From 1st July 2012, the first KiwiSavers will be able to access their accrued retirement savings. However we don’t currently have any simple solutions for KiwiSavers that will provide them with an income stream or manage their risks during retirement: both the risk of death before the income stream runs out and the risk of living beyond the maturity date of an income stream.
We need to create a viable and efficient market in retirement income products otherwise KiwiSaver is likely to fail in its objective of enabling New Zealanders to enjoy a dignified retirement.
Traditionally, products known as annuities, provided by life insurance companies, were used to provide retirees with an income for life. In exchange for a lump sum, the provider guaranteed the retiree a regular income stream for life, regardless of how long they live.
Variations on these products include variable annuities where the annuitant receives, as income, a fixed number of units in an investment fund rather than a fixed payment; this may fluctuate based on investment returns. Or deferred annuities which allow the retiree flexibility to defer their payment to a later date and receive it at either a fixed or variable rate.
Allocated pensions are another common option; this is where an income is drawn down gradually from the retirement savings which are housed in an investment account (similar to KiwiSaver) while the remaining balance continues to attract investment returns.
While there are benefits in developing a stronger annuity market in New Zealand, Mercer acknowledges the use of annuities globally is in decline. Several factors including increasing life expectancy are making annuities a high risk / low margin product. Without government action in the area of taxation or compulsion, we are unlikely to see any further market activity.
In our paper Securing Retirement Incomes Mercer advocates the introduction of NZ Super Plus as a suitable retirement income solution. This is a proposed product allowing individuals to purchase additional NZ Super (using their KiwiSaver savings) from the government to provide an enhanced pension for life.
This offers several advantages over an annuity from a life insurance company, as the government acts as the insurer and carries the investment risk. This would help to manage costs for retirees and provide greater protection against market risk and unexpected high inflation.
Also being linked to an established program, a product such as NZ Super should be easier for investors to understand. Mercer believes that NZ Super Plus is the only practical way a viable annuity market will evolve in New Zealand.
Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @Mercer_NZ