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NZ 'missed the boat' on decumulation

New Zealand missed its chance to implement a decumulation solution - but it is one of a number of issues that are now 'past urgent' to address, one researcher says.

Thursday, May 2nd 2019, 6:00AM 6 Comments

Susan St John, co-director of the Retirement Policy and Research Centre, spoke at last week's retirement policy forum.

She said New Zealand was had “missed the boat” because KiwiSaver was not introduced with an associated decumulation provision.

“There should have been a quid pro quo that recognised that the initial sweeteners to get into KiwiSaver justified restrictions on how the lumpsum could be used. Ideally, people should have been forced to have a proper decumulation plan that produced income in retirement that continued as long as they lived," she said.

In the past she has called for a Government-backed KiwiSpend system to help people make their KiwiSaver savings last.

“Past retirement income reviews have mentioned lack of suitable decumulation products . As well the RPRC has written on this and hosted various forums and workshops but there has been little interest from the Government.  This maybe that there is no widespread appreciation of the nature of the problem, and a misplaced faith that a pure private market will come up with answers."

The private market could not provide the extent of what was needed, she said.

“Insurers differentiate on gender because they can. Women don’t get as much annuity for a lump sum as a man. But NZ Super is gender neutral and what is needed is gender neutral annuities.

“Another problem is uncertainty around extended and expensive life and health care. People should be able to insure this. But the private market won’t do it without Government intervention.”

If the KiwiSaver default was to enter a decumulation product, people were more likely to stay there, she said.

The infrastructure was already in place, she said, with the FMA regulating and IRD acting as a clearing house for KiwiSaver.

"A limited lifetime income stream could be offered as the default for the use of lumpsums. This could have attractive features with some degree of subsidisation to ensure inflation proofing and state underpinning to provide certainty."

St John said it was not enough to talk about the issue with every retirement policy review.

There should be an ongoing taskforce set up to monitor changing demographics and the implications for policy.

"It's become past urgent to look at these issues."

 

 

Tags: annuities decumulation

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Comments from our readers

On 2 May 2019 at 10:06 am Pragmatic said:
The bigger issue is that the majority of default KiwiSaver investments are conservative - meaning that many members will fail to achieve their retirement financial expectations.

The challenge is that this is “tomorrows problem” with many/most rule makers blissfully unaware of the social implications of retirees not having enough to live off versus government not having enough to sustain relevant social services
On 2 May 2019 at 2:20 pm John Milner said:
I think you’re right Pragmatic. If we haven’t got the accumulation phase sorted yet, it seems unlikely we’re in a position to get decumulation right. If the government was to make a change and prevent full withdrawals at retirement, I would want to see a greater financial reward for locking my money up. That reward so far has come from the pockets of employers. And as far as I am aware, the UK now has a gender neutral position with annuities thanks to the EU.
On 2 May 2019 at 5:36 pm Michael Gray said:
The investment solutions are available now to address these issues, it is not too late, and this would seem as an opportunity for the industry to show real leadership across these issues and several others. The use of Target Date Funds as the investment solution seems most appropriate as the Default Fund option and would offer much better outcomes than merely increasing the equity allocation. These solutions, along with the Post Retirement investment solutions, should be based on a Goals-based investment approach as implemented overseas. I have covered this on my Blog (kiwiinvestorblog), and more specifically the use of Target Date Funds and Goal-Based investment solutions. The Uber moment for the industry will include the implementation of more tailored investment solutions for the client and the appropriate use of technology, as been advanced in other countries


On 2 May 2019 at 8:54 pm Murray Weatherston said:
If we had to have gender neutral annuities, would we also have to have gender neutral life insurance, income protection and trauma premiums.
If not what is the difference?

Also clear Susan thinks people should not have full freedom to do what they like with their Kiwisaver balances when they hit 65.

Historically her "boat has been missed."
But not necessarily permanently as there is nothing to stop some bright spark policy analyst arguing that 75% of the balance had to be used to buy an annuity, and convincing some politician to sponsor it.

Equally the advocate could be a Kiwisaver provider who wants to keep more funds under control.

There is nothing to stop such a policy being implemented in the next Budget with legislation introduced that day under urgency - i.e. no notice so nobody over 65 could withdraw in anticipation of a new policy.

That's why my general advice is to invest in a Kiwisaver product only up to the level where you have maximised the money someone else (employer of Government) will put in.

For anyone earning more than about $35,000 p.a, that's 3% employee contribution if employer is only paying the minimum.

This is not, repeat not an exhortation not to save, but rather it is advice to save your money that isn't being subsidised by anyone else in a form where you remain totally in control of your own destiny.
On 3 May 2019 at 8:33 am Vandal said:
I agree with Pragmatic above, I think most people in the investment industry recognise that KiwiSaver is failing the general population across a number of meansures. The challenge is that most investors in KiwiSaver dont understand this. Our population is blissfully unaware of the true costs of retirement, and while our government may understand this, they are not prepared to make hard decisions today to solve a future issue that wont occur while they are in power.

I think the broad education requirements forced on KiwiSaver providers are failing and will continue to do so. Hyperbolic discounting ensures that the general population is unable to plan appropriately for a future they dont understand.

Broad, population based investment structures need to be based on "The Nudge", something KiwiSaver is not. If we assume that the population wont be skilled enough to make sensible decisions about a long term investment programme, then we should also assume the same about a decumulation programme.

Which means that for the general population we need the government to develop both appropriate accumulation and decumulation options.

Given our experiences with KiwiSaver, I don't have the confidence that our government can or will do this.
On 3 May 2019 at 11:13 am all hat, no cattle said:
"Insurers differentiate on gender because they can. Women don’t get as much annuity for a lump sum as a man. "

W the actual F? That's not an example of fairness!

Your feminism is showing. Badly.
The reverse of St John's theory applies with super. Women get more than men from NZ super because of Gender Neutrality. Women live longer. They claim it for longer.

End of story.

Unlike NZ super, Annuity providers would have to compete and where investors are able to compare offers from multiple providers the competition forces providers to pay as much as they can. The data the actuaries price from is deep and rich, and a womAn gets less each week, because womEn live longer.

If you want more from an annuity I might suggest you take up smoking before buying one.

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