Financial Planner Canberra

The issue of post-retirement risk as a major challenge facing the financial services industry, was in the spotlight at the recent Investment Management Consultants Association conference in Sydney.

Speakers at the Investment Management Consultants Association (IMCA) conference compared the success of annuity markets in other countries to Australia and looked at how behavioural factors can affect market outcomes.

John Piggott, professor of Economics at the University of New South Wales, and director of centre for pensions and superannuation in Sydney, said he was surprised by the poor uptake of annuities here.

"The Australian context is one of the most interesting when it comes to questions of longevity risk. What happens when you get to the point where people want pay outs?"

"For a country of 22 million people, annuity number sales are extraordinarily small. We don't have any longevity insurance to speak of," he said.

Piggott believes there are a number of reasons for this, including regulatory.

"There are restrictions around the way in which life annuities can be marketed. The underestimated story around the life annuity market is distribution- many financial advisers don't have a good understanding about longevity insurance has to offer, often they are targeting young families who mightn't see the value in life annuities," he said.

Melinda Howes, chief executive, Institute of Actuaries, also questioned why Australia didn't have what she called a "vibrant" post-retirement market given its size, and pointed to certain behavioral factors.

"When someone goes to buy an annuity, it's the first time they are confronted with the cost of their own longevity and it's not cheap," said Howes.

According to Howes, there are a number of reasons for this, including difficulty in predicting longevity, political barriers, and market risk.

"The major cost of a guaranteed income stream is actually the market risk, not the longevity risk. The cost of guaranteeing someone the same income year in year out over a long time, regardless of what the markets are doing is high," said Howes.

"This is why deferred annuities are such a good idea- rather than locking into something at age 65, if you take the first 15 years of market risk out of it and lock in something from age 80 that protects your longevity it starts to look much more affordable," she said.

Howes also suggested carrying compulsion into the retirement phase in relation to annuities, "as is the case with the SG".

However David Shirlow, executive director, Macquarie Adviser Services was less sure about the value of compulsion or preferential treatments.

"Would it improve adequacy? Would it remove double dipping? Would it get rid of an anti-selection problem? Yes it would, but is that desirable, probably not.

"Would it improve efficiency? Possibly. But on balance, the Australian system does have a means tested age pension as a backstop as a kind of guarantee for people, and that is a pretty good framework," said Shirlow.

"We also have the issue, if you move to providing guarantees, in the private sector, you are largely replacing your investment and longevity risk with institutional risk- you are creating an environment where the institution for taking on the risk will want to receive a premium for having done so."