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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
Australia’s
taxation system.
Part of that
wide-ranging view will examine whether Australians are exposed to too much
market risk in their retirement savings strategies, particularly as they
approach the decumulation phase. Annuities have been flagged by Henry himself
as a potential remedy for this. As the obligor for roughly 40 per cent of
Australia’s
annuities market (65,000 policyholders), Challenger has penned a submission to
the review, arguing that this style of income stream should comprise 30 per
cent of a retiree’s asset allocation.
In addition to reducing the amount of
“equity market timing” engaged in by retirees, the submission argues lifetime
annuities would reduce “leakage” from the system because any assets left over
by a deceased policyholder could be retained and used toward the retirement
income of others in the pool. Given the psychological barriers, Howes suggested
the purchase of lifetime annuities should either be heavily tax-incentivised
or made compulsory, and that the private sector be left to provide the
products. “You could argue the Government already has its hands full running
the lifetime annuity known as the age pension,” he said, adding that the
pricing and terms of annuities would become far more favourable to consumers
as a result of the scale created by compulsion.
