Retirement

Lifetime annuities

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This paper examines Australian and overseas retirement income products and in particular immediate and deferred lifetime annuities, to determine the role that the latter two could play in meeting the Retirement Income Covenant (Covenant). T

he commencement of the Covenant, on 1 July 2022, ushered in a new era of responsibilities for superannuation trustees.

The key requirement is for trustees of superannuation funds to have a retirement income strategy which demonstrates the way that retiring members will be assisted, in the words of the Treasury 'to balance maximising their retirement income, managing risks, and have some flexible access to savings.

The family of retirement account income stream products

Before examining the use of immediate annuities and deferred annuities in retirement plans, the broader family of retirement incomestream products and their ability to generate adequate levels of retirement income and meet the challenges of longevity are considered.

Several of these have been developed overseas, especially in the USA, while others are homegrown. They fall into five groups:

• Allocated pensions-also referred to as account-based pensions.

• Variable annuities-also referred to as guaranteed pensions.

• Investments which use 'bucketing' and may also utilise mortality and withdrawal surplus.

• Market-linked lifetime annuities.

• Annuities with guaranteed income and no market-linking.

Allocated pensions

The vast majority of Australian superannuation funds provide retirement accounts which operate as allocated pensions. Apart from a relatively small number of exceptions which have previously included guaranteed fixed interest or cash investment options, these accounts carry neither a guarantee on the account value, nor on the amount of pension drawn. Similarly, there is no guarantee that the investments in the account, together with earnings, will last long enough to continue to meet pension drawings and match the actual longevity of the retiree.

Retirees are generally able to invest in a mix of investment options, with the aim of reducing volatility in both capital value and earnings and generating a steady annual return over a lengthy period. A typical allocated pension account contains a balance of asset types, one of which could be a mix of 55% defensive and 45% growth assets, where the first mix consists of cash and fixed interest options, and the second contains mainly Australian equities with some global equities.