In its submission to the Financial System Inquiry, Challenger argued the government needs to encourage the “self-provision” of retirement income by individuals by supporting the growth of pooled longevity products.
Challenger argued that pooled longevity products are less costly and a “financially efficient means of self-provision for individuals”.
“Given that retirement incomes, aged care and health are all subject to social safety nets, the alternative is that the government bears much more of these costs through means test arrangements and outlays on public hospitals as the population ages,” said the submission.
Challenger believes government provision in the area is problematic because of the “political separation that occurs between the acceptance of liabilities and the means of paying for them".
The submission argued longevity risks would instead be better managed by APRA-regulated balance sheets, where it will be “appropriately capitalised and properly managed”.
Challenger argued this can only be achieved if individuals purchase products reducing their likelihood of relying on public safety nets.
“Immediate and deferred annuities are the most obvious and important of these products,” said the submission.
“There are other product opportunities in areas of aged care and private health insurance that could see further longevity risk transferred off the government’s balance sheet.”
The submission argued, however, that in order to facilitate the development of these types of products, the current regulatory settings must be adjusted.
In terms of deferred lifetime annuities, Challenger believes the definition of a superannuation pension under the Superannuation Industry Supervision Act should be amended to include deferred lifetime annuities so they will be eligible for the benefits tax exemption for anyone over 60 years old.
The submission also said the APRA prudential standard on minimum surrender values should be amended so that non-commutable deferred lifetime annuities are not treated as investment products during the deferral period, and for non-commutable deferred lifetime annuities to be exempt from the aged care assets test during the deferral period.
Despite Challenger’s strong concerns around longevity risk they have advocated against compulsory annuitisation.
“Compulsion would be detrimental to those groups with higher mortality, including sick, poor and indigenous people to the extent that their higher mortality may not be reflected in the price of the annuities they purchase,” said the submission.
