Superannuation funds can offer retirement accounts that easily exceed the income from annuities, believes Rice Warner.

Michael Rice, chief executive of the actuarial firm, is working with several large funds to help them convert a member’s account-based pension into a distributing trust, with separate cash and capital accounts.

The cash accounts would make pension payments and Rice says not only could these payments easily exceed the income from an annuity, but they would also go very close to meeting minimum pension drawdown requirements.

The capital account can then adhere to a long-term investment strategy suitable for the member’s life expectancy, including investing in property, infrastructure and equities to capture the expected illiquidity and risk premia.

“Most of the funds, with very little administrative difficulty, could adopt this quite quickly,” Rice says.

“They obviously have competing investment objectives. You can’t do them both through a standard single-option investment strategy.”

He envisages income, dividends, franking credits and rents from account balances being moved to the member’s cash account producing a yield of four to five per cent.

This would leave capital untouched and allow for long-term investments in assets such as infrastructure. The solution would also not incur capital gains tax at retirement.

Rice said his firm has compared this potential solution against current alternatives, and all other options “compromise, and therefore fail”.

He described these solutions as either shifting money out of growth assets; failing to cover longevity risk; forcing retirees to draw down capital when markets are low; shifting money to cash by selling assets and therefore run market timing risk; or requiring complex advice for simple budgeting. Sometimes they fail on more than one count, said Rice.

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