Paying for longevity

ustralians are living longer, but few of them are seeking out new financial products capable of ensuring their retirement savings last longer.

That is the bottom line of research undertaken within the Association of SuperannuationFunds of Australia (ASFA) and recently presented to the University of NSW Centre for Pensions and Superannuation.

A paper developed by ASFA’s research and resource centre director Ross Clare revealed that the most popular products being accessed by consumers are account based income streams, with sales of lifetime annuities from both superannuation monies and other sources being negligible over the past 12 months.

The ASFA data suggests that sales of lifetime annuities over the period were worth a total of just $29 million.

It said that while term allocated pensions (TAPs) had been more popular with sales of $420 million over the period and a total of $1.44 billion in funds under management, TAPs were set to become a legacy product from September 20, this year, with a number of providers exploring options as to how they can transfer this part of their business to other providers.

By comparison, allocated pensions and annuities were far more popular, with the ASFA paper suggesting sales of $13,926 million in the past 12 months.

“Clearly, allocated pensions and annuities are by far and away the most popular retirement income stream products,” the ASFA paper said. “Sales of lifetime annuities have been completely underwhelming in recent years following the abolition of the 100 per cent asset test exemption, and they were not very large even prior to that.

“Basically, Australian consumers are not very interested in financial products that offer a low implicit investment return, have high fees and have nil capital value on the death of the primary or reversionary beneficiary unless some other sweetener is tossed in by Government,” it said.

“This is not much of a sales spiel for a product and sales would be a challenge for even that dying breed of individuals who sold life insurance to individuals based on tales of grieving windows, and no-one ever complains about getting a cheque after a loved one has carked it.

“Even with the considerable sweeteners that applied in the past, in the vast bulk of cases lifetime annuities formed only a part of an overall retirement income strategy,” the ASFA paper said.

It said that lifetime annuities had also fallen out of favour with self-managed superannuation funds and there were a number of reasons for this.

“With the abolition of Reasonable Benefit Limits there is no longer a need for various strategies, sometimes rather contrived, to get around the limits,” the paper said. “In addition, legislative changes have effectively removed this option going forward from small funds on the not unreasonable basis that you do not get much pooling of risk when only one or two lives are involved.”

It said that a number of provisions of the Simpler Superannuation changes were also designed to cut down on the scope for estate planning strategies that aimed to keep assets within the concessional superannuation taxation environment for multiple generations.

The ASFA paper said it could be argued that the real challenges in coping with the financial burden of longevity were:

n Accumulating a reasonable level of retirement savings. If you only have $100,000 or $150,000 (or even less in the case of most current retirees) in savings in retirement there are much more pressing concerns than whether you have a one in 10 chance you will live to 90 or 100 or whatever and run out of private savings some years before you die.

n Achieving a reasonable (or even good) net investment return (after fees) during the retirement income phase.

n Keeping the level of income and other taxes paid to a minimum during the retirement phase.

n Not spending too much each year in retirement.

n Obtaining sufficient pooling of the financial risks associated with longer than average life expectancy.

The paper concludes on the note that the greatest challenge for most superannuation fund members in dealing with the financial consequences of longevity is accumulating a reasonable level of financial savings by the time of retirement.

“Once more than a modest lump sum is achieved then the sensible option from the viewpoints of both individuals and society as a whole is to make use of some sort of income stream in retirement,” it said.

The paper said having a range of types of income streams available helped to deal with individual needs and tests and there was no strong case for compulsory annuitisation of retirement savings.

It said the new income stream rules provided a considerable degree of flexibility for most retirees, especially those who took out an account based income stream.

“However, there is a case for modification of the legislative rules so as to allow the development of life annuities with more attractive investment returns, and the development of products designed to assist holders of account based income streams with the financial consequences of longevity.”