Professor David Blake, director of the Pensions Institute at Cass Business School in London, is scathing of a system that obliges workers to save for the future but has allowed them complete freedom regarding what to do with those savings in retirement. The rapidly changing nature of the retirement space in Australia will be discussed at Professional Planner’s upcoming retirement conference.
Blake is also highly critical of the Productivity Commission’s recommendation of a separate independent inquiry into the broader role of super in funding retirement incomes.
Rather, the pensions expert wants to see a royal commission-type look into the lack of progress since the David Murray-led financial system inquiry, which recommended that all funds offer a regular and stable income stream, longevity risk management and flexibility.
“You have already had an inquiry that established what needed to be done,” Blake says. “You now need an inquiry into why nothing has happened.”
Blake is critical of Australia’s failure to settle on a comprehensive income product for retirement (CIPR) to reduce longevity risk.
“Decumulation only works if you buy a deferred annuity – otherwise people risk running out of money before they die,” he says.
Certainly, as the Productivity Commission points out, the government’s retirement income covenant – which will require funds to offer a risk-pool product to members when they retire – has been beset by design challenges and implementation has been delayed to 2022.
The PC’s report states that trustees do not always want to offer these products and that the government should abandon the covenant if the flaws cannot be “sufficiently remediated” by the deferred date.
“It looks as though the CIPR product will be voluntary – and no one voluntarily buys annuities. I think the take-up will be low,” Blake argues. “This suggests that the industry is hostile to the product and is looking for excuses to trash it. If it is, then [the product] has been subject to regulatory capture by the industry.
“They are happy to keep people invested in equity-type products for as long as possible in order to extract maximum fees.”
Blake points out that once a customer moves into an annuity-type product, two things happen: the investments switch to bond and bond-type investments, which have lower returns and hence lower implicit fees, and there is a new risk – longevity risk – which is not easy to hedge against in the absence of longevity bonds issued by the government.
Also, he says, you would move from an investment management regulatory framework to an insurance industry regulatory framework, which has much more onerous capital requirements.
Super funds need to do more
KPMG wealth partner and former union boss Paul Howes says industry funds have so far been weak on the issue of retirement and creating sustainable longevity products.
He too would like to see an immediate focus on decumulation.
KPMG superannuation advisory partner Adam Gee adds: “We believe it remains critical for super fund trustees to develop a range of retirement products that will suit the varying needs of members and are disappointed with the PC’s suggestion that this could be abandoned.”
In 2015, the UK Government scrapped the rules that forced pension savings to be spent on annuities to provide guaranteed incomes for life.
Blake says this was a huge mistake.
“The UK had the world’s biggest annuities market and the finance minister decided for political reasons that people didn’t need to annuitise. That market collapsed overnight,” he says.