An independent committee appointed by the Australian government has recommended the country consider compelling retirees to take out some form of annuity to guarantee income, citing evidence from the UK that it says shows less client detriment than in “voluntary annuity markets”.
An interim report has called for a new round of submissions on how Australia could better meet the challenges of an ageing population, and includes proposals such as providing incentives to encourage retirees to purchase retirement income products that help manage longevity and other risks.
It also claims longevity risks could be managed effectively by forcing people to convert all or part of their ‘superannuation’ benefits into an annuity-style product that provides protection against inflation.
Superannuation funds are built up through compulsory saving by employees and mandated contributions from employers.
The paper states: “If annuities were selected for mandatory take-up, this would address adverse selection problems and should reduce their price.”
The paper cites research into annuity prices in the United Kingdom, which the committee says “found that the effects of adverse selection in compulsory annuity markets are substantially lower than in voluntary annuity markets”.
As it currently stands, the UK government is consulting on reforms that would liberalise pensions and make a form of drawdown the new default, as opposed to annuities. Some expect the annuities market to fall by anywhere between 50-90 per cent.
The changes were announced in a Budget speech this year that itself came on the back of a report from the regulator that derided the “disorderly” annuity market as not offering good value to consumers by not encouraging shopping around.
The interim report warned there are trade-offs between individuals having more freedom and flexibility to decide how to draw down their benefits.
It cites low levels of financial literacy and awareness, behavioural biases preventing retirees from purchasing longevity protection and the government’s exposure to longevity risk, and claims around one-quarter of people with a superannuation balance at age 55 have depleted their fund by age 70.
The Australian government currently mandates contributions into superannuation for a significant majority of Australian workers. Around half of superannuation benefits in retirement are currently paid as lump sums, while the other half are paid as income streams.
When Australians want to convert this into an income they can choose from two products: account-based pensions and annuities. The overwhelming majority of retirees who take income streams choose an account-based pension and demand for annuities “is very low”, the report says.
According to the paper, the current retirement income system provides “limited choice for managing risks in retirement”.
