Effectively delivering post-retirement products in Australia will require not only an element of political consensus but more sympathetic tax treatments, according to an analysis formulated by ASFA.
The Association of Superannuation Funds of Australia (ASFA) has recognised the need for superannuation funds to be a focal part of delivering post-retirement solutions to their members.
The degree to which ASFA has engaged on the post-retirement issue was reflected in a paper delivered by ASFA chief executive Pauline Vamos and policy specialists Ross Clare and Louise du Pre-Alba.
In that paper, the ASFA team makes clear that delivering change will be no easy task and argue that both an industry and political consensus will be necessary.
“Bringing about change is not necessarily easy but a number of activities will assist in bringing it about,” they said.
It said these activities included:
- Development of a consensus across the superannuation industry on what should be the goals in the post-retirement phase and how these might best be addressed;
- Development of a political consensus on the importance of post-retirement issues;
- Providing a stable regulatory and tax environment for post-retirement products which is also clear and understandable, so that individuals can plan with confidence for the future;
- Undertaking comprehensive research and consultation before any measures are put in place, so as to better meet objectives and avoid any unintended consequences; and
- Undertaking a program of public education on post-retirement issues and how to better plan for retirement.
The ASFA paper makes the point that the current position with respect to retirement products in Australia is very much the result of the underlying taxation system.
“Most Australian retirees take lump sums or make use of account-based income streams,” it said.
“Currently, sales of life annuities and deferred annuities are minimal, although term annuities are becoming more popular.”
The ASFA paper said tax and other policy settings had played an important role in generating the very limited use of market-based longevity products, with the result that the attendant longevity risks and demands fell upon the Federal Government and the delivery of the age pension.
“A key argument of this paper is that both incentives and compulsion are needed for greater take-up of retirement income streams providing longevity protection for use in post-retirement,” it said.
The ASFA paper then went on to detail the post-retirement products currently available via superannuation funds or financial institutions in Australia.
Pensions
A pension is a regular stream of income, payable from a superannuation fund. Many defined benefit schemes provide an income stream until death, with no residual value.
At least partly because employers have generally closed entry to such defined benefit schemes to new employees, most Australian retirees have been opting for account-based income stream pension products (often referred to as allocated pensions).
These provide for accumulated superannuation monies to be invested to generate income in the account, with withdrawals above some minimum amount related to account size required by the Government.
In the event of death, the remaining account balance accrues to the investor’s estate or dependents.
Such products involve two major risks for the retiree. One is that the capital and earnings can run out before a person dies (longevity risk).
The other is investment risk, reflecting the variability of returns and thus the size of the available funds from which an income stream can be drawn.
Annuities
An annuity is an income stream purchased by payment of a lump sum to a financial institution.
That income stream is payable for a set period (usually referred to as a term annuity), or for life (lifetime annuity). The latter obviates longevity risk.
Investment risk also effectively is borne by the product provider rather the investor – arguably a more suitable allocation of risk for those in retirement, although it does come at a cost in terms of the price paid for the annuity.
Other post-retirement products
There are a small (albeit growing) number of products where investment and longevity risks are shared between the customer and the product issuer.
Some products offer (for a price) market-linked returns plus an income and/or capital guarantee, and some also protect investors against longevity risk.
Outside superannuation, investments such as bank term deposits, shareholdings, and investment properties can be used to generate investment income in retirement.
Reverse mortgages also are used by a small minority of retirees.
Notwithstanding the limited range of products available to Australian retirees, the ASFA paper argues that they represent a necessary objective.
“For the great bulk of the population, the age pension is not considered to be sufficient to meet retirement needs,” it said.
The analysis also pointed out that Australia was unusual when compared to most other countries in that, apart from a small minority of individuals in defined benefit funds, “the great bulk of retirees take lump sum benefits or maintain an account-based income stream in retirement”.
“While account-based income streams provide considerable flexibility for retirees, they provide relatively little protection against the financial consequences of living beyond average life expectancy,” it said.
“Such account-based products also expose the retiree to variations in both investment returns and in the capital value of assets supporting the income stream.”
The ASFA analysis said there were sound public policy grounds for supporting greater take-up of income stream products which provide protection in regard to the financial consequences of longevity and/or variation in investment returns.
However it said increasing support for such products was likely to require a variety of measures, including removing regulatory and tax impediments to the development of new post-retirement products, “nudging” retirees to take up such products through the setting of appropriate default arrangements, and compelling retirees to insure against the financial risks of longevity in appropriate cases.
