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The ‘correcting’ and steepening of the yield curve over the last three months, combined with a new aware­ness from the Government and retirees of the market risk to which they have been exposed, will help make annuities “the product for the times”, hopes the chief executive of Challenger’s life busi­ness, Richard Howes. Last month, Challenger bolstered the rates on its annuities, such that a 15-year product with ‘nil residual capital value’ – that is, one where all the initial capital is progressively returned over the term – will pay 6.5 per cent annual interest, plus the return of the principal. Challenger’s annuities are backed by a mix of investment grade corporate debt, infrastructure bonds and property.  

However even though term deposits are offering only around 4 per cent for a maximum five year term, they retain the overwhelming majority of Australia’s conservative saving market, helped im­mensely by the ‘Government Guaran­teed’ brand bestowed upon them. “We need to educate consumers that as an APRA-licenced insurance company, our assets have to be held at fair value, so the guarantee that we can meet out obligations to policy holders is actually greater than banks can offer to their depositors,” Howes said, because banks only have to carry assets at book value (a historical quirk owing to their ready access to commercial paper markets).  But Howes acknowledged that edu­cation on annuities can only go so far.  

 

“There’s a certain level of psycholog­ical aversion to annuities, particularly to lifetime annuities – people don’t like the idea of losing money to a life company, and people also tend to underestimate their longevity and therefore the size of the longevity protection they need to buy.” Indeed, the tiny size of the lifetime annuities market in

Australia reflects these psychological challenges.  CommInsure is the only life com­pany offering a lifetime product, and writes approximately $10 million in lifetime annuity premiums each year. The popularity of annuities gener­ally has never recovered since their exemption from the age pension means test was progressively revoked, being removed altogether in 2007.  However a chink of light has emerged for the annuity market of late, in the form of the Ken Henry review of

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