In its response to the FSI interim report, global research house Standard & Poor’s said lifetime annuities possess valuable product features that can assist retirees meet their risk management needs, especially for longevity risk.
“It is well-recognised that Australia's retirement income system is not well geared toward protecting retirees against longevity risk,” the submission said.
“That's because the lifetime annuities market is very small, and because retirees now often have to make investment choices without necessarily being well informed about the options, nor do they generally receive sufficient financial advice on longevity risk management.”
Standard & Poor’s submission said other annuity products, such as immediate or term-certain annuities and allocated annuities have had stronger growth but these do not protect against longevity risk given they may not last for the remaining life of a retiree.
The submission also said the small size of Australia’s lifetime annuities market is a “legacy” of a tax and regulatory regime, and of market forces that have constrained supply and demand.
“These include a shortage of high-quality and affordable advice in relation to longevity risk management, unfavourable consumer biases and perceptions on annuity products and features, and a lack of incentives for life insurers to underwrite longer-term annuities,” the submission said.
“Among the key factors restraining demand is the widespread availability of the age pension as a safety net,” it said.
“However, from the Australian government's perspective, greater take-up of annuities with longevity risk insurance could help reduce its growing and significant funding requirement for age pensions.”
