The UK government has ended compulsory annuitisation, removing the requirement forcing retirees to purchase annuities with a majority of their fund balance, said Mr Baker in the latest Trialogue.
The decision to end compulsory annuitisation followed a statement by the UK corporate regulator declaring the annuities market “disorderly”.
“With interest rates near nil, annuity returns are abysmal, effectively forcing retirees to buy bonds at the very top of the market, when much better yields are available elsewhere,” said Mr Baker.
He said other concerns in the UK annuity market include the high margins generated by insurers when retirees roll over to default providers, a lack of competition, a lack of flexibility and complexity.
Mr Baker said many of the issues in the UK annuity market surrounding “vertical integration, flipping, inertia, complex products, and limitations on competition”, are also present in Australian super.
For Australian super funds, Mr Baker said this “radical reform” in the UK will be “something of a cold shower for those assuming they need to invest heavily in guaranteed retirement income products”.
The removal of compulsory annuitisation in the UK is estimated to see a 75 to 90 per cent decline in annuity sales, according to Tria Investment Partners.
Share prices of specialist annuity providers have also halved, he said.
Mr Baker said this, however, is probably also the case with super.
“It would not be a $1.5 trillion industry without compulsion, that’s for sure,” he said.
“It doesn’t necessarily mean either is a bad product – just that most people don’t really want to save for retirement or buy longevity protection.”
The UK has looked towards platforms and asset managers or non-guaranteed personal income products and solutions in its reaction towards the policy change, according to Mr Baker.
“With UK direct contribution members now having the option to cash out, the practical issue for the product manager is this – given that my members no longer have to buy an annuity, what should the default design of my pension division look like?” said Mr Baker.
He said this is a dilemma also facing the Australian super industry.
“Retirement income has been seen as unfinished business from the Super System Review, and APRA has signalled its expectations that funds will develop solutions that address the well-known issues, including longevity and sequencing risk,” he said.
Mr Baker believes the industry both here and the UK has an opportunity to develop something new within the structures available.
“In direct contribution systems, members like being in control, and they’re used to investment choices, the ups and downs of market returns, and paying something every year for death protection,” he said.
“Those features have the potential to be repackaged to create more flexible and marketable retirement income products.”
He said this will also depend on the interaction with tax and security systems.
