In November 2009, the Australian Institute for Population Ageing Research and the Centre for Pensions & Superannuation joined forces to host a Longevity Roundtable.
It brought together representatives from Treasury, FaHCSIA, APRA, ASFA, and the private sector to share ideas and perspectives on this looming issue.
According to Treasurer Wayne Swan, Australia's population will increase by about 45% in the next 40 years. But over the same period, the number of over-60s will more than double, and the number of people over the age of 85 will increase more than 4 times. But even more importantly, estimates of longevity increase are very poor, and their accuracy unknown, stultifying the development of a longevity reinsurance market.
Population ageing is of course a global phenomenon, but one which is especially important in our region. Between 2000 and 2025, the proportion of the elderly in Asia will increase by more than 40%, faster than any other region. Between 2025 and 2050, the regional increase in the elderly will grow more rapidly than the overall population. By 2050, it is estimated that more than 500 million people in Asia will be more than 65 years old. This will have profound economic and social impacts: savings and investment patterns will change, the sustainability of pension schemes will be challenged, labour markets and trade patterns will be reconfigured, and health care needs will increase.
While the Roundtable discussion was intended to focus on issues relating to creating a viable annuity market, it became clear early in the discussion that there was a need to better define what retirees actually wanted when it came to income as well as longevity risk management. For example, there was need for some flexibility in cash flows to cater for lump sum needs for medical expenses. Whilst recognising this issue, the discussion focused on the issues relating to the annuity market.
It was recognised that there had been market failure in Australia with respect to the provision of a lifetime annuity market. It was also recognised that government support would be needed to create a viable market, in the short term at least. For there to be a viable annuity market, issuers needed to be able to hedge long term longevity risk, expense (inflation) risk and investment risk, and capital market vehicles to permit hedging were not available. The discussion considered the need for government to offer long term bonds, with inflation protection to provide issuers of annuities with instruments to hedge inflation and investment risk if they chose to do so, and thereby reduce capital requirements. It was also recognised that longevity risk was a difficult issue for issuers with limited capital, and that some form of government instrument to hedge longevity risk was needed.
A proposal to have government provide a deferred annuity from some arbitrary age, such as 85 was discussed. This deferred annuity would be purchased either directly by the purchaser of the annuity or by the issuer of the annuity. The transfer of the longevity risk to government would reduce capital requirements of issuers, which in turn would enhance the value of the annuity to the purchaser. It was considered government was in the best position to finance the longevity risk, and could more easily access the catastrophe insurance markets to transfer the risk to investors or reinsurers.
Issues relating to current taxation and age pension treatment of annuities were discussed, and it was considered that a review of these issues was required to create an attractive product for retirees.