Travelling an unfinished road to Retirement – Part 1

It is no secret that Australia's retirement system is not perfect and needs work as pre-retirees find themselves having to work longer than they had anticipated.

Challenger chief executive, Brian Benari, likened the system to a half built Sydney Harbour Bridge that did not take people safely to where they needed to go.

He said the system was incomplete as it was not structured for converting savings into a sustainable income for life.

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Former Prime Minster, Tony Abbott, once said that "superannuation is not about building up your wealth, it's about saving for retirement".

Benari said the superannuation system stood at $2 trillion (larger than Australia's gross domestic product), yet it was underpinned by an Age Pension safety net that cost the government $44 billion a year.

Willis Towers Watson head of retirement solutions, Nick Callil, pointed to the fact that 75 per cent of those aged over 65 claimed and would continue to claim part of the Age Pension, and said dependence on the full Age pension would continue despite a future increase in the super guarantee (SG).

Callil noted that while the current retiring generation relied on the SG, it was not enough to provide a decent income, whether it was through an account-based pension (ABP) or an annuity.

Annuities part of the answer

King Loong ChoiDeloitte partner, Russell Mason, said annuities could be part of the answer, but they were expensive.

Colonial First State (CFS) said annuities were the only product on the market that satisfied best interests and the Future of Financial Advice (FOFA) reform.

CFS general manager of product and investment, Peter Chun, said CFS had united with PwC to model the best retirement solution, and found it was a combination of an ABP and an annuity.

However, Chun said 95 per cent of Australian retirees used ABPs, while only five per cent used annuities.

He said the best way to integrate them in to a client's portfolio was to blend them as part of their cash and fixed interest exposure.

The Federal Budget's proposal for defined lifetime annuities (DLAs) is scheduled to kick off after 1 July 2017 thanks to bi-partisan support.

Chun said it would be great for advisers as they would kick in after the ABP balance and income stream was projected to deplete.

Then, from say age 85, the DLA would pay the client an income for the rest of their life, he said.

On the available evidence, a growing number of planners have been recommending annuities to their clients, with 41 per cent of planners recommending them in 2015, up from 38 per cent in 2014, according to Investment Trends.

Investment Trends senior analyst, King Loong Choi, said 62 per cent of advisers also planned to recommend annuities to their clients in 2016.

He said advisers planned to recommend annuities based on their Centrelink/social security advantages to hedge against inflation and provide a stable retirement income stream for their clients.

Investment Trends surveyed 8,312 Australians (aged 40 and over) and 591 financial advisers and found consumers had an appetite for annuities.

The research said consumers wanted a product that would provide an income that lasted throughout their lifetime.

Interestingly, research company, DEXX&R, said that allocated pensions funds under management/administration (FUM/A) fell by 0.7 per cent over the 12 months to March 2016, (to $167.2 billion), and annuities increased by 1.2 per cent (to $109.9 billion).

DEXX&R said the largest swings in the annuity space were with term-certain annuities, which saw a 12.6 per cent uptick in new premiums (to $3 billion) and lifetime annuities, which saw a 24 per cent decrease in new premiums (to $487.35 million).

However the experts said that would change as a result of last month's Budget.

Building the new system

The Federal Budget cleared the way for a better approach to retirement, with three key changes, according to Challenger.

Benari said one of the Government's first reforms was to confirm the objective of superannuation as an income substitute/supplement for the Age Pension, consistent with the recommendations of the Financial System Inquiry (FSI).

"The changes to super in the budget, including the $1.6 million transfer balance cap, are consistent with this newly-articulated purpose of super," he said.

Secondly, the government wanted to allow a broader range of retirement income products to be available on the market, including DLAs, which would remove the uncertainty from retirement planning, he said.

"We insure ourselves in our everyday lives, we insure our cars and our homes, but many of us don't insure ourselves against a risk that has a much higher chance of happening. That is the risk of us outliving our savings. DLAs will help us do just that," Benari said.

The final component of the reform was a result of the FSI recommendation "for all super funds to have an option for retirees to choose a comprehensive income product for retirement [CIPR]".

"CIPRs would be aimed at providing longevity and inflation risk protection. They work by combining current superannuation products with lifetime annuities and other longevity risk products," Benari said.

Willis Towers Watson, CFS, and Challenger said fund managers were working on solutions and talking to the market to see what they wanted in the CIPR space.

They also said they would not develop any products until they received further instructions from the Government with clear requirements. They expect the Government to release more details on 1 July, 2017.


Challenger said the average married couple had a retirement balance in the mid $400,000, while CFS said the Budget's transition-to-retirement (TTR) changes would not impact the average household.BrianBenari-Challenger

Agreeing, Callil said "that transition-to-retirement strategy would still be an effective tool, [regardless of CIPRs and the cap]".

"There will still be room for TTR to be used and it would still benefit those who are genuinely transitioning to retirement," he said.

Chun said a good financial planner would be able to work around the caps with other savings mechanisms and annuities, and added many of them were already considering these options.

"The cap is $1.6 million per person, that's $3.2 million combined. There are other products such as insurance bonds or family trusts that could be set up," he said.

Read part two of this feature: Investing to cope with all seasons

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Few older clients understand the way their remaining life could unfold - including the opportunities and threats which accompany increasing longevity. Until this uncertainty is properly discussed, advisers will continue to have difficulty with a dialogue which is primarily based on product selection. We urgently need to raise the longevity awareness of both advisers and their clients.

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