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Government-run annuity scheme proposed

A Government-run annuity scheme is being suggested as a way to help New Zealanders make their KiwiSaver savings last through retirement.

Tuesday, November 25th 2014, 6:00AM 11 Comments

by Susan Edmunds

Auckland University associate professor Susan St John, co-director of the Retirement Policy and Research Centre, told a forum at the university that the challenge was to design an income supplement that would give retirees of the future some security of income.

She suggested the product be called KiwiSpend, to capitalise on KiwiSaver’s branding familiarity.

For $170,000, it would give retirees an inflation-adjusted $10,000 per annum on top of the pension and would treble if they needed to enter long-term care.

St John said private annuities did not have a good history in New Zealand.

“They were a lottery. A complete lottery it depended on where you went, which firm you got your annuity from, what time you retired and what interest rates were doing,” she said.

But this time, the Government could play a role.  “Should we have a state agency to manage this product or should KiwiSaver providers be the ones who develop and manage KiwiSpend? I’m going to consider that KiwiSpend would be managed through a state initiative, one crown agency. The choice would be for a product that would give $10,000 annuity at the age of 65.”

She said the “elephant in the room” was the cost of long-term care.

While the Government subsidises some rest-home care at present, the asset test for eligibility is stringent.

St John said KiwiSpend could be designed to treble its payout from $10,000 per annum to $30,000 if someone was deemed to require long-term care. That, combined with the pension, would cover the cost.

“The fact that we haven’t done much to incentivise or sweeten the accumulation phase gives us reason to think some subsidisation of decumulation can be justified with a social argument,” she said.

St John said the important thing was that the state could carry the inflation and longevity risk of the annuities. “We can talk about longevity bonds and inflation for as long as we live.  But they are not easy products. The state is in the best situation to bear that risk from a social insurance approach.”

The annuity could be paid for at 65 with cash, such as from KiwiSaver, or with an equity share in property.

She said it was yet to be determined whether the scheme should invest the money as it came in or operate as a pay-as-you-go system.

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Comments from our readers

On 25 November 2014 at 9:40 am Pragmatic said:
I would prefer the free market to design solutions for retiring consumers rather than relying on a central government remedy... with the later not having a particularly glamorous history of getting things right
On 25 November 2014 at 4:25 pm Brent Sheather said:
Well my dear pragmatic I don’t think you would prefer the free market solution if you knew the internal rate of return (IRR), implicit in a typical annuity deal. I ran the numbers earlier this year for an annuity proposal by one of the biggest providers in Australia and that had a pre tax IRR of just 3.6% pa given various assumptions for longevity etc. That compared with 4.6% at the time from 15 year Australian governments which will probably be around in 15 years…..more than can be said for many annuity providers. Why would you bother?

Susan St John’s idea is a good one and probably the only way that retail investors will get a fair deal in the annuity space. We have seen what happened in the UK with privately priced annuities and it would be a disaster if that was allowed to occur in NZ.

Incidentally the FMA should require any provider of annuities to disclose the pre tax IRR implicit in the proposal and the long dated government bond yield for comparison and force any salesmen to highlight both of those numbers to potential purchasers.

Brent Sheather
On 25 November 2014 at 4:37 pm interested2 said:
I agree with both, and commend Susan St John for furthering the discussion about annuities. That said, the state (and therefore future generations) should not be burdened with the risks of our financial products. The state should regulate the compaines that take the risks - I know current regulation isn't great but that is being debated elsewhere.
On 25 November 2014 at 4:42 pm traveller said:
$10000 pa on $170,000 requires a return of almost 6%pa. Is this net of tax? I imagine most advisers would be very happy to promise their clients this. And it's suggested it be inflation adjusted!
And government guaranteed?
On 25 November 2014 at 7:40 pm interested2 said:
I agree with both, and commend Susan St John for furthering the discussion about annuities. That said, the state (and therefore future generations) should not be burdened with the risks of our financial products. The state should regulate the companies that take the risks - I know current regulation isn't great but that is being debated elsewhere.
On 26 November 2014 at 9:12 am R1 said:
It should also be said that the 'free market' has not done so well for 'mum and dad' either due to high fees and a lack of transparency, not to mention the fraudulent acts that lost many a large chunks, if not all of their life savings. Has this new regulatory regime done much to mitigate against these sorts of behaviours? Lots of commentary on this blog suggests it is simply kowtowing to the institutions and not dealing with the risks for 'mum and dad' that mean their returns are poor over the longer term.
On 26 November 2014 at 9:36 am alan clarke said:
Can we have reverse mortgages underwritten by govt please

Sorely needed

Perhaps run by a public - private partnership

But underwritten by govt

And funds raised by govt, since they can raise money at lower rates than anyone else

On 26 November 2014 at 3:02 pm interested2 said:
Alan's idea above also has great merit, those in the 50's & 60's and beyond have massive wealth they need help to unwind - and they should have to do so before relying on the state. That is what the conversation boils down to. But you can hardly say it is fair (and most of them would not say it is fair), for the risk of that process to lie with state. Essentially being their children (currently 20-30yrs) and then their grandchildren. Why not encourage govt to facilitate and regulate the free market solutions.
Fair point made by traveller above - the free market may not offer such amazing offers as this proposal, but there will be competition.
On 27 November 2014 at 7:43 am alan clarke said:
Not sure what interested2 is trying to say

However a govt underwritten private public partnership scheme could set up reverse mortgages as an "annuity"

no lump sums

Set up only for those people over 65 who are not too financial

It would be pretty easy to design a basic framework

If the people in the Beehive really cared about older Kiwis, they would have designed such a scheme long ago

Just another example of no one asking the people at the "coal face"
On 27 November 2014 at 6:13 pm w k said:
yeah proposed it 3 & 1/2 yrs ago, even showed how the structure works and assist home owners. furthermore, it's been a proven structure for over 40 years in another country. nikki kaye and bill english binned it.
On 28 November 2014 at 2:45 pm w k said:
i should add, i know it works because i was one of the million plus who have benefited from the scheme.

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