Every developed country is facing up to how people should manage their money in retirement. New Zealand is no exception, but is unusual in having no annuity market. If annuities came to New Zealand, would the problem be solved?
Traditional annuities promise to pay income for life, in return for a one-off payment to an insurance company. As long as the company lasts, or there is insolvency protection in place, the buyer has no longevity risk – the promised income is paid for how ever long he or she lives. Modern annuities might vary the nature of the guarantees to share some risks with the buyer, or achieve similar guarantees by nifty ways of using hedging investment and longevity insurance.
For some people, annuities will meet a need for fixed income with no fuss at a suitable price. Reasons why annuities may not be appropriate include: having too low a savings amount with which to buy a useful income stream; a preference for keeping money more flexibly invested (perhaps at lower cost); or, needs for regular income being met by a public pension like New Zealand Superannuation.
I recently worked with an experienced group from the New Zealand Society of Actuaries (NZSA) on a paper examining alternative products for obtaining income in later life. Find it here. We came to the conclusion that it is not surprising there is no annuity market here, but we expect market innovation to provide a range of new products to help the growing numbers of retirees manage their money in later life.
In fact, the market is already doing just that – KiwiSaver products mostly have a drawdown option, home equity products are available, and a new provider is close to launching a variable annuity.
Annuity markets exist in many countries, although some success is a result of tax incentives or policy settings, such as product rules or means-testing, which do not exist in New Zealand. Experience from overseas and from the specific funds with annuity-type options in New Zealand suggests that perhaps 20 to 40 per cent of older people might find annuities attractive.
Some commentators think that the New Zealand government should provide annuities, so that everyone could buy one. The NZSA paper set out the difficulties with the market providing traditional guaranteed annuities at reasonable cost, and agreed that government provision might be the only way for all New Zealanders to have access to such a product. But that doesn’t mean government provision is either likely or desirable.
Offering an annuity product is not cost-free, even for the government. If only some New Zealanders want to buy, is it fair that other taxpayers should pay? And if taxpayer dollars are going to pay for protection against longevity risk, shouldn’t the first call be on making New Zealand Superannuation as good as it can be for all New Zealanders?
People will need help to understand the risks and benefits of market innovations. More attention will need to be given to advice, because people vary in ways which are fundamental to what the appropriate product(s) is for them. We shouldn’t assume that an annuity – or any other product – is right for everyone.