A former deputy chairman of the Australian Securities and Investments Commission has urged UK defined contribution schemes to better protect members by developing default retirement products combining drawdown and lifetime income.
Jeremy Cooper, who also led an influential review of superannuation in 2009 and is now chairman of retirement income at Australian provider Challenger, said DC members have become more risk-averse and receptive to annuities as the size of their pots has grown.
Australia’s pensions landscape is often seen as an indicator of the UK’s potential future, having converted to compulsory DC more than 20 years before staging of auto-enrolment began in this country.
Where demand for annuities has dropped off here, Australia’s comparatively underdeveloped insurance market is booming. Challenger’s retirement division reported a 12 per cent increase in total life sales as at the end of June this year.
If a single-employer scheme can’t really look after its retired members, you really wonder why the system continues to promote these funds
Jeremy Cooper, Challenger
The need to protect members against running out of money has also led to the Australian Treasury leading work into “comprehensive income products for retirement” and placing a duty on super trustees to develop and offer suitable CIPRs to members.
Cooper said similar pressure to care for members in their old age is likely to develop in the UK: “I look at the UK – the same thing is coming, it’s just not as urgent; it might be coming in 10 to 15 years.”
He said a combination of larger pot size, increasing longevity, and a growing realisation that cognitive decline makes complex investment management unappealing in later life, have all contributed to the rebirth of guaranteed income in the country.
“[Investing in funds] starts to get either profoundly uninteresting at that stage, or worse, simply not possible,” he added.
No excuse for not providing suitable products
Suitable products for the future of retirement in both countries should blend the existing options of drawdown, annuities, cash, and even include the newer concept of collective insurance such as the nascent collective DC concept, according to Cooper.
“Inherent in what this duty involves is making a sort of package that does a little bit of each,” he said.
Some work has been done on developing hybrid products in the UK. Blueprints have been laid out by both mastertrust Nest and consultancy Aon, with Smart Pension and Legal & General the first to start work on a specific product.
If the cost of development and provision proves too much for the UK’s many small single-employer trusts, Cooper argued that they should be pushed towards consolidation.
"If a single-employer scheme can’t really look after its retired members, you really wonder why the system continues to promote these funds that are sub-scale. I really think the UK needs to bite into this problem of small DC schemes,” he said.
Rate fall starts to reverse
Another factor rekindling interest in annuities could be rising rates. Hargreaves Lansdown found last week that annuity rates for 65-year-olds have risen 16.5 per cent from their low in September 2016.
“Research we did last year points to the fact that there is plenty of appetite for annuities, but that people won’t just buy it at any price,” said Nathan Long, senior analyst at the platform provider.
He said that those currently opting for drawdown may find annuities more attractive as they age, as rates continue to rise and because annuity pricing becomes more competitive for older pensioners.
However, Long expressed doubts about the packaged models under consideration in Australia and the UK, pointing out that chunks of annuity bought as a member ages could lock in a bad rate if their health deteriorates shortly before they are first paid.
“It’s an interesting model and I can understand why people are looking at it, I just think that the biggest motivation for people going into drawdown is that they want control over their finances,” he added.
Fiona Tait, technical director at Intelligent Pensions, doubted the demand for hybrid products.
"There are products already available which contain an element of drawdown and an annuity in one wrapper, and these will suit some individuals who prefer the simplicity of just one policy, however it will usually be more flexible and cost effective to use a combination of products to create a tailored income strategy," she said.
“This is a complicated area of financial planning and we would recommend people talk to an adviser to obtain the best product combination and rates for their circumstances.”
