A new international study of longevity risk reinforces the need for essential reforms to safeguard the retirement income system for current and future Australians.
Jointly prepared by the Actuaries Institute, the American Academy of Actuaries, and the Institute and Faculty of Actuaries in the UK, the paper: The Challenge of Longevity Risk: Making Retirement Income Last a Lifetime highlights the political appetite in each nation for changes to their respective retirement income systems.
The study supports measures to increase pension contributions, encourages the introduction of lifetime income guarantee or “intelligent default products”, and criticises “tinkering” with current measures which further confuses those nearing and in retirement.
It also favours innovation by product providers amid a flexible regulatory framework while noting that “changes to the retirement income system cannot be undertaken without consideration also of pension costs, aged care costs and all sources of potential funding, including housing wealth”.
“The paper underlines the significance of the Government’s response to the Financial System Inquiry, particularly its commitment to enshrining the objective of the superannuation system in legislation and assessing the appeal of ‘intelligent default’ products for retirees,” said Estelle Pearson, President of the Actuaries Institute.
Freedom and choice are now at the core of retirement systems in all three jurisdictions, which creates a responsibility to protect and guide retirees attempting to navigate a complex system, some without adequate advice.
The Five Principles
The paper examines five principles for managing longevity risk: adequacy, information, flexibility, equity and sustainability.
“The tangible outputs arising from the first three are perhaps most relevant to industry, while content relating to equity and sustainability is more geared towards policy makers,” said Georgina Hemmings, an actuary with experience in the UK annuities sector, who worked on the paper.
Financial literacy and access to information are crucial where individuals are free to withdraw or invest their savings as they choose. The paper recognises that people need information, not just at the point of retirement, but leading up to and beyond it. Furthermore, government, regulators, industry, and employers can play a role in educating people.
Information needs to be presented using simple language and illustrations geared towards the demographic, said Georgina. As such, the paper suggests there would be merit in developing a common information template, in a format that reflects regional regulatory practice, serving as a consistent basis for retirement planning initiatives.
Following on from freedom and choice, the paper cautions that regulation should be sufficiently flexibility to accommodate individuals’ different retirement needs and their varying capacity to exercise choice.
“While the Australian market is promoting the development of products that offer soft(er) guarantees, perhaps we can find inspiration in other solutions that have been road tested overseas,” said Georgina.
From April this year, new tax rules mean British retirees now have the freedom to choose how to draw down their pension savings. Previously most had to take out an annuity. Australian retirees already have freedom of choice and in a voluntary market setting there is low demand for longevity protection, Georgina explained.
“A key challenge for insurers operating in this space is consumers’ perception that annuities do not represent value for money for several reasons including seeking a return of capital and viewing retirement savings as an investment rather than a means to fund future consumption,” she said.
This issue is not exclusive to Australian retirees and highlights the importance of innovation.
“Political pressure to revise the UK pension rules reflects consumer sentiment towards ‘compulsory or incentivised’ annuitisation. While underwriting – a key feature of the UK market – has helped to improve the value of annuities, it is commonly recognised that British retirees do not capitalise on its full benefit because they don’t shop around as much as they should,” said Georgina.
Makings of the Joint International Paper
The idea for the joint paper came from a dinner conversation in Washington DC in 2014. At the six-monthly meeting of the Council and Committees of the International
Actuarial Association (IAA), Australian and UK representatives got talking about the then-recent UK budget announcements which foreshadowed the end of compulsory annuitisation.
“We realised this meant the Australian and UK retirement income systems would face similar issues going forward and it seemed a good idea to prepare a paper on the challenges for retirees, utilizing the experience of both countries,” said Martin Stevenson, Convenor of the Australian Actuaries Institute International Council Committee and Australia’s delegate to IAA’s Council.
“This is the first co-operative venture of this type between professional actuarial associations in Australia, UK and US…and will hopefully lead to future joint endeavours,”
Georgina approached Elayne Grace, Deputy CEO and Head of Public Policy, about getting involved in a project through the Actuaries Institute as a way to stay connected with the profession while on a maternity break.
“Coincidently, this international paper was in its early stages so it provided a great opportunity to put Georgina’s experience to work,” said Elayne.
“This joint paper is a good example of what Institute HQ achieves by coordinating knowledge and experience from our members and the wider profession.”
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