Improving Australians’ financial literacy through advice is the best way to achieve greater demand for longevity risk products, according to the Financial Advice Association Australia (FAAA).
In its submission to Treasury on the retirement phase of superannuation consultation, the FAAA discussed how to make lifetime income products more accessible.
According to the industry body, the barrier to the supply of these products is directly related to the lack of demand for them.
“Australians largely do not understand the issues involved in the provision of these products (longevity risk, sequencing risk, etc), nor do they understand how they work or whether they would be beneficial for them. The lack of understanding limits demand and the appetite to invest in them,” the submission wrote.
“This general lack of knowledge means that they are often confused, ill-prepared for retirement and unlikely to consider products that essentially reduce access to their funds as a retirement solution.”
The FAAA expects demand for longevity risk products to rise as a result of improved financial literacy through financial advice – not from government action.
“We do not believe that the government needs to intervene in this market,” the FAAA continued.
Instead, the FAAA opposed direct intervention from the government in the financial product space, as it will likely come at a “significant cost” to taxpayers without guaranteeing voluntary take up by consumers.
“We see no reason at this point, when commercial products are already available, for the government to take a material risk in underwriting a solution, when these products are only being used by a small proportion of the market.
“Far better, in our view, is to spend the limited resources on financial knowledge to enable informed decisions to be made regarding strategies and products that will provide for retirement needs,” the submission wrote.
In addition to improving the accessibility of financial advice, the FAAA pushed for improved tools, calculators and educational initiatives to support Australians approaching retirement.
Assessing the RIC
The government’s Retirement Income Covenant (RIC), introduced in July 2022, sought to support the development of retirement income products.
One year on from the RIC’s implementation, a joint review by APRA and ASIC of 15 trustees to evaluate the RIC’s progress found a “lack of urgency” in their approach to enhancing retirement outcomes for members.
While super funds have felt the pressure to develop such products for consumers, the FAAA encouraged the industry to “not limit our thinking” with who can provide these solutions.
“We would also suggest that whilst the development of these longevity products by super funds should be encouraged, they should not be considered the only provider of these products. Life insurers are already providing these solutions and we expect will continue to do so,” the association added.
