O’Dwyer points to limitations of account-based pensions

The Federal Government has signalled it will be calibrating the social security means testing regime around the development of new retirement income products.

The Minister for Revenue and Financial Services, Kelly O'Dwyer has pointed to the Government's willingness to follow through on retirement income products which she believes will help overcome the limitations inherent in account-based pensions, particularly with respect to longevity risk.

She said that as things currently stood, at least 94 per cent of Australia's pension assets are in account-based pensions.

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"There are benefits to account-based pensions, obviously. But they do offer limited protection against longevity risk, and may not deliver high levels of income from a given superannuation balance," O'Dwyer said.

She said that was why the Government was consulting on the development of a better regulatory framework to facilitate the provision of more efficient and innovative retirement income products.

"These products are intended to help manage longevity risk, increase diversity and choice of products, provide individuals with guidance to make complex financial decisions, and, to ensure the retirement income system can withstand the change in Australia's demographics," O'Dwyer said.

The minister said that, importantly, the Government was mindful of the need for social security means testing arrangements to be complementary to the facilitation of these products.

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Here it comes, the Cooper/Challenger/FSC lobby, we'll end up with mandated annuities, all when bond yields are at their lowest ebb for 30 odd years.

I think you are correct in your prediction Phil. It appears that it will be mandated that a percentage has to be invested into an annuity with the balance placed into an account based pension. The account based pension will also have a limit on the amount that can be taken as a lump sum. However, if the government introduces this it will also be forced to further increase the SG because no sane person would make voluntary contributions to superannuation. The ISA must be rubbing their hands together with glee. It seems astonishing that a Liberal government could even contemplate introducing such freedom sapping restrictive legislation. But i guess that is why Turnbull is so hated by the right of the party.

You got that one right. On many fronts, this Fed Coalition Govt is incompetent. Bad sadly, Labor would be even worse.

Dear me cynical Phil, you've missed the point of these newfangled retirement income products; they are going to deliver in terms of longevity risk AND provide higher levels of income from a given superannuation balance.
OK I admit it; cynical me.

Ha, yes all for a moderate fee of course, and they need to mandate it anyway - how else can they get people to buy government debt in the form of bonds!!

May not deliver high income. Perhaps, but that is determined by the investment mix. It has nothing to do with the account based pension "structure". How about addressing the bigger issue. People can pull 100% of their money out, and go on the age pension the next day. So they get a tax deduction and then they also get to spend everything and then also get the pension and free hospital care. etc... Maybe it is time to open the debate on restricting the max withdrawal to 10% of the fund if the balance is more than $20,000. This would go a long way to solving some of the longevity concerns and make super do the job it was set up to do. Fund retirement living.

Compulsory annuitisation actually exists in many parts of the world and is quite successful in helping retirees fund their ongoing cost of living.

Over time I'd agree, but introducing it now and herding trillions in there when rates are so low may not be ideal or in the interests of these clients. One of the fears out there is that these massive pension funds who are forced to buy long bonds are sitting on dynamite should yields rise beyond expectations - how then do they meet their clients longevity needs.

I think the big annuity issuers would be aware of the risks. They would probably just reduce the yield by the risk factor. Say 1%pa to cover themselves. Makes the investor's returns less .....

94% of retirees are currently being rewarded for accepting longevity risk, but the government now thinks this is a bad thing (because the FSC says so?). Where's the evidence its bad? I would suggest that 94% of retirees have chosen not to give up their hard earned capital on death to "the pool", instead preferring that it is passed on to their families. Wake up Kelly O'Dwyer; this idea is a stinker and is completely contrary to an inspirational Australia.

Wow, with friends like in the adviser community who needs enemies? We have been incorporating modest allocations to annuities for our retiree clients for 12-18 months. We explain it to them in great detail and you know what? They are absolutely happy with a 5% return and quite often elect to put large sums of money into them, especially our recently retired clients that like the certainty of income that they have just forgone. As part of a well blended retirement income strategy they are a damned fine idea.

I didn't say they weren't an option, just shouldn't be mandatory. I haven't seen too many 5% annuities lately, but that might have been awhile ago. And yes, they need to be explained in great detail so the risks are clear - like, you could replicate the assets backing an annuity ( basically bonds/property), like the Centrelink improvement over time you just modelled may not in fact play out because the variables may all move, like the fact that the reason it is favourably assessed is because a portion is just your capital coming back to you, which you could design yourself reasonably, and the biggy, which is interest rate movement, locking in to long bonds at record lows. But yes, they have a role if that is the choice of the client.

there's always longevity risk if the annual contribution cap is $100K and you've got a small balance. Longevity risk soon disappears when you've got $800K plus in the fund. Maybe we should work on ways to encourage people to save and contribute to super rather than spend it all and get an age welfare payment. Restricting peoples savings into some state based dictated product on the guise of helping them ensure funds last should be stated for what it is.

What was wrong with the old Term Allocated Pension Products? All the benefits of Account Based Pensions (market linked) and also the benefits of Annuities (tie the funds up and protect against longevity risk).

Why does all this chat about Annuities assume low yield fixed income products? Why not force people to lock their money in an income stream (as super is designed to do), but allow them to invest it according to their risk appetite.

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