Call to revive 'lifeless' annuities market

The Shadow Minister for Financial Services and Superannuation, Chris Pearce, has called on the Rudd Government to consider issuing consumer price index (CPI)-linked bonds to help combat the problem of longevity risk in superannuation and reduce the strain on the pension system.

Speaking at the Self-Managed Superannuation Fund Professionals' Association of Australia (SPAA) national conference in Adelaide, Pearce said despite the fact that Australia currently has a “largely lifeless annuity market”, hybrid-style annuities should be considered as an option for insurance against longevity risk.

While annuities were once a solution for longevity risk, the model has become increasingly unviable in recent years due to a range of factors, including the volatility in the value of bond rates and the fact that bond rates are not indexed to the CPI.

To combat this problem, Pearce called on the Rudd Government to consider the issuance of CPI-linked bonds that annuities companies could then purchase to support their products.

Pearce said in the current market there is “an unmet appetite for certainty” that annuities could provide. And with life spans increasing, many super members are likely to suffer shortfalls and become reliant on government pensions.

If a solution to longevity risk was not found, “the public pension will be under more strain … and who knows what will happen in 30 years’ time”, Pearce said.

Pearce said hybrid annuities could contain portions of fixed and variable income.

However, he did acknowledge that, if developed, it was unlikely hybrid-style annuities would be treated favourably in tax law.