Compulsory annuities move would shift risk

Suggestions that the Federal Government legislate to require that superannuation fund trustees pre-select a comprehensive income product for a members' retirement would represent a fundamental shift of longevity risk from individuals to product providers, according to the Institute of Public Accountants (IPA).

The Institute has used its pre-Budget submission to point to the gravity of the structural changes which would be necessary to undertake such a move.

Discussing the proposal, the submission said, "This recommendation represents an attempt to shift a degree of longevity risk from retirees to product providers. However, moving from an account based pension to an annuity will require structural changes in the marketplace which will take time to develop".

It warned that products that offered longevity protection were much more complicated to understand and engineer and that, consequently, much more time would need to be spent on explaining product structures and implications to clients.

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"Therefore a more supportive regulatory framework is required to encourage the development and uptake of annuity products," it said.

The submission went on to say that while extensive legislation exists to regulate how much, and the manner in which Australians contribute to superannuation, limited legislation exists relating to how Australians withdraw their superannuation once they have retired or reached 65 years of age.

"Accordingly, Australians are free to do as they please with their superannuation upon meeting certain conditions of release," it said. "Australian Bureau of Statistics (ABS0 data from 2007 shows around 60 per cent of retirees take either a partial or total lump sum. Of this group only 40 per cent invested in a pension product (an annuity or life pension) or an income earning product (bank account). Around a third of all retirees used the lump sum to pay off a mortgage, while 16 per cent of males purchased a new car."

"It is the IPA's view that the use of retirement funds in this manner is not always appropriate and does little to diminish the future pension burden faced by a shrinking workforce and aging population," the submission said.

It said that while the IPA supported choice in superannuation decision-making, it also believes there needs to be suitable incentives which encourage retirees to invest in income streams such as pension and annuity products.