An international study of longevity risk has reinforced the need for urgent reform of Australia’s retirement income system.
The study, entitled ‘The Challenge of Longevity Risk: Making retirement income last a lifetime’, was jointly prepared by the Actuaries Institute of Australia, the American Academy of Actuaries, and the Institute and Faculty of Actuaries in the UK. The combined study supported a range of measures to improve retirement income systems, including increasing pension contributions, the introduction of lifetime income guarantee or ‘intelligent default products’, and a stop to constant policy tinkering of retirement incomes.
The joint study also favoured government support of product innovation, given a flexible regulatory environment in which to work. However, the study noted 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”.
According to the president of the Actuaries Institute of Australia, Estelle Pearson, the study underlines the significance of the Australian 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”.
“The introduction of these intelligent default products will provide greater income security and protection for many retirees who now face the prospect of outliving their savings,” Pearson said.
The American Academy of Actuaries, which recently undertook its own research paper on financial sustainability, said longevity risk is not well understood by many people and this would have significant implications for the retirement income needs of consumers.
The international study identified five key principles of managing longevity risk:
- Adequacy — accumulating adequate savings over the course of an individual’s working life.
- Information — providing consumers with information on saving and managing savings, not just at the point of retirement but leading up to it and beyond.
- Flexibility — regulation is sufficiently flexible to reflect individuals’ different retirement needs and their varying capacity to exercise choice.
- Equity — governments and regulators to ensure that decumulation is fair and the concept of ‘fairness’ is understood.
- Sustainability — changes within a retirement income market should enable a long-term sustainable market to develop.
