NZ could learn from the Australian experience to reboot its extinct ‘pure’ annuities market, Challenger retirement income chair, Jeremy Cooper told a local audience last week.
Cooper, on a dual-city NZ tour as guest of Harbour Asset Management, said the country faced the same retirement income dilemmas as Australia.
“Retirees need to spend their savings but they have a longevity risk they can’t self-insure against,” he said.
Cooper said over the last 20 years in Australia the most common age of death has gone from 78 to 87, suggesting retirees were increasingly in danger of running out of money late in life.
He said the problem was often compounded by late-life “cognitive impairment” that left retirees vulnerable to scams, unscrupulous relatives or poor decision-making about their assets.
“It’s a highly-complex problem with no silver bullet but partial annuitisation can be a good tool in the overall package,” Cooper said.
In fact, he said the emphasis on partial annuitisation – rather than advising retirees to plough all their savings into annuities – was one factor behind Challenger’s resurrection of the product in Australia.
‘Pure annuities’ – or products that offer guaranteed life income but no capital redemption (even after death) – have gone through several regulatory phases in Australia but reached a nadir in 2009 when just 45 were sold, Cooper said.
He said Challenger, essentially the sole remaining player in the space at the time, revitalised the annuities market from that low with a savvy consumer marketing campaign and strategic distribution alliances.
In the latest financial year the ASX-listed firm (which also operates a funds management division) sold about A$1 billion of pure annuities and a similar amount of its ‘flexible’ product, which provides get-out options over a 15-year period.
Challenger also sold A$3 billion in ‘term annuities’, which pay out over a set number of years, aimed at the competing with the retiree product-of-choice, bank deposits.
The group’s lifetime annuity clients average about age 70 at a typical investment level of $160,000.
Cooper said the Challenger ad campaign connected with real retirement situations rather than the “absolute rubbish” dog-on-the-beach scenario typical of the genre.
But he put the annuity turn-around story in perspective: of the roughly A$70 billion moving from accumulation to pension phase in Australian super only 5 per cent has headed to the annuity market.
The Australian government is currently considering how to better manage the longevity gap via the Comprehensive Income Products for Retirement (CIPR) consultation: Cooper serves on the advisory committee.
Originally designated as a product category, CIPR is now known as ‘MyRetirement’ in a move that echoes the MySuper default funds that Cooper recommended in his 2010 report into the Australian superannuation system. MySuper products recently hit a collective A$625 billion – up 19 per cent year-on-year.
He told the Auckland crowd that MyRetirment annuity-like products – if introduced – would probably be offered by all super funds under a “soft default” model – allowing members to opt out.
According to Cooper, the KiwiSaver system also needs to consider retirement income as part of the package.
“KiwiSaver has been good at helping people accumulate savings,” he said, but offers nothing post-65.
“Why have KiwiSaver if people just end up with NZ Super?” Cooper said.
And lifetime annuities would always be just one option to consider, he said, citing deferred income, collective mortality pooling, or guaranteed income variable annuities (such as NZ’s Lifetime Income Group product) as useful solutions.
Challenger currently does not offer products in NZ but “we keep an eye on the market”, he said.