The search for the perfect annuity – a reasonably priced, flexible source of an income stream lasting the customer until death – has become the Holy Grail of the post-retirement product industry. CATHERINE JAMES checks the progress of those on the quest to find it.
A visiting Russell Group actuary from the USA, Don Ezra, recently noted that whoever succeeds in having the product with the best solution for funding baby boomers’ long and uncertain retirement years will truly “nail” the market. The manufacturers know this, and as ever are racing to develop the ideal product. But what about the superannuation funds?
In this race, an assumption that account-based pensions rule will likely leave a super fund last – despite the current popularity of the pension making it seem a winner. Recent market turmoil, along with the ‘problem’ of longevity, has placed a question mark over the humble pension, tax-free as it is.
Russell’s Ezra faced a bias towards pensions when he addressed a recent forum of the Fund Executives Association on this topic of funding longevity. After outlining the extent of longevity risk, he went on to suggest lifetime annuities had a strong case to be the underlying instrument to deal with this “risk”, albeit with a tweak or two to make them more attractive.
But the Australian fund executives were not easily convinced. As one chief asked: who would champion such a product after legislation had so clearly rendered them second to pensions by a long stretch? Furthermore, annuities were not an easy sell given the inflexible, non-transferable nature of the upfront capital payment for the annuity – an insurance-like contract that guarantees an income for life in exchange for an initial large capital downpayment – compared to pension assets which always remain one’s own, and in one’s control.
The Australian lifetime annuity market lost much of its relevance to the consumer, giving way to the account-based pension, when the asset test exemption for complying pensions and annuities was removed by new legislation last September. The exemption had excluded 50 per cent of assets in either lifetime annuities, life expectancy-based or term-allocated income streams from the asset test. Now they are 100 per cent included. (The trade-off for removing this exemption was to raise the level of the asset test, allowing more people to qualify for the pension, and also increasing the pension amount people could access.)
With the Centrelink benefits gone, many lifetime or immediate annuity providers have responded by closing their funds to new business, suspecting that the demand would dry up. According to Morningstar tables, there are some 135 immediate annuity products on the market. Only 17 of these are still open, and eight of them have less than $5 million in assets under management. “The market [for annuities] has fallen away,” Axa’s life office head of product Elizabeth Foley says. But in its place, Axa, like many others is seeking to offer “other retirement products which are more flexible [than annuities] and better suited to people’s needs”.