Retiree incomes could increase by as much as 30 per cent if superannuation funds were forced to offer ‘longevity-based’ products, the Actuaries Institute has claimed.
In a new paper released on Thursday, the peak professional body said Australian retirement incomes would be significantly boosted through the compulsory use of ‘longevity risk’ managing products.
These products, such as lifetime annuities, are intended to provide a stable, regular income to retirees for their entire life.
And although they have long been popular and effective overseas, UNSW associate professor and report author Anthony Asher told The New Daily Australia has been slow to adopt them.
By creating a broader range of these products and making them a compulsory part of Australia’s superannuation system, Professor Asher said retirees will enjoy bigger incomes without running out of money.
But he said “draconian” laws preventing super funds from giving members the advice they need will first need to be amended.
A welcome change
Retiree advocacy group Combined Pensioners & Superannuants Association (CPSA) welcomed Professor Asher’s findings.
Speaking to The New Daily, CPSA policy co-ordinator Paul Versteege said annuities provided the best outcomes for most retirees.
The government must better explain and popularise these products so fewer retirees miss out, he said.
So far, discussions on the future of superannuation have been “indicative of an obsession” with the savings phase.
“It really is up to the government to start making this stuff popular,” he said.
The super funds have a responsibility – and an interest too, I would say – because if people take out large lump sums and it becomes chaotic in the retirement phase, that doesn’t do them any good, either.”
What has to change
Annuities are one of many ways that Australians can draw down their superannuation – alongside lump sums and account-based pensions.
But although they offer guaranteed income – even in cases where a retiree outlives their savings – they have not proven popular in Australia.
Data from APRA shows annuities accounted for only about 6 per cent of super funds’ pension account types at the end of June 2019.
Professor Asher put this down to several factors.
He said product manufacturers had failed to provide enough choice, retirees did not understand the products, and super funds were limited in the advice they could offer members.
All three problems need to be addressed, he said.
Although retirees often have different goals for their retirement savings, Professor Asher’s research found they are broadly based around the following objectives:
- High income
- Income that lasts for life (including the life of a spouse)
- Stable income each year (that keeps pace with living costs)
- Enough access to capital
- Desire to leave a bequest.
The only significant variance between each retiree is how much weight they assign to each of these objectives.
Professor Asher said product manufacturers could use them to create better, more tailored solutions for retirees.
The next hurdle faced in transitioning to this retirement income model is in helping retirees understand and choose an annuity that meets their needs.
Professor Asher’s research found the number of people interested in using an annuity grows from less than 30 per cent to more than 70 per cent when the product is adequately explained to them.
That raises a big problem for super funds, as financial advice is governed by strict legislation.
Funds are typically licensed to offer ‘intra-fund’ advice, which allows them to help members with a limited number of financial issues.
But if they stray into ‘personal advice’, they can be badly penalised by regulators APRA and ASIC.
The outcome of that is that rather than being told something they might misinterpret, they’re told nothing – which they definitely will misinterpret,” Professor Asher said.
Instead, members are told their retirement will be fine if they draw down an account-based pension.
For some, this means running out of cash in their late 80s.
To stop this from happening, Professor Asher said super funds should be given greater freedom to work with their members to find the best products to achieve their goals.
The Australian Taxation Office could help as it holds a wealth of data on members’ spending habits, which could help inform their choice.
Professor Asher said super funds should work together with government, the ATO, and regulators to create a system where members can receive the help and advice they need.