The longevity risk being shouldered by Australia’s burgeoning retiree population can be neutralised by a deferred annuities market, write PHILIPPA YELLAND and SIMON MUMME.
The superannuation industry has five years to meet the longevity challenge before the volume of money in the decumulation zone becomes too great to risk, says John Evans, a guardian of the NZ Superannuation Fund and head of actuarial studies at the Australian School of Business. The financial crisis alerted everybody in the field to the problem: copping a market collapse like that in the early years of retirement can be debilitating. But as more accumulation money progresses into the decumulation phase, the industry can almost be certain that the fallout from the next left-tail shellacking will be more severe. Not only economically, but socially and politically: “You can’t have retirees out there eating cat food. They’re 25 per cent of the population.
They’re powerful,” Evans says. In 10 years, the problem will be too big. So a solution must be implemented within five years to meet the need, Evans says. And his preferred solution is a mandatory deferred annuities market. Jeremy Cooper agrees. The head of retirement income at Challenger and author of the influential Super System Review likens deferred annuities to fluoride in the water. Speaking at the Post- Retirement Conference in Melbourne last month, which was convened by Conexus Financial, publisher of Investment Magazine, Cooper said Australia was a paternalistic, ‘fluoride in the water’ country and so the Federal Government could – and should – legislate for a deferred annuity product to ensure that people did not exhaust their superannuation savings. “Yes, Australia is a paternalistic, ‘fluoride in the water’ country, so the Government should mandate a deferred base-level annuity product and then just ram it in there,” he said.
“Yes, it’s paternalistic, but get over that and move on.” Evans says this is the most logical and least risky option – particularly if it is Governmentrun. Even though investment banks, insurance companies and retirement income vendors would no doubt willingly accept the challenge, the risk is too great. If thousands of newly retired fund members buy 30-year annuities from a commercial operator, they are going long a very sizeable credit risk. “The cost of capital inside insurers would be high, so therefore we need government intervention in this market to hedge the risk. And the Australian Government is not much of a credit risk,” he says. “I think the risk of deferred annuities is too big for any insurance company. It could blow them up. And if it blows up, the taxpayer pays the bill.”