Speakers at a superannuation symposium on Friday were not shy giving Treasury officials a laundry list of the challenges they face in developing products to help consumers ensure they do not outlive their savings.
Their timing was near-perfect, given that Treasury is about to embark on its next round of consultations with industry as it tries to devise a framework for comprehensive retirement products.
Not that Treasury's retirement income policy division head, Jenny Wilkinson, doesn't understand the depth and breadth of the issues at hand. She noted on Friday that after months of discussions and roundtables, despite broad agreement over the aims of the exercise, there were three big questions thrown up by the superannuation sector.
The first was: should a comprehensive income retirement product, or MyRetirement, be a single, mass-customised or multiple, mass-customised products? And if it was the latter, what sort of advice would be needed and how might that be provided?
Second, who were MyRetirement products suited for and not suited for and what is an appropriate mechanism for excluding members for whom they are inappropriate?
The third question was over the likely adoption if the system was not compulsory, which is the government's preferred model?
On the third question, Olivia Mitchell of the Wharton School at the University of Pennsylvania had some useful insights. The Wharton School's professor of business economics and public policy noted that one of the big problems was consumers' general lack of understanding of insurance products and, as a result, their inability to place much value on them. Essentially consumers don't place much value on receiving peace of mind.
When it comes to insuring people against the risk of living for too long, the job of selling an annuity is arguably even harder. Annuities are complex products that most people will probably only buy once, so they can hardly be expected to be experts in the field.
If take-up is to be voluntary, it will require the government and industry to mount a huge education campaign. It will also require the discussion around longevity risk to move away from life expectancy. Retirees should not assume the need to fund themselves until they reach the average life expectancy age because half of them will live longer, noted Professor Mitchell.
"The focus on life expectancy has been misleading. It's the wrong notion. You need to look at the chance that you will live to 100 or more," said Professor Mitchell at the Annual Colloquium of Superannuation Researchers at UNSW in Sydney. In the UK, actuaries were already using 120 years as the maximum lifespan they needed to provide protection against.
Into that mix, other experts added challenges such as the lack of investment products to support annuity products, the costs associated with risk pooling, the lack of expertise on the part of super fund trustees which will inhibit their ability to design appropriate products, the need to cater for women who may outlive their husbands by many years and the treatment of bequests.
And then there is the thorny issue of operating a voluntary system.
The Warton School academic argued that the lack of understanding of annuities suggested that some compulsion was in order – probably not what the government wants to hear.
"I would be in favour of a minimum level of compulsory annuitisation," she said. That level could be sufficient to provide basic subsistence. The US academic was also in favour of deferred annuities, particularly as this would help offset the issue of cognitive decline once retirees reach their 80s.
Arguably if the retirement system is going to work, some other fundamental issues need to be solved, such as superannuants' attitudes. Rather than focusing on their total super balance, savers need to understand the level of income that balance will provide in retirement. Super funds could help out by including such projections on annual statements.
This might encourage superannuants to make further additional voluntary contributions and lay the groundwork to convince them of the need to buy a guaranteed income stream.
The Financial Review
9 July 2017