High-level approach needed for annuity reforms

Government needs to implement a principles-based approach to develop the deferred lifetime annuity market, according to The Actuaries Institute, Melinda Howes, however it was a balancing act that presented a number of roadblocks.

Howes said social security laws, tax laws and superannuation laws had conflicting requirements that made it difficult to launch new products - a number of providers had launched products only to then take them off the market.

"It's all too black and white and we need to take it to the level above and have a more principles-based approach that would allow product development," said Howes.

However, it created a catch-22 situation because looser legislation was needed to promote new product development but conversations with Treasury had highlighted the possibility it could create tax loopholes for planners and product developers.

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"The concern with that is that if you have a higher level approach there might be loopholes or tax strategies that planners or product providers can find to exploit," she said.

Another challenge was in changing investors' perception of annuity products from that of an investment option to a form of insurance.

Howes said deferred lifetime annuity products could be incorporated into bulk advice platforms that led investors and super fund members through the benefits of the product.

However, people were still significantly under-estimating how long they would live in retirement.

She said research had shown people were willing to give up some of their savings now for security in the future but DLAs were not sold like that and needed to be packaged with an account-based pension during the deferral period.

It was important the industry made the public aware of the value-add DLAs could provide, she said.

"These things really have to be sold, not bought — it's that classic insurance treatment," she said.

To launch these products, however, a super fund needed capital and would probably have to partner with a life company which may be easier for bank-aligned funds.