Sun sets on 90s killer product
The changes to retirement income streams put in place by the Federal Government on September 20 last year was met with a short-lived flurry of activity.
The changes to retirement income streams put in place by the Federal Government on September 20 last year was met with a short-lived flurry of activity.
Shortly before September 20 last year, life companies scrambled to put in place prod-ucts which would comply with upcoming Department of Social Security (DSS) changes. The chase for the great killer product of the late nineties was on.
Money surged into products which complied with the new legislation — long-term and lifetime annuities. These products had become the favoured products as they complied the DSS (now Centrelink) changes employed on the assets test to determine pension benefits for retirees.
According to figures from consulting actuaries Plan for Life, funds moving from su-perannuation and other sources into retirement income streams surged from $70 mil-lion in the September quarter to $171 million from the December quarter last year.
Yet by March of this year the figure had dropped to $44 million, showing that the rush to complying products had all but dried-up.
It would be optimistic to say the rapid increase of last year was even a trend. AM Corporation adviser technical services manager Phil La Greca says the huge move-ments in the December quarter were merely market reaction to the changes.
"No doubt there was a huge surge in the December quarter as a result of the need to comply with the DSS changes, but levels have returned to pre-September 98 in com-plying products being sold," La Greca says.
It is also worth remembering that out of the billions of dollars that go into retirement income streams products annually, less than five per cent goes into complying prod-ucts such as long term and life annuities.
So why are retirees seemingly disinterested in long term annuities? The lack of growth lies with the relatively low returns achieved by long term annuities. Returns for long term and life annuities are based on current interest rates which are currently at historic lows.
AMP Financial Planning managing director Steve Helmich says the reluctance of re-tirees to purchase these products is part of an overall cautionary approach. One of the features of a lifetime annuity is that once the purchaser dies, there is no return on capital to the person’s estate.
"There is a certain reticence among Australian retirees concerned about where the money goes when you die. Combine this with the low interest rate environment and annuities are never going to appear to be as good as in the past," Helmich says.
Colonial product manager for retirement income streams, Sean Corbett, says low in-terest rates are not the only factor restricting new annuity business.
"Lifetime complying products are priced on rates and the industry is stuck with that issue but the reluctance to invest in long-term annuities is partly due to low interest rates and also the disadvantage of being forced to lock money away," Corbett says.
Some industry players say there is a lump sum mentality which prevents retirees from investing in longer term annuities.
Mercantile Mutual Funds Management general manager Paul Bedbrook says retirees are seeking products with better returns.
"Do they want to lock into what is effectively at present a term deposit when they are well aware money should be in growth assets over time," Bedbrook says.
Helmich believes the lump sum mentality is a generational issue. He says it stems from the impression that money is hard to come by and an estate should be left to the next generation.
"It's almost a fatalistic view. They are conservative with money and see living long as a risk. Some are not willing to take that risk but wish to pass something onto the kids," Helmich says.
Rice Kachor Research executive director Mark Kachor says any upward movement in interest rates will see renwed attention on long term annuities. Until then people will choose products offering better returns.
"People want certainty of higher returns and that breaks against the whole life annui-ties area," Kachor says.
"The general thrust of last September's changes by the Department of Social Security was to encourage retirees into longer term annuities and to prevent them from relying solely on the pension. Yet it all depends on information given by the planning indus-try which in this market is influential."
Some elements of the financial planning community have been influential. Equally, there are financial planners who have all but ignored the changes, according to Tower Life national manager for products Darren Stevens.
"Some are trying to optimise Social Security benefits so they move the clients toward long term and lifetime annuities."
"Others are looking at returns in the low interest rate environment and looking at eq-uities, unit trusts and so on," Stevens says.
Nonetheless Colonial's Sean Corbett says it is important for planners to tackle the changes directly.
"Planner have to get their heads around the system. We have an ageing population and our seminars have shown that people are keen on long-term and lifetime annuities," he says
"The bulk of the money in this industry is on the retirement side and we are dealing with steadily increasing sums of money. These changes can create a real value add for clients."
Corbett says financial planners should not underrate long term and lifetime annuities.
"They are the only asset test exempt product available and in a well constructed port-folio can maintain and increase social security benefits."
The advantages of combining a lifetime annuity product with social security benefits are well documented, says RetireInvest technical manager Louise Biti.
"The result is the effective return period for the annuity is decreased as it creates lev-erage in the assets test. Advisers have a good understanding of this and when shown this investors can see the attraction of annuity products," Biti says.
"There is still a lump sum mentality but the rules are now much simpler and fairer, while still giving retirees a degree of being able to have their cake and eat it also," Biti says.
AUTHOR
Jason Spits
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