Speaking at the Actuaries Institute Financial Services Forum in Sydney yesterday Towers Watson investment consultant Paul Newfield stated only 70 per cent of the total amount invested into annuity goes into future payments, with the other 30 per cent allocated to “contingency margins, capital adequacy margins, administration costs and profit margins”.
Mr Newfield said the returns for lifetime annuities are low due to the fact that annuities are required to be backed up with an annuitised bond portfolio.
He also questioned the ability of lifetime annuities to provide this guaranteed income in the future, stating that if investors or retirees who have purchased an annuity live 40 or 50 years longer than expected, “invariably every annuity pool will be insolvent”.
Responding to Towers Watson, Challenger Life appointed Tony Bofinger said a "sudden sudden leap in life expectancy by an extra 40 or 50 years would mean neither a pooled survival fund (PSF) nor an annuity provider could continue to make income payments to its retirees, but for different reasons".
"The PSF has no legal liability to make payments and the discretion to reduce them to zero, so can never be technically insolvent. A life office has a legal liability to make payments, so would become technically insolvent," said Mr Bofinger.
"Either way, the retiree would not get paid if there was an overnight cure for cancer and heart disease."
