Should compulsory longevity risk management be added to all super products?
The federal government may soon force super funds to change their ways in order to provide more retirement income that lasts longer, says an academic. And he believes funds need to do more to protect and even bolster super savings.
Academic actuary and associate professor at UNSW business school, Anthony Asher, has released a paper, Developing the Retirement Income Framework, which proposes that compulsory longevity risk management be added to all superannuation products.
Mr Asher says products that provide longevity risk cover could potentially increase retirement income by as much as 15 to 30 per cent and retirees would enjoy bigger incomes without running out of money.
“It seems clear that more direct government intervention may be required – just like the introduction of the Superannuation Guarantee, MySuper and even account-based pensions,” he said.
“While not likely to be popular, there is potentially a case for compulsory partial allocation of some members’ superannuation to lifetime income stream products in retirement.”
His modelling shows such products could increase incomes by 15 to 30 per cent “by using an appropriate allocation to suitable lifetime income streams”, but he says “draconian” laws currently stop super funds from giving members the advice they need to make this happen.
Mr Asher said funds should offer longevity protection products for all or part of a member’s balance and be able to advise on the pros and cons of such a scheme before paying any benefits on retirement.
Without such products, some retirees would either leave significant bequests or run out of money in later life, he said. Such products could also aid a “particular need to protect longer living partners with lower personal balances”.
“Members and their beneficiaries are prejudiced by the absence of options to obtain suitable income stream products, and trustees should be at risk if they fail to make such an option salient,” he said.
More efficient management of longevity risk could ensure higher living standards in retirement and eliminate the stress of whether or not savings will last, he added. It would also help the superannuation system better align with its objectives.
Mr Asher said most retirees have five basic requirements from their retirement savings: a high income, an income that lasts (including for a spouse), a stable annual income, access to enough capital, and a desire to leave something behind for children and family.
He said trustees should be able to offer longevity risk-style products that meet those needs and provide low-cost financial advice to help improve the living standards of older Australians.
This could work in a similar fashion to income protection insurance and life insurance products embedded in super products.
The paper also addresses the need to plan for the third stage of retirement.
“Despite the uncertainties around a retiree’s future aged care needs at the start of retirement, a choice of retirement income products can ensure income and/or a lump sum would be available to pay for fees should the need arise. This choice would be imprecise but could go some way to preparing the retiree for meeting future aged care fees and home support,” it said.
Mr Asher admits that further work needs to be done to “find solutions which assist retirees in planning for aged care at the start of retirement, but we would suggest that the requirement to think about a retiree’s ability to meet future aged care fees should be part of the member’s retirement income objectives considered as part of the retirement covenant”.
What do you think of this idea? Would you like to know that whatever superannuation savings you have would last your lifetime, or would you rather have total control over your money? What would you say if CIPRs became compulsory?
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