Currently, the vast majority of pension assets are account-based pensions, which have the flexibility of withdrawals and lump sum payments but expose retirees to longevity, inflation and investment risks. By contrast, annuities provide a guaranteed regular income stream either over a fixed term or over the remainder of life, but no residual balance at death. The strong preference in the Australian market towards account-based pensions means the Australian Government, through the aged pension, bears much of the risk of retirees outliving their savings.
The report observes that in Australia, there are a number of tax, regulatory and other policy impediments to developing retirement income products to address this longevity risk. Submissions to the inquiry noted that the current SIS regulations are too inflexible to deal with product innovation and that unless the product qualifies for a tax exemption, it will be difficult to find a market for that product.
Given there is a huge incentive for the Government to encourage development of products that insure against longevity risk, it is likely many recommendations of the Financial Systems Inquiry, including those relating to tax, will have the Government’s support. The Government has already demonstrated its initial commitment by the release yesterday of the 'Review of retirement income stream regulation' discussion paper, which canvasses views on minimum payment requirements and extending tax concessions to deferred lifetime annuities and group pooling products.
Product developers should be looking forward to this next chapter in the retirement product space.