Jeremy Cooper, architect of the government’s 2010 review of the superannuation system, says Treasury has its mind set on encouraging cash-hoarding retirees to spend down their savings.
About 700 Australians hit retirement age every day, consequently the country’s ageing demographics will soon start to take a toll on consumption growth and economic activity.
Mr Cooper, chairman of retirement income at annuity provider Challenger, said the government was now designing its so-called Comprehensive Income Products for Retirement in a bid to stop retirees from sitting on their nest eggs till they die.
Recent research from the Australian Institute of Superannuation Trustees found that the average annual expenditure for self-funded households was just under $40,000. For retirees on a part-age pension, the rate of annual spending was nearly identical. Retirees on the full age pension spend less than $25,000.
“It’s overly frugal retirees that the government is trying to make solutions for,” Mr Cooper said. The raft of policy work, including CIPRs and MyRetirement, was designed to “make retirees more confident to spend down their savings”.
The average 65-year-old male who spends at the minimum drawdown rate on the account-based pension will die with 31 per cent of his savings intact. Only 69 per cent of his superannuation savings would have been spent.
“It’s that 31 per cent that is a real focus for the government. In the government’s mind it hasn’t been properly consumed to give the retiree a better standard of living,” Mr Cooper said. “The position the Treasury is taking is that an account-based pension is simply not going to cut the mustard as a retirement product.”
It’s a global problem. A new analysis from the University of Michigan found the average American over the age of 60 cut spending 2.5 per cent per year, or about 20 per cent over a 10-year period.
The federal government introduced measures to free up post-retirement income products in the 2016 budget, and is finalising a consultation paper on CIPRs next month. It is expected that super funds will be mandated to provide some sort of comprehensive retirement income product by mid-2018.
Historically, super funds have focused on the accumulation phase, but soon they will be required to offer portfolios that will probably involve annuities — Challenger is the largest provider of annuities in the country.
Annuities pay a guaranteed stream of income. Over the short-term they are similar to term deposits, but lifetime annuities act as a form of longevity insurance in the event a retiree outlives their savings. “The super system is incomplete,” Mr Cooper said.
“We’ve got a great front half, but the retirement phase isn’t really finished. The government is working hard to try and make sure the super system does what it is really intended to do.”
Challenger has successfully put itself in the middle of the reforms. In 2010, it sold just 52 lifetime annuities. Last year that figure had jumped to more than 9000.
“Long-term annuities as a proportion of our book have grown from a quarter to a third in less than a year,” Challenger Life chief executive Chris Plater said.
24 May 2017