A group of industry experts at the SMSF Association National Conference has suggested more thought be given to annuities being built into super to protect older Australians.
The panel was brought together as part of a thought-leadership breakfast to discuss the question: “Does superannuation need to play a broader role in the retirement of Australians in the future?”
Melinda Howes, general manager of superannuation at BT Financial Group, cited deteriorating mental health rates as a key consideration before any further changes to super.
“We’re seeing rising levels of dementia and cognitive decline,” Howes said. “At what point do decisions need to be made elsewhere and who monitors a person’s ongoing ability to make the right choices?”
The answer, she says, could come from annuities and pooled income resources. While the products have been out of fashion in recent decades, the ageing population and the health issues it brings have made the option relevant now and worthy of sharper focus.
“By age 85, people start to want more certainty and maybe move away from the more complex decisions, so a deferred income stream that kicks in at that time…there might be some appetite for that,” Howes said.
Beyond products
Not all annuity programs need to be product based, Howes argued. She brought up the option of embedding deferred, annuity-type resources within superannuation funds and letting trustees manage them.
“What I’d like to see is a pooled or longevity component as optional in superannuation,” she explained. “The legislation should be flexible enough to allow the trustee to decide if this is appropriate.”
The legislation she mentioned is part of a government program looking at developing the framework for Comprehensive Income Products for Retirement (CIPR), or ‘MyRetirement’ products. Treasury released a discussion paper in December 2017, following a consultation period that ended that July.
“This is a live debate at the moment,” Howes said. “We haven’t seen the legislation yet, but Treasury is working on CIPR and there might be a compulsion for some sort of longevity component as part of that.”
The roadblocks, Howes said, include the fact that we already have a ‘longevity pension’ – the age pension, and the fact that trustees may be reluctant to take on the longevity risk, which would adversely affect costs.
“Why would the trustee take the risk on? There’s a big uncertainty premium because there is so much variation in the individual outcomes,” she said.
Annuity adoption is also hampered by more traditional biases, Howes explained.
“People have rational and irrational reasons for not wanting to invest in annuities. One of the irrational ones is that young people don’t believe they’ll ever die,” she said. “However, perversely, when near retirement, we think we’ll die whenever our parents or grandparents died.”
The longevity gamble
These beliefs lead to a “longevity gamble”, Howes said, whereby people don’t believe going to live that long as long as statistics suggest they will.
“People are radically underestimating their life expectancy; we’re already one of the longest living populations in the world. The figures are sobering. Right now, men’s (life) expectancy is 79 and women’s is 84. But those number don’t account for improvements in longevity over time,” Howes explained. “In 2050 [life expectancy] will be 96 for men and 97 for women.
“Consider a man at 65 who is expecting to live to 79. He is actually going to live 17 years longer and die at 96. That’s almost double the expected time in retirement. But the average person isn’t thinking this way and planning for it.”
The annuity proposal was strengthened by figures SMSF Association chief executive John Maroney quoted. He brought up a National Seniors Australia survey that asked if super should include “an insurance option that continued to pay an income if you live beyond 85; 56 per cent of respondents replied yes and about a third replied no.”
When asked if they would consider paying a portion of their savings – say 10 per cent – to increase income once they reached 85, “57 per cent said yes and 43 per cent said no, including 11 per cent who didn’t think they’d live that long.”
Despite the theoretical desire to plan for old age, NSA chief executive Dagmar Parsons is aware of the challenges in convincing people to commit to it.
“Planning is something people shy away from, which is very sad to see,” Parsons lamented. “How long is a piece of string?”
