australia’s superannuation system was among the most sophisticated in the world, it did not take account of longevity risk, and this was why MoneyForLife could be used as both a personal superannuation product and a pension product.

While AXA’s existing North product might have taken some time to gain genuine traction in the market, it has been the envy of many other product manufacturers over the past 18 months, having attracted more than $1 billion in funds under management since its inception in November 2007.

This accounted for more than 7 per cent of net funds flow into superannuation in Australia in the year to June 30, 2009, AXA said.

The general consensus within the financial services industry is that while the current legislative and regulatory environment is not hostile to the development and implementation of pension-type products, it is within the scope of the Henry Tax Review to remove some of the remaining impediments.

At least some of that might also be achieved via changes to some of the regulatory requirements flowing from the Superannuation Industry (Supervision) Act, which places strictures on timing and access, and that is something that might be achievable as part of the Cooper Review’s analysis of the superannuation industry.

In the meantime, planners are likely to encounter no shortage of new pension-type products coming to market, with Challenger strongly maintaining its market presence, new products coming online from ING and AXA and reports Macquarie is bringing its own product offering to market.