What challenges would the federal government face if it became a manufacturer and issuer of lifetime annuities? This is the question considered by Towers Watson in research it recently completed for the Investment and Financial Services Association.
Research co-author and Towers Watson senior consultant Nick Callil said the Henry tax review raised the issue of a compulsory annuities system and whether or not it would be suitable for the government to enter the market as a retail provider of annuities.
This issue was further considered in the review panel's commissioned report by Michael Sherris and John Evans on behalf of UNSW Global.
"One of the reasons that we wrote our report is that we wanted to unravel those issues because while they're related, they're actually separate issues," Callil said.
"The Sherris report implies that there would be better rates on offer because of the cheaper cost of capital to the government. But we think that it is by no means clear cut . there are effects and advantages to the government taking part in that marketplace."
While the Towers Watson report does not comment on the policy of compulsion itself, it did find that in a "compulsory, unisex lifetime annuity system where the Commonwealth provides age-based, unisex annuities and where the public sector and the private sector are competing, there is a significant risk that the public sector will be 'gamed' by the private sector".
According to the report, that meant the private sector would "cherry-pick" those retirees who represented better risks and as a result the public sector would be left with a higher concentration of "bad" risks than the population as a whole.
Further, it presents a public policy challenge.
"By compelling all retirees of a certain age to purchase a uniform-priced annuity, those retirees who are of poorer health would subsidise healthier retirees of the same age," the report said.
Challenger Life chief executive Richard Howes agreed the government provision of annuities was not the answer to longevity risk.
"[This is the case] particularly when there is so much innovation occurring in the private sector regarding new-generation lifetime annuity products," Howes said.
A report commissioned by Challenger found that government annuity provision could contribute to downgrades from ratings agencies, causing a significant increase in the cost of Australia's sovereign debt.
"The history of Australian governments being directly involved in the financial services sector has not been stellar . rating analysts could be expected to view negatively any move by the government sector to enter into a new financial services business providing annuity products to retirees," the Challenger report said.
The Towers Watson report suggested that alternatively the government could consider facilitating private sector efforts to provide longevity protection solutions to retirees.
"Those are things like having a longevity index on the back of which private organisations can write longevity-based products or the government issuing long-dated government bonds," Callil said.
While this issue is definitely a complex one, he said the most important thing to take away from the report was that the Henry panel and the government should be made aware of the potential issues.
"If the government is going to take action based on the advice of the Sherris report, we think there is another set of arguments to consider before the government goes down the line that we think is being promoted by Sherris," he said.
