Retirement income

Policy debate

Deferred lifetime annuities

Deferred lifetime annuities (DLAs) are not currently offered in Australia, although they can be purchased in other countries.

DLAs are regarded as a 'pure' form of longevity insurance, in that you only 'claim', or are paid, when you're more likely to be in need of an additional source of retirement income, having lived for longer and further depleted your superannuation and other investments.

For a given premium, a DLA investor will receive higher regular income payments after expiry of the deferral period, than would have been received immediately if they'd purchased a lifetime annuity instead. This is because they will receive fewer payments in total, and because the annuity provider can pass on some of the investment returns earned on the premium during the deferral period.

Similarly, a DLA requires a smaller investment to produce the same level of guaranteed income as an immediate lifetime annuity, because the DLA doesn't make income payments during the deferral period. In fact, the longer the deferral period, the smaller the DLA premium needs to be to produce the same level of guaranteed income.

The main reason for deferred annuities not being offered in Australia is the fact that they currently wouldn't attract the same superannuation tax concessions as other retirement investments. This is an unintended consequence of our laws as opposed to a deliberate exclusion.

There exists widespread industry and political support for the removal of impediments to deferred annuities, with these products also the subject of Treasury's Review of Retirement Income Stream Regulation.

In 2011, Challenger commissioned Deloitte Access Economics to analyse the potential impact of the introduction of deferred annuities in Australia. It found that the introduction of deferred annuities would cost the Federal Government nothing, and would in fact save money over the long term, because DLAs transfer longevity risk from the public sector to the private sector. The report found that an average take up of deferred annuities by retirees at age 65 would reduce the Federal Government's combined outlay on the Age Pension and aged care by 3% in 2050.

Further reading:

Financial system inquiry

About the FSI

The Federal Government has tasked the Financial System Inquiry (FSI) with laying out a 'blueprint' for Australia's financial system over the next decade.

Challenger welcomes the FSI's Final Report as heralding a 'retirement revolution' and supports Government's adoption of its Chapter 2 recommendations. Specifically, that some structure be introduced in the retirement phase of superannuation in the form of pre-selected retirement products for fund members which deliver stable income and longevity protection. Read the media statement.

Challenger believes that an expanding annuity market, driven by demand from an ageing Australian population and an appropriate regulatory framework, will allow life companies to make a significant contribution to addressing the challenges and priority issues identified by the Financial System Inquiry.

Read Challenger's submission 

Joint Mercer-Challenger submission to Government

In response to the Murray-led Financial System Inquiry (FSI) report, Challenger and Mercer have compiled a joint submission to Government.

The submission refers to Recommendation 11 from the FSI report which states APRA - regulated super funds be required to 'pre-select' a comprehensive income product for retirement (CIPR) to help retirees manage retirement risks.

The joint submission recommends that the development of CIPRs represent an important step forward in moving Australia's superannuation system from wealth accumulation to focus on providing retirement income.

Read the Mercer-Challenger submission

Challenger submission to Government

Challenger has submitted a consultation paper to the Government in response to the FSI's final report.

In its submission Challenger supports the need for public superannuation funds to pre-select a CIPR for their members. It proposes a CIPR should be robust, meet all retirement risks and be flexible.

Read the Challenger submission

Attachments

  • Attachment A - Patricia Pascuzzo, 'An International Comparison of Pension System Performance in Delivering Adequate Retirement Incomes'
  • Attachment B - Prof Hazel Bateman UNSW, UNSW Retirement Planning Course
  • Attachment C - Access Economics, 'Retirement Incomes Policy: Annuities Simulations Paper'
  • Attachment D - NATSEM, 'Fiscal and Household Impact of excluding complying assets from the pension asset test'
  • Attachment E - Rawlinson and Cater, 'Retirees' Longevity Risk'
  • Attachment F - Access Economics, 'Public and private pension provision in Australia'
  • Attachment G - Towers Watson, 'Comparing Retirement Income Strategies'
  • Attachment H - independenteconomics, 'Economic impacts of reforming the Financial Claims Scheme'
  • Attachment I - Ernst & Young, 'Comparability of capital requirements across different regulatory regimes'