‘Unprecedented times’ in annuities rush
“So much of our advice process and even our industry has grown up around the accumulation process in superannuation,” says Angela Murphy, CEO of Challenger Life. “It’s been about saving that money. But there is now a greater focus on what the things are that we need as we try to turn that pot of savings into something that can last for a lifetime.”
The force driving greater interest in annuities is the Retirement Income Covenant (RIC) – new legislation by which superannuation funds will have to develop a retirement strategy for their members to “deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way.” That’s started a retirement arms race in the Australian financial services industry, but Murphy believes that a rising tide will lift all boats – and that as a result of the RIC, annuities will become more comprehensible to the consumers that actually need them.
“One of the things that can be really challenging is that people pick up an annuity and they compare it to an account-based pension,” Murphy says. “I think that as we start seeing more options come to market, you can say ‘OK, this one provides a smoother income stream but it doesn’t necessarily provide protection against idiosyncratic risks.’ You start being able to compare what different products are providing – so I do think we will see more innovation.”
On the innovation front, Challenger has recently launched a market-linked option for its Liquid Lifetime Annuity, which it believes is the first of its kind in Australia. The option was developed in collaboration with financial advisers whose clients wanted ongoing exposure to equity markets while preserving the longevity protection of annuity products (it also offers payouts pegged to the CPI and RBA cash rate, separate to the market-linked option, as suggested by advisers, with the option to change the investment risk/return profile on a yearly basis).
“We do expect to see more of this with the RIC coming in, with a greater focus on retirement across the industry… In the US, annuities have been a more common savings vehicle – there’s a different tax regime, so they’re more common in general,” Murphy says.
“And people tend to invest in them even earlier, so I guess they’re probably wanting more market exposure. Whereas the lifetime annuity here, and even the way the annuity has been used in Australia, it’s basically been used as a defensive asset.”
A greater shift towards internalisation of some functions could see superannuation funds roll out their own retirement products (they’ve helped you save the money – they might as well help you spend it). But while the trend towards internalisation is certainly there, Murphy notes that those that have been able to execute on the premise already have insurance licences – such as QSuper, with its Lifetime Pension product – and that it can be hard to build a retirement product from scratch.
“Anyone who wants to provide that guarantee, it is very, very complex to do so. And actually, our policyholders have got a lot of protection through prudential standards, which actually require that we hold our own capital as a buffer,” Murphy says.
“That would be a very difficult thing for a fund to take on by itself. You’d have to actually apply for that APRA regulation, but someone would also have to provide that capital. Our shareholders provide that capital. Anyone who goes down that guaranteed route, the concept of partnering is pretty attractive,” she says.