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Think tank calls for government-backed annuities to fix super
Grattan urges the government to enter the annuities market, saying retirees need guaranteed lifetime income instead of complex drawdown choices.
The Grattan Institute has urged the federal government to directly provide annuities to retirees, saying only public intervention can ensure superannuation delivers secure incomes for life.
In its submission to Treasury’s consultation on retirement best-practice principles, the think tank said Australia’s system leaves retirees “cast adrift” once they stop working, with little guidance on how to draw income from their savings.
“Many other countries automatically offer retirees an income that lasts the rest of their lives, but Australian retirees get little guidance about how to use their super,” the report said.
Currently, most retirees rely on account-based pensions, which require them to manage spending risks and often result in large balances left untouched. Grattan said this system creates stress and undermines the purpose of compulsory super.
To solve the problem, the institute recommended mandating that retirees with balances above $250,000 allocate 80 per cent of their super to lifetime income products. The remainder would stay in account-based pensions to preserve flexibility.
Crucially, Grattan said the government must step in to offer annuities under a new scheme called “Lifetime Super”.
The baseline product would be a simple lifetime annuity, with alternatives such as investment-linked annuities also available, while an independent agency would manage the scheme and ensure products are priced fairly.
“People struggle to understand annuities, which can make it difficult for retirees to scrutinise products for their value and make rational decisions,” the report said.
“And annuities are typically ‘one-shot games’ – a retiree typically cannot switch to a better deal if they see one. Designing a wholesale market that overcomes these issues would be challenging. Government-provided annuities are the best option.”
The institute estimated its reforms could boost retirement incomes by as much as 25 per cent, while providing retirees with the certainty of a guaranteed income for life.
Alongside government-backed annuities, the submission proposed establishing a free retirement guidance service, modelled on the UK’s Pension Wise, to help Australians navigate age pension rules, super drawdowns, and income planning for couples.
It also called for the Australian Prudential Regulation Authority (APRA) to performance-test account-based pensions and assess lifetime-income products and for the government to publish a top 10 list of super funds to improve transparency and direct retirees towards best-value providers.
Grattan also called for Treasury’s best-practice principles to go further by explicitly guiding funds towards “annuitisation” and emphasising value for money. It said high fees and poor design remain a “major failing” of the super system.
“Best-practice principles are, in many ways, a step in the right direction. But this approach – trying to steer funds towards producing better outcomes with high-level, non-binding guidance – will ultimately fall short,” the report said.
The Treasury’s consultation is examining how funds can better design retirement income solutions, but the institute said only bolder reforms would prevent retirees from underspending and leaving behind large balances.
AUTHOR
Adrian Suljanovic
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