The RBA’s decision to cut the cash rate to 2% today has increased the risk that retirees without longevity insurance will outlive their savings, underscoring the urgency with which the Government should act to enable the establishment of a deferred annuity market, says Challenger Chief Executive Officer Brian Benari.
“Australian retirees have been hit by the triple threat to their incomes of greater longevity, low cash rates and a greater chance of losing capital if they venture into risk assets.
“Although the fear of outliving retirement savings is not at 2009 levels, it has re-emerged as a major concern for retirees who haven’t purchased longevity insurance,” said Mr Benari.
“For these people, neither the ‘coping’ strategy of cutting spending, nor the ‘hoping’ strategy of dialling up risk are viable at present, so there’s a pressing need to provide new and innovative ways for them to stretch their super.”
Mr Benari said that while there was no silver bullet to this predicament, there were steps that the Government could take to give retirees more choice around managing the risk of outliving their savings.
“Treasury has said it is considering the removal of the legislative roadblocks that prevent deferred lifetime annuities (DLAs) being offered in Australia, and we urge the Government to fast-track their implementation.
“A levelling of the taxation playing field in this regard will have no cost to revenue, and has bi-partisan political and wide industry support, with a number of life companies indicating they would enter the annuity market if the unintended impediments to DLAs were removed.
“As a pure longevity insurance solution, DLAs offer a unique and powerful approach to the problem of making retirement savings last. They remove the key uncertainty in retirement planning of retirees outliving their savings,” he said.
By paying an agreed amount of guaranteed, indexed income at a future date, DLAs free up retirees to use the balance of their super to meet income needs over the finite period of time from the point of retirement until that date.
DLAs are flexible and cost-effective; making them ideal for use in a retirement strategy that manages interest rate risk and times the receipt of additional income to the likely times when late-life expenses like health and aged care will increase.
In addition to removing the unintended legal obstacles to DLA issuance, Treasury is considering measures which would boost the convenience and efficacy of this approach to managing longevity risk, such as allowing DLAs to be purchased during the saving phase of super, and permitting payment of a DLA premium to be spread out over several years.
“The worsening dilemma for retirees also provides strong impetus for progressing with the Financial System Inquiry’s recommendation that super funds offer their members retirement income products with longevity protection. As the Final Report noted, DLAs could provide this protection in a cost-effective manner,” said Mr Benari.
Source: Challenger
