Longevity perceptions and post-retirement products

Hello Mr Venkatramani

Putting aside governments’ patchy track record in costing and funding defined benefit pension schemes, the idea that the answer to an ageing population lies in the bottomless pocket of the taxpayer is not new, but it seldom gets traction for the reason that governments want the private sector to foot more of the longevity bill than it already does, not less.

This is, after all, the whole point of compulsory superannuation.

As for private insurance offerings being “sketchy”, any concern in this regard should be directed to APRA, whose LAGIC regulatory capital regime imposes tougher requirements on Australian annuity providers than those in Europe and North America.

In relation to the well-documented “annuity puzzle” or, as you call it, “behavioural antipathy”, insurers are well on the way to curing this problem, and lifetime annuity sales are rising strongly. The numbers speak for themselves.

Kind regards
Stuart Barton
Challenger Limited

Hi Geoff

I'm not sure why you had such difficulty in finding Challenger's rates. They're no harder to find than term deposit rates on any bank's homepage. Go to Challenger.com.au, hover "Our products" top navigation, a dropdown menu unfurls which features 'rates' as the bottom option.

thanks and regards
Stuart Barton
Challenger Limited

Coincidentally or otherwise, the submission of the Centre of Excellence in Population Ageing Research to the Murray Inquiry (to be released on 14 April) hits the problem on the head: the risks of longevity are such that private insurance offerings, sketchy at best, have proven inadequate, costly and are unable to tackle the understandable behavioural antipathy to the insurers perceived to be gobbling up the retirement capital of savers.
The insurers are in a difficult position here: after meeting the costs, they need to provide a risk-adjusted return to their shareholders. The costs are high, because the expected longevity improvement is unknown to humans, blunting the usual actuarial tools.
The regulator cannot dilute its standards either, as that would mean forsaking its mandate to safeguard policyholders unable to divine the black box of annuity pricing.
Traditional methods of pricing and regulation are falling short, as we are dealing here with development of a badly needed product / service on top of our accumulation model, where disengaged members are bearing risks they cannot grasp.
Such development, akin to infrastructure development with a lousy payback, cannot be left to profit-seeking private industry, but must be addressed by the state. Its perspective of social cohesion and longer term sustainability cannot feature on the radar of private providers, driven by stock analysts' demands.and even shorter term news media.
The Centre's recommendation for the Government to step in is the only way: after all, the taxpayer is already the default insurer (through underwriting the unfunded age pension) as well as a significant equity-provider in our super regime (through tax subsidies relative to opportunity forgone).
Our super industry, cocooned by compulsory super and soft tax concessions the likes of which other finance industries can only fantasise about, has fallen seriously short on innovation (investment choice excepted).
This recommendation if enacted, will shake it up, and deservedly so.

Hi Jeremy,

After some frustrating searching I did indeed find Challenger's current annuity rates, but you don't make it easy.

Might I suggest that you provide a big unmissable link to This Week's Annuity Rates on Challenger's home page?

Hi Melinda

The good news is that the answer is right in front of you.

Some of your criticisms of lifetime annuities may have been true 5 years ago, but since 2012, the contemporary product has changed dramatically and is breaking sales records each quarter.

Today’s innovative, but simple lifetime annuity is the most successful post-retirement product launched in the last few years. While still a small fraction of the market-linked or account-based pension market, its recent growth trajectory has been very steep.

For example, in calendar 2013, Challenger sold $413 million worth of lifetime annuities, nearly 10% more than the entire industry has sold in any prior year.

Addressing your other comments:

1. A 65-year old female can buy a lifetime annuity that pays her $5,863 a year, per $100,000 invested, for the rest of her life, with access to capital for her or her estate in the first 15 years. This information is on Challenger’s public website. There are no other product fees or variables involved. That’s a pretty simple proposition that is proving highly attractive to retirees.
2. As this example, and sales over the last few years attest, the interest rate cycle does not have as much of an impact on lifetime annuities as is often thought. Having said that, low discount rates impact all investments, the value of retirement capital and the cost of producing cash flows in retirement. There is no free lunch.
3. The largest annuity provider in the market isn’t having any trouble finding long-dated assets to back annuity liabilities, so we’re not sure where this apprehension comes from.
4. As for the cost of protection, see point 1.
5. We would agree that fees do appear high on some variable annuity products, which could explain their lack of popularity.
6. Challenger’s Liquid Lifetime annuity has a 15-year guarantee period in which there is access to capital for the policyholder or their estate. Anyone buying an annuity below 71 years of age can ask for all of their money back at the end of the 15-year withdrawal period and will receive 100% of the amount invested.
7. The industry seems to be almost universally of the same view on the tax and Centrelink treatments.

You’re right, perceptions in the industry do need to shift – but they need to shift in relation to outdated notions attaching to lifetime annuities.

Jeremy Cooper
Chairman, Retirement Income, Challenger