Three broad retirement income or disbursement options have developed for plan members as they approach retirement: taking retirement savings in a lump sum and investing these funds in banking or managed accounts solutions; opting for an allocated pension or drawdown solution invested principally in conservative equity, bonds and cash solutions; and traditional and flexible annuities.
The last option has raised much public policy controversy in the UK. Freedom and choice have eroded the previous policy of compulsory annuitisation by the age of 75 years. Yet in Chile we see 65 per cent of retirees taking an annuity, South Africa has a growing market in flexible annuities, where traditional annuities are combined with fund management products, and the sale of annuities to Australian pensioners is increasing. This contrasts with New Zealand where annuities have declined and investment in rental property has thrived. The unintended consequence of this trend has made it tougher for younger workers to get on the property ladder and, in some cases, led them to borrow from their KiwiSaver pension accounts.
Dr Susan St. John from the University of Auckland says in the report that: “The decumulation phase of DC schemes, increasingly including KiwiSaver as that scheme matures, is underdeveloped. Drawdown arrangements are becoming common whereby members can leave their funds with the same provider and same portfolio allocation. There is however, no functioning annuities market in New Zealand.
“New Zealand has focused on the accumulation stage, leaving the decumulation phase largely to take care of itself. Pensioners may take a tax-free lump sum from KiwiSaver and must manage their longevity and other risks such as inflation. Drawdown products are more common from KiwiSaver providers but offer no longevity protection.”
The US has recently moved to develop deferred annuity products for certain pensioners but these along with traditional annuities still remain relatively unpopular. Only 5 per cent of US pensioners embrace annuity solutions, preferring to roll over into Individual Retirement Account structures. One chairman of a leading 401(k) provider has suggested that Americans want control and that is why annuities are not popular.
State Pensions and Regulation
