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Encouraging Australians a smooth retirement income with longevity products a major challenge

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Giving Australians the confidence to spend in retirement is the “first hurdle” for Superannuation Fund trustees as Retirement Income Covenant (RIC) measures loom this year, says Deloitte actuarial consulting partner Andrew Boal.

From July 1, trustees must outline how they will help members, retired or nearing retirement, to maximise their retirement income, manage risks and give flexible access to expected funds.

Annuities and other products aimed at “middle Australia” would help maximise retirement income for those who will be looking to fund their lifestyles with a mix of the age pension, saving and investments, Boal and co-author Optimum Pensions innovation head Jim Hennington, wrote in an Actuaries Institute paper released on April 27.

Spend extra while healthier

Treasury modelling shows by 2040, half of all Australians will have between $250,000 and $750,000 in savings at retirement and will want to spend extra in their healthier, more active early retirement but do not want the income to run out before they die, Boal says.

“In the middle, these are the people who probably have an aspiration to have an enjoyable, good retirement but don’t really have enough to live just off the investment income,’’ Boal said.

“They need to spend the capital and that’s where they get worried about having the confidence to spend [it] and running out of money before they die.

“That’s the group that longevity projection products will be of great benefit to and so that’s the growing problem.”

Varied success

Boal says the Covenant comes at a good time for “middle Australia”, who will move from one-quarter to half of all retirees over the next 20 years.

Deferred Lifetime Annuities (DLAs), an insurance product that pays a guaranteed income starting at a future date for as long as people live, based on a one-off or regular premium, has had varied success in Australia, he said.

“Before 2004 we did have a reasonably good lifetime annuity market… because [Australians] were 100 per cent exempt from the means tests for the age pension. But then in 2004, that was reduced to 50 per cent and we still had a bit of a market and then in 2007, it was reduced to zero per cent exemption, and the market died,” Boal said.

“In 2019, we were able to get the government and Treasury to reintroduce a 40 per cent exemption on the means test and as a result, we started to see a bit of a comeback.”

He says QSuper launched its Lifetime Pension product in March 2021 which had gained traction with its members.

DLAs were “a pure form of longevity protection” to help secure the latter part of life, from age 85 or 90, which allowed people to only spend 10 to 15 per cent of their money upfront, Boal said.

“So if you do happen to die young, you haven’t given up the whole amount of your assets and the whole inheritance if that’s what you want done with the money, and still keep control over the other 85 or 90 per cent,’’ he said.

Challenger and GenLife recently launched investment-linked income streams which, rather than guaranteeing payments, they pay say 100 units a year for the rest of your life.

Market exposure

“You can invest the units however you like, so it’s totally invested in gross assets and the dollar amount you get will go up and down with the value of the unit,’’ Boal said.

“That still provides longevity protection, but… gives… exposure to [the] investment markets.”

The Actuaries Institute paper noted a trade-off between higher retirement income such as CPI-indexed lifetime annuities and account-based pensions, which may not keep pace with inflation for life.

Boal says Australia’s current minimum drawdown guideline requirements were the wrong shape – growing from five per cent to six per cent and seven per cent between the ages of 65 to 74, 75 to 79 and above 80 years, when spending in retirement tapers.

“What we do need to do is provide better guidance to people. So actually, what you should be doing at the start, is spending more like six per cent or even six-and-a-half per cent and stepping it up a bit quicker and then smoothing out that pattern,’’ Boal says.

A big challenge for the Super industry will be how to inform, educate and distribute new retirement products to middle Australia from July 1, he says

“Retirees are still reluctant to drawdown their assets, even if they have a high degree of longevity protection. It appears retirees may be influenced by a desire not to spend, rather than a concern about outliving their savings,’’ he says.

Confidence to spend

“But I think at the end of the day, the first hurdle we have to overcome is to give people the confidence to spend.”

Part of the reluctance to spend is uncertainty about aged care costs which will require “a bit of work” simplifying and financing this step, he said.

There was some confusion about how residential deposit amounts (RDAs) work “so maybe a better way to do it going forward is it’s based on an income … a certain amount of the age pension is set aside each year to fund residential aged care costs”, Boal says.

Super funds were also now developing the scale thanks to Your Super, Your Future requirements.

“We’re now getting enough people coming through to this situation where the investment is now worthwhile and so funds are talking about it,’’ Boal says.

“The Covenant has been timed very well and it makes a very strong encouragement or forced encouragement to actually do something.”

“(Next) Funds need to start educating members about retirement products, and retirement risks, probably when they turn 50. Putting some meaningful information on the annual statements for 50-plus-year-olds would be very helpful about what the income in retirement might look like, it’s [then] you can talk about different products, and how they might help to meet their needs,’’ he says.