Regulation, fee-for-service model blocking annuities

The findings from the Orford Initiative, an initiative funded by the Orford Foundation in collaboration with the University of Melbourne, have shown there is a demand for annuity retirement products, which provide retirees with a set income either for a fixed term or for the remainder of their life.

However, the details of the products are often so complex, consumers feel paralysed by choice.

“The role of the adviser is crucial. The majority of annuitants we spoke to purchased their annuity based on the advice of their adviser,” senior research fellow Teagan Altschwager said.

“Many had little knowledge of annuities and really relied on their adviser to introduce them to the idea, teach them about the mechanics and options, and give them the confidence to make such a large – and often irreversible – investment.”

She added many holders of annuities had a “strong emotional engagement” with their adviser, with enough trust to hand over decision making responsibility.

“This emotional engagement and reliance on the adviser meant that annuitants did not need or want, to cognitively engage on a product level on the annuity decision,” Dr Altschwager said.

However, there are two main barriers in the way of advisers recommending annuities, the research found. The first is the fee-for-service nature of the advice business model.

“Some advisers said that because annuities are a ‘set and forget’ kind of product, it actually limits the value that they can add to a client if they sign them up to an annuity,” Dr Altschwager said.

“This is problematic if advisers are turning away from annuities because it would mean a lost opportunity for the adviser, rather than being driven by consumer benefit.”

The second obstacle to recommending the products was that increasing regulations did not encourage annuity advice – perhaps due to a belief among government professionals that annuities are unpopular.

“This could help to understand why the Australian annuity market is so different to other countries,” Dr Altschwager said.

“Internationally, annuity products have far greater prominence because government policies are in place to incentivise people to take this option and protect themselves against outliving their retirement savings.

“There needs to be a greater balance between comprehensive compliance and giving advisers the freedom to provide advice in a meaningful and engaging way with clients.”

Exploring the feasibility of annuities is important to Australia’s future, as an ageing population and an increasing life expectancy put pressure on state and federal budgets, the research noted.

There are markets overseas that Australia could look to, including Switzerland, which has fixed nationwide annuity conversion rates and Singapore, which has a publicly managed Central Provident Fund, which provides life annuities and government guaranteed interest rates.

“It would be beneficial for the government to look at these examples, because retirement income products and annuities help to solve the problem of financial security in retirement, which is increasingly more important as Australia’s population ages and our life expectancy increases,” Dr Altschwager noted.