CIPRs are coming and that’s exciting

All CIPRs (Challenger included) depend on the ability of the vendor, at some future unknowable time, to pay money. This will largely depend on the capabilities of the vendor and its actuary either or both of which could prove inadequate and both of which must make assumptions about distant future conditions. At best the vendor or perhaps the guarantor must be a government which could use the up front payment for infrastructure.

David,

Are you talking, to some degree, about the long-awaited introduction of deferred annuities? If so, what type of premium/price do you think would be payable for a deferred annuity starting at age 65 and payable at say, 85 years of age if a person wanted a $20,000 pa income? If I remember correctly, the Cooper Report suggested a $20,000 once-off premium payable at age 65 would provide a $20,000 pa income at 85. Is this figure still an reasonable approximation?

Nothing to get excited about here. In 2018 (or 2017 at the current rate) Prime Minister Morrison will announce a "root and branch"review of the retirement incomes system to be headed by some industry luminary (I'm tipping it will be someone like Cameron Cline or Ahmed Fahour), and the whole process will start over. Sure there will be some private sector innovation at the margins, but CIPRS and retirement income products in general are in the too hard basket for Australian politicians. That's unlikely to change.

Matt,

Usually I put comments like these in the negative / cynical bucket and let them slide. However the crux of this article is that this is good change and it is something all in the industry should be positive about. I think it is important to make a case for being positive about change and CIPR's. I make a few points.

First, a CIPR, well designed and implemented, will deliver a better expected retirement outcome than a generic account-based pension. This is great for the millions of Australian's in default funds.

Secondly the superannuation industry is still immature and there are areas that need to be improved. This is a problem with DC systems the world over. One gaping hole is post-retirement. The recommendation of a CIPR will improve our system.

Finally, I guess we could all claim regulatory review fatigue and down tools. However why do that when the recommendation of a CIPR actually improves retirement outcomes? Given the ten's of billions of dollars spent annually on the age pension and super tax subsidies, and given the social importance of a good pension system I can understand why there have been a number of reviews. It would not surprise me at all to see another review announced in three years time. However I wouldn't expect a reversal of CIPR. It is a logical and good idea on which Murray built on Cooper's original recommendations (so there has been consistency).

I guess the choice is whether to be positive or not about the challenge, work and opportunities posed by CIPR's. I am very positive.

Regards, David

Matt, I respectfully disagree. We can no longer afford to dismiss retirement income products as being "too hard".

What makes this Government support of CIPRs so exciting (and definitely not something that will be a throw-away policy) is the fact that these products will consider not only market risk (the current accumulation paradigm) but also longevity risk. Existing research (both local and international) would tell you quite clearly that this is the best approach for retirees.

I also think that David's idea of compulsory retirement outcome generators is a brilliant one which will assist with the financial literacy problem that we have at the moment. This will, in turn, make the retirement income problem "not so hard".

Chris,

I can't speak for the retail funds because Mine Wealth + Wellbeing is a profit-for-member business model.

I choose the positive view on this situation: nearly all super funds don't consider mortality risk in their post-retirement solution and soon they will. Longevity risk is one of the largest risks to individuals in retirement; now it will be better managed. Retirees in default funds should have a more secure retirement outcome.

Perhaps if we see super funds of any kind mis-use the intention of CIPR to profit then they should be called out. Of course we have APRA regulating the industry and there are research ratings groups who assess the funds.

Overall I am positive.

David

You're drooling over CIPRs because retail super funds will make a mozza off them. Not because they are in the best interests of superannuants.

For what will for many years be small balances in Default funds at retirement, I cannot see why there is a priority now on CIPRS - a nebulous concept that has the risk of offering ATAP (all thinks to all people) but a contract which offers indecernable difference to an allocated pension when calibrated against the investment risk outcome of both options.

Lifetime annuities bought voluntarily, need careful consideration of family circumstance before money is locked up. The members life annuity amount from a default fund might be trivial in the context of offsetting age pension but on later death an uninformed surviving spouse may have found the cash alternative very important in a non-home owning low assets existence. Cash guarantees on life annuities in old age remove the redistribute purpose of life annuities.

Lifetime annuities in super should be the preserve of very significant balances where they can have a meaningful impact on offsetting age pension cost and giving security of total income in retirement. If made compulsory for say 30% of all super (not just Default) above say $50,000, the community rating of CPI indexed nonprofit life annuities would be a valuable completion of Australia's retirement income objectives for super and would offer clearly superior projected outcome to any other approaches to secure real retirement income..

Bruce,

You make some interesting comments on small balance members but I think that CIPR is much more than simply transferring members compulsorily into a lifetime annuity at retirement. If that is what the regulations end up requiring then that would be disappointing. But surely a trustee would be obligated to consider many facets of a retirement product design including bequests and accessibility. It would also make sense to consider what role the age pension plays in the outcomes of members with different balances. The range of considerations is so broad it could be daunting, but that is what in my view makes this such an exciting challenge.

David

Hmmm...aren't these CIPR things just annuities under a different name? And who gets to wear all the risks?

I view that comment as a little uninformed. Yes there have already been announcements that some funds will go down the life annuity path for their CIPR. But there are other solutions and the best solutions may be a combination of products. For example there is an interesting product out there that pools members to hedge the bulk of an individual's mortality risk but does not provide a guarantee and so potentially offers a higher return.

David

Why would super funds have to be told by government to offer decent retirement income products? I must be missing the whole point of super?

Unfortunately super is a big complex industry which in my view isn't as mature as you might expect. Much of the attention has been placed on the accumulation stage and not the post-retirement stage, partly because balances were not that large at the point of retirement. Now they are becoming more sizable and the regulatory reviews and the government have prompted the industry to have a better look at their post-retirement solutions. It's not like there weren't funds trying to innovate but now you will see far greater innovation.

The key difference is that super funds will now be mandated to account for mortality risk in the design of their CIPR. This is an area that nearly all super funds have ignored - the focus has largely been on account-based structures hence investment risk. I predict this will prompt a lot of innovation across many parts of the industry.

David