Government-run annuity scheme proposed

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A Government-run annuity scheme is being suggested as a way to help New Zealanders make their KiwiSaver savings last through retirement.

Tuesday, November 25th 2014, 6:00AM 11 Comments

by Susan Edmunds

Auckland University associate professor Susan St John, co-director of the Retirement Policy and Research Centre, told a forum at the university that the challenge was to design an income supplement that would give retirees of the future some security of income.

She suggested the product be called KiwiSpend, to capitalise on KiwiSaver’s branding familiarity.

For $170,000, it would give retirees an inflation-adjusted $10,000 per annum on top of the pension and would treble if they needed to enter long-term care.

St John said private annuities did not have a good history in New Zealand.

“They were a lottery. A complete lottery it depended on where you went, which firm you got your annuity from, what time you retired and what interest rates were doing,” she said.

But this time, the Government could play a role.  “Should we have a state agency to manage this product or should KiwiSaver providers be the ones who develop and manage KiwiSpend? I’m going to consider that KiwiSpend would be managed through a state initiative, one crown agency. The choice would be for a product that would give $10,000 annuity at the age of 65.”

She said the “elephant in the room” was the cost of long-term care.

While the Government subsidises some rest-home care at present, the asset test for eligibility is stringent.

St John said KiwiSpend could be designed to treble its payout from $10,000 per annum to $30,000 if someone was deemed to require long-term care. That, combined with the pension, would cover the cost.

“The fact that we haven’t done much to incentivise or sweeten the accumulation phase gives us reason to think some subsidisation of decumulation can be justified with a social argument,” she said.

St John said the important thing was that the state could carry the inflation and longevity risk of the annuities. “We can talk about longevity bonds and inflation for as long as we live.  But they are not easy products. The state is in the best situation to bear that risk from a social insurance approach.”

The annuity could be paid for at 65 with cash, such as from KiwiSaver, or with an equity share in property.

She said it was yet to be determined whether the scheme should invest the money as it came in or operate as a pay-as-you-go system.

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