(Pictured: James Moore)
Fund manager distribution models and the introduction of FOFA may present impediments to the introduction of the latest US-style retirement solutions to Australia, as well as uncertainty around future taxation of annuities, according to a paper by PIMCO.
The paper, ‘Retirement Income Options: The Next Step for Australia’, looks at the worldwide challenge of ageing populations from an Australian perspective and the various product and strategy options. Writing the report was also an international affair. The authors are James Moore, the US-based co-head of investment solutions and pension strategist, Sara Higgins, a Sydney-based vice president and account manager, and Tony Hillyard, a New Zealand-based new business consultant.
The paper observes that many of the products developed overseas, particularly those offering longevity insurance, such as annuities, are not available in Australia. However, the combination of the ageing population and increased super savings means the amount of money held by people at or close to retirement will grow sharply.
The Australian Government is currently reviewing the tax treatment of deferred annuities and many providers, PIMCO says, are waiting for new regulation before developing products in this space.
With variable annuities, the paper argues that the government age pension acts as a form of longevity insurance and therefore an impediment to development of that market. Variable annuity assets in the US represent 9 per cent of the retirement market, compared with just 0.4 per cent of the pension market in Australia.
The paper also questions whether independent advisors in Australia will find selling annuities attractive.
“Under FOFA, the financial advice business will move toward an annual fee model, with client sign-off, and away from commissions. So, advisors may have less incentive going forward to lock their clients’ money into products with fixed returns, like annuities.”
The paper’s authors say that potential providers of retirement products may be waiting for a signal from the Government to establish new legislation and regulations before investing in product development. Providers may also be uncertain about potential demand given the history of superannuation where most people take a lump sum and then seek financial advise through a retail advisor.
“Longer term, however, growing retiree assets in Australia are likely to spur greater focus from product issuers and from regulators intent on providing greater income certainty for retirees…
“We think demand already exists for some of the longevity products now available in the US. For the moment, this demand is likely to be highly segmented, depending on the size of the retirement account. For those with low balances, longevity protection will continue to be accessed through the age pension. For the growing segment of retirees with $250,000-$750,000 in assets, a product with some genuine longevity protection is likely to be optimal. Those retiring with higher balances will likely follow an asset allocation approach with perhaps a partial allocation to an annuity-type product.”