Means-testing uncertainty still dogs annuities

The superannuation industry is still in need of clear direction on how longevity products will be treated with respect to the Age Pension means test, according to actuarial research house, Rice Warner.

In an analysis published this month, Rice Warner has pointed to the superannuation industry’s relatively slow take-up of annuity products, suggesting that retirees remain to be convinced that they will meet their stated objective.

“One of the difficulties is that the purchase of a longevity product does not increase value for a retiree,” the Rice Warner analysis said pointing to the firm’s modelling which shows that the present value of increased pension payments is more than offset by the reduction in the value of any benefit left behind on death (bequests).

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“In addition, the long-term investment returns on longevity products are unattractive when compared with the investment pools of MySuper products which benefit from the equity risk premium,” it said. “Clearly, retirees (and their financial advisers) appear not to value the greater certainty of returns nor have they been convinced to live less frugally and draw down higher pensions.”

The analysis said that as longevity products could not be sold on merit, some industry participants had been lobbying to have preferential treatment of the products in the means-tests of the Age Pension, noting that in last year’s Budget, the government stated that it would address ‘superannuation regulations that restrict the development of new retirement income products and act as barriers to innovation’.

New regulations that came into force from July 2017 include a change in the tax treatment of deferred annuities and GSAs, which are now tax-free during the period of deferment after age 60.

Rice Warner said that another problem raised by the industry had been the absence of a clear direction on how longevity products would be treated for the means-tests of the Age Pension.