Last annuity provider to exit market

By the end of this year, there will be no New Zealand providers offering annuities, and one academic says it’s a serious problem.

Tuesday, October 15th 2013, 6:14AM

by Susan Edmunds

The current sole provider, Fidelity Life, is to stop offering annuities due to lack of demand and increasing regulatory pressure.

Chief executive Milton Jennings told the Future of Super conference in Auckland yesterday that the company had only given out 12 quotes over the past year – and the one annuity product sold was to a 95-year-old planning to try to outlive the company’s longevity predictions.

“There’s low demand for annuities in the New Zealand market.”

He said that was driven partly by tax disincentives on the product and partly because people did not think they needed another pension on top of NZ Super. Additional requirements from the FMA, including the need to rewrite the investment statement and prospectus for the product, as well as another disclaimer for directors to sign their name to, made annuities not worthwhile for the company, he said.

“Over the last 20 years, life insurance companies have lost millions on annuities, because when they sold them in the 1990s, they did not factor in mortality or the very low interest rates we’ve experienced.”

Investors wanted more flexibility, he said. Most providers put most of the annuity investment into long-dated bonds. “Do we want instead to invest in the New Zealand sharemarket? Or do we want to invest overseas or in the Auckland property market?”

But Auckland University’s Susan St John said the lack of annuity options was a serious problem, especially for less financially-savvy investors who wanted the stability of a guaranteed income. “We know annuities are good for us, why don’t we have them?”

She said there was nothing to help investors deal with lump sums and make them last throughout retirement. “Annuities are a brilliant solution to protect your nest egg.”

She said the social benefits of offering annuities justified Government intervention in the market. Annuities fulfilled social functions such as spreading the cost of ageing. “The Government will save costs where there’s money to pay for long-term care.”

KiwiSaver should have had an annuity aspect as a compulsory feature, she said. “It is well past time for Government action.”

Jennings agreed investors needed more protection in the decumulation process to ensure that they invested in appropriate products. While KiwiSaver had made big strides in the accumulation phase of retirement savings, little had been done for those post-retirement age, he said.

Former AXA chief executive Ralph Stewart is developing a new type of annuity product, NZ Income Guarantee, which he is hoping to bring to market in the second quarter of next year.

But he said the only thing that was similar to a traditional product was that it paid out regularly.

Investors would have their money in a balanced fund, with active asset allocation and active hedging to manage risk. Investment could be split between naked drawdown options and those with a guarantee.
He said he had been talking to annuity providers overseas to learn from their experience. “We’re almost through the feasibility stage.”

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