Restrictive laws holding back innovation
Financial services businesses and organisations are lobbying for changes to superannuation and tax laws they believe will boost innovation related to retirement products.
Challenger, considered Australia’s leading annuities provider, has for some time been lobbying for changes to the Superannuation Industry Supervision (SIS) Act and tax laws, and its calls for change have been recently supported by the Institute of Actuaries of Australia (IAA).
The asset test exemption for annuities was removed following legislative change in 2007, and the IAA stated in its latest Federal Budget submission that the SIS Act was “unnecessarily prescriptive”, and that annuities were unfavourably treated under aged care and Centrelink rules. It also said that tax rules on deferred annuities should be changed so in the drawdown phase they could be regarded as a pension for tax purposes.
The IAA stated that these legislative changes would promote development in the variable annuities market. However, Challenger’s head of corporate marketing and communications, Stuart Barton, argued they would pave the way for simpler, more cost-effective solutions. Barton said variable annuities — hybrids between allocated pensions and lifetime annuities — were highly structured and, while a couple of players introduced them to the Australian market over the last two years, they were unpopular due to their relative high cost.
Legislative constraints concerning annuities aside, the industry is showing a renewed focus on retirement solutions, with various companies launching new products or setting up specific retirement solutions teams. Wade Matterson of product development consultancy Milliman said this was only the beginning.
“The sheer projected growth in the retirement sector is going to be enormous over the next five, 10 or 15 years, and the needs and requirements of people moving into retirement are very different from what they have traditionally been provided with in the past,” he said.
The author of the latest Investment Trends Retirement Incomes Report, Tim Cobb (pictured), said product innovation in the last few years had generally focused on the account-based pension type products with investment guarantees, like ING Money for Life, AXA North and Macquarie Lifetime Income Guarantee.
Challenger launched its Guaranteed Income Fund, but has also innovated around annuities and will soon launch its Liquid Lifetime annuity product, which addresses traditional liquidity concerns about annuities by giving some access to capital in the first 15 years. Barton said the global financial crisis showed that account-based pensions were a flawed investment in the superannuation drawn down phase and resulted in a jump in annuities sales last year.
Total sales of Challenger’s retail and institutional product range grew more than three-fold to $2.19 billion in 2010, with retail annuity sales alone jumping 82 per cent in 2010 to $933 million.
Challenger hopes to maintain momentum in the retail space through its $30 million consumer advertising campaign, launched this week.
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