1. Lifetime Annuities
A public/private model for sustainable real lifetime additions to retirement income from superannuation assets.
Disclaimer: Figures show are “ball-park” illustrations and no liability is accepted by Financial Demographics for any use of this material.
Bruce Gregor FIAA AIA
6 December 2018
Financial Demographics

2. Purpose of this Presentation
This presentation outlines a Proposed Research Project which
would be conducted jointly by Financial Demographics
and the Australian School of Business at the University
of New South Wales. The purpose of the presentation is to seek sponsorship for this research.
The presentation illustrates a working model of a system proposed
by Financial Demographics for provision of lifetime annuities
from part of Australian superannuation assets.
Any figures used are purely “ball-park” indicators. The purpose
of the figures is so that people unfamiliar with annuities and reinsurance can readily picture the system to be studied.
The research project will provide actual numbers and conclusions
from the latest academic research on mortality pooling and from
population projections for Australia and superannuation assets.
6 December 2018

3. Essential Elements of the Model
“Not for profit” annuity terms
Community rating of life expectancy
Maintain annuity assets in superfunds
Government covers extreme longevity risk
Government oversight of risk pooling
Standardisation of annuity terms
Compulsory 20% in deferred annuity
Nil net long term cost to government
Investment Guidelines for annuity pools
6 December 2018

4. “Not-for-Profit”
Insurance company rates for annuities have been shown to include 15-25% loading for selection, longevity risk and profit margin
NFP Super system has substantial scale efficiency which is under-utilised
Insurance company annuity rates are hard to sell compared to high Aust. cash rates
Most people have modest super balances which need to be stretched as far as possible by working on cost margins and efficiency
6 December 2018

5. “Community Rating”
Selection in voluntary insurance makes annuities more expensive
Assumes only long-livers are buying
‘Catch 22’ of current annuity market
Rates are not attractive so no one buys
If everyone had to buy an annuity, rates would be more attractive
Deferred annuities are very attractive if community rating applies and NFP
6 December 2018

6. Illustration – Annuity $pa / $100k
Males
$pa
Females
“Select” voluntary insured Immediate Annuity from age 65
$5,000
$4,500
NFP community rated Immediate Annuity from age 65
$6,250
$5,700
NFP community rated Deferred
Annuity from age 75
$13,850
$11,600
Main Assumptions: Government Actuary’s Australian Life Table
with 25 year average longevity improvement. Investment return 5.5%pa,
inflation 2.5%pa. “Select” has 20% margin. Purchase price refunded on death (no interest). All annuity figures are current dollars which are assumed to be indexed for CPI inflation after purchase date.
6 December 2018

7. Maintain assets in current funds
A strong fund regulatory structure exits including provision for segregated pension assets pools
Large funds can leverage current operational efficiency
If full annuitisation existed, post retirement assets would be about 25% of super assets within 20 years
Pooling annuitant mortality in current funds avoids transfer of assets to insurers and saves transaction/intermediation costs (assuming longevity risk can be absorbed by government)
6 December 2018

8. Government covers extreme longevity
Govt. covers this for public servants
Govt. covers this for age pension
Insurers “over-reserve” for longevity risk due to unpredicted future trends and no natural hedge
Nil net cost to government if amount of extreme longevity reserve is balanced by less age pension outgo (if modest income test for deferred annuities) or levy on annuity pools– see Illustration.
6 December 2018

9. Govt. Oversight of risk pooling
Govt. oversight increases confidence of fund members in annuity rates
Pooling reduces unproductive and costly “competitive” activity
Pooling gives more stable annuity rates averaging over more lives (subject to minimum no. of lives for participant pools)
Government actuary already maintains Life Tables
Future Fund money to incubate a reinsurance co-op company
6 December 2018

10. Illustration
Required Reinsurance reserve for greater than projected longevity risk (which is in annuity terms)
Extreme risk level illustration is 2 x Govt. Actuary 25yr projection of mortality improvement
Equivalent Age Pension Income Test clawback (normal is 50%) to apply to Deferred Annuities:
2.5% if all have 100% age pension
5% if they average 50% age pension due to other income and assets
Alternative is to collect a levy of 1.5%pa of assets from deferred annuity pools
Reinsurance refund to DA pools if Australian population longevity exceeds projected level in annuity terms
Reinsurance company supervises the annual mortality equalisation transfers between DA pools
6 December 2018

11. Standardised Annuity terms
Lifetime annuities are most efficient when early deaths release reserves to balance long-livers annuity payments (“communal assets”)
Complex optional annuity terms offer “all things to all people” and reduce the above efficiency / reduce annuity
Pooling works best if annuitant risks are as similar as possible in each fund participating in the pool and the aggregate of all pools equates close to population average mortality
6 December 2018

12. Compulsory 20% Deferred Annuity
Many Australian’s have little experience with self management of income production from assets during their working life
Financial Planners are not incentivised to spread super money over life expectancy
Advance provision of deferred annuity covers the most fragile stage of life
Population ageing will bring old age voter pressure for age pension rises which could have been funded by super assets
6 December 2018

13. How the Compulsory DA works
Members
Are educated
On DA system
Members commit
20% of balance
to a DA pool
Deferred
Annuity
Starts 55 60 65 70 75
Annuity Calculations
At age 60 the deferred annuity payment is advised
This payment is calculated from government actuary tables
Members are advised a new deferred annuity each year indexed for CPI
At age 75 the deferred annuity has a further one-off increase if the member’s selected annuity pool earned more on investment than the real return assumed in the original calculation of standard annuity rates
After 75 annuity stays fixed for duration of life except for CPI indexation
6 December 2018

14. Nil net cost to Government
Future Fund invests in new reinsurance pooling company; on-sell equity to NFP funds when mature – say 10yrs+
Modest income test on deferred annuities or levy on annuity pool to offset extreme longevity risk reserve for deferred annuities
Super funds responsible for annuity admin and keeping track of deaths
Reinsurance claims paid for extreme longevity are balanced by premiums paid
FF return + Cost of established and admin of Reinsurance company covered by sale price
6 December 2018

15. Investment Guidelines for pools
30% Maximum in listed equity exposure
All offshore assets 100% currency hedged
Annual cash income from investments to exceed a set scale % of annuity outgo
Inflation linked bonds encouraged
Requirement for participating funds to absorb assets and liabilities of any pools which fall below annuity payment sustainability rules
Governments required to give priority to inflation linked bonds(ILB) when issuing new debt until ILB’s on issue > 50% of deferred annuity pools’ assets
6 December 2018

16. For more information on this Proposal, please contact:
Bruce Gregor at
6 December 2018