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Govt needs to step in to annuity market: Researcher

A New Zealand academic has renewed her call for government intervention to fix a “serious hole” in the country’s retirement income policies.

Friday, January 11th 2019, 6:00AM 6 Comments

The University of Auckland Retirement Policy Research Centre released an updated before Christmas in which it reproduced Susan St John’s address to the Financial Services Council on decumulation.

She said the country had a problem because it lacked a simple, secure income insurance option for middle-income New Zealanders.

Schemes such as KiwiSaver were shifting the risks of ageing, such as outliving your money, on to the savers, she said.

“This worrying neglect is happening in the context of rapid ageing. We are already in the sixth year of the 20-year baby-boom retirement. Once the tsunami starts turning 85 from 2030, we will see the true folly of today’s inaction.

“Older people are living longer on average but the real problem is the size of the tail of those who live longer, sometimes much longer, than the average and who need extensive and expensive long term care. As well, rapidly increasing numbers of those over 65 are suffering dementia. Many may be exposed to being exploited financially if they have only a DIY decumulation plan.”

She said Ralph Stewart’s experience setting up Lifetime had shown the time and cost involved in setting up a private annuity option. The government needed to provide more resourcing to retirement policy developments, with more attention on the overseas experience.

“And debate must be more inclusive. We rely on poor surveys and one-sided opinions too much. My own view is that the voices of women are sidelined. For many women managing money after retirement, often when they are on their own is daunting. Knowing how much they can spend each year and not run out of money is critical. New Zealand is unusual in taking a very a hands off approach to decumulation. It is also unusual in its seeming acceptance of a DiY or rule of thumb approach.”

She said the country’s bias towards property as a retirement asset would need radical reform.

The government could also use the success of KiwiSaver and its infrastructure to launch a generic annuity product, overseen by the Financial Markets Authority.

“We could call such a product Kiwi something, eg KiwiSpend and in time it could be an accepted part of the retirement incomes mix. Using the ‘opt out’ experience of KiwiSaver, members could be defaulted into an annuity option with an opt-out provision for a limited time.”

It would provide the same annuity for the same lump sum across men ad women and have low fees, as well as inflation protection.

“The annuity could be linked to average wages/ investment returns and have an add-on insurance for long-term care. For example, retirees with modest KiwiSaver accumulations and other capital on retirement would have the option to purchase annuity of $10,000-20,000 pa with a provision for augmentation once the need for long-term care established.”

St John said KiwiSaver providers would have a role with the possible use of the NZ Superannuation Fund to underpin the longevity and investment risk.

“The state would also have opportunity to make the purchase of such annuities attractive. In contrast to tax incentives for accumulation common in most OECD countries, subsidies for decumulation for a limited annuity can be well-designed with clear social benefits in sight. The costs of subsidies would be limited by a cap on the size of annuity that could be bought.

“Nothing will happen until the social and personal value of annuities to middle-income people is more widely appreciated. There is much work to do.”

Tags: annuities retirement

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Comments from our readers

On 11 January 2019 at 11:58 am Referee said:
This idea for the NZ Superannuation Fund to underpin the longevity and risks, has huge merit. Other than this, the Government should only promote it, as with KiwiSaver.
On 11 January 2019 at 5:03 pm Susanstj said:
Thanks for posting this. It would be good to think that the 2019 retirement incomes review might examine options for decumulation with an open mind. The terms of reference certainly includes the topic-
On 11 January 2019 at 5:24 pm Michael Chamberlain said:
There are many poor ideas floated and they all have one thing in common – ‘if you say them quickly enough they sound good’. There is a reason why there is not an annuity market in New Zealand. It is because they do not work for the environment of today. Any investment product that needs to last a long time needs significant flexibility to cope with the changing circumstances. Flexibility comes with a cost. Any investment product that makes promises (eg an income for life) needs to build in solvency which comes at a high cost. The person who pays that cost is the buyer of the product. A product with high costs means a product with poor returns. The one annuity product on the market today is such that most people for whom it is targeted at, would be better off putting their money in the bank. Better off in terms of higher income and better returns and still receiving an income for life.

What appears to be proposed here is to have taxpayers underwrite the investment risk and mortality risk and guarantee flexibility so to the individual it is a good deal. Philosophically I think that this is a poor idea but accept that some people think that the role of the government is to underwrite everything and tax people accordingly.

There are many ways of decumulation in the market place today that provide good outcomes and lets the individual manage the risk of living too long or not having the skills to manage money without insurance and the costs of insurance. Let’s make sure that these are promoted and understood and then let’s see if we have an actual problem and not a perceived problem.

Of course, if we are going to let males and females buy annuities for the same price, even though the risks are different, then in additional to it being a non-commercial idea, it will also disadvantage those that have lower average life expectancy creating greater inequality!
On 12 January 2019 at 3:17 pm Murray Weatherston said:
Does anyone want to have a guess as to the cost of a $10,000 p.a.annuity for the following:

1) a 65 year old male with the annuity simply nominal dollars
2) a 65 year old female with a nominal annuity
3) a 65 year old male where the annuity is indexed to inflation up to a maximum of 3% in any year
4) a 65 year old female where the annuity is inflation indexed up to 3% in any year

My guess is the cost will be of the order of $200,000 for a nominal annuity and materially more for inflation indexation.

A supplementary question then is "How many NZers at the age of 65 will have the necessary capital at retirement to buy these annuities?"
On 12 January 2019 at 4:38 pm Billy said:
The govt should get involved in setting up a reverse mortgage scheme

e.g. a retiree with a $500,000 house and no other assets

No I’m not talking about a lump sum that get spent too easily

Rather say $600 a month for 20 years

Try to find a reverse mortgage that will do that from say age 65 to 85
Not easy
If the Govt set up a scheme, a lot or retirees would have a better life

$600 pm increasing by 2% pa for inflation

at 4% interest rate over 20 years would only be a total debt of $350,000

if structured properly, it would cost the govt (aka taxpayer) nothing

the fact that this has not happened shows just how ignorant our politicians are on financial matters in retirement
On 14 January 2019 at 4:30 pm AndyB said:
There are two reasons why the banks (and the government) don't want to get involved in reverse equity mortgages.

1, What do you do when the borrower lives 'too long' and effectively has consumed their home? Kick them out?

2, How do you deal with the family when selling the family home and only 20-30% of the value is available to the estate?

But these are not insurmountable.

An entity offering reverse equity mortgages, perhaps Housing NZ, could simply accept the actuarial risk of someone living too long by simply requiring a higher return than that of a simple mortgage. An entity with a large enough portfolio of 'lives' would demonstrate a profile representing actuarial life expectancy tables.

In terms of dealing with the estate, the government could insist, like it does with those entering retirement villages, to seek legal advice. That can suggest that family members be consulted but shouldn't be a requirement. It assists retirement villages in dealing with families as they are able to highlight that mum/dad/grandma/poppa got the appropriate advice before entering the village.

The only issue I see above is the government having:

1, the wherewithal to actually put the legislation and structure in place, and

2, the government (or anyone) having the risk appetite to put together an investment vehicle as described above.

It would negate the need for an annuity market... it would simply move the life expectancy and housing market risk from the owner to the government/bank/provider who would need to be suitably compensated.

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