The New Zealand annuities market

Summary of "The Annuities Market in New Zealand"¹

To achieve good outcomes, retail investors need to have access to a range of appropriate investment opportunities, including annuities. The Capital Market Development Taskforce asked Susan St John of the Auckland University Business School to look at the size and development of New Zealand’s annuities market and the barriers to its growth.

In its simplest form, an annuity is an exchange of a capital sum for an income stream – often until the annuity purchaser dies. In New Zealand, there has been a shift from defined benefit superannuation plans to defined contribution plans, and this reflects an OECD-wide trend that has focussed increased international attention on the annuities market.² However, the market for purchased annuity products in New Zealand has virtually collapsed, with Fidelity Life being the only remaining provider. Thus, without a policy change, the older population "will become increasingly reliant on managing accumulated financial assets to supplement New Zealand Superannuation without the benefit of longevity insurance."³ This will become more of a problem from 2012 when the first KiwiSaver members are able to withdraw their retirement savings.

There are a number of barriers to the development of the annuities market, including taxation and regulatory issues, and a number of systemic issues that contribute to market failure in a voluntary annuities market. As a result, traditional annuities are often seen as illiquid, inflexible products that can be poor value for money. And from the provider point of view they are low profit and unattractive products to price accurately. New Zealand Superannuation is also often cited as contributing to the lack of interest in annuities, although few middle- or higher-income people are likely to perceive it as adequate insurance against longevity.

Annuities markets also remain underdeveloped in many other OECD countries. They are most evolved in Australia, Canada, Switzerland, the US and the UK.⁴ However, even in these countries annuities do not tend to be popular. For example, in the UK, where purchase is compulsory, a majority of older people surveyed said they would not hold annuities if not forced to do so, citing issues of flexibility, lack of trust in the providers, and poor value.⁵ However, as markets develop it is expected that more attractive options and flexibility will emerge.

It is clear that for an annuities market to thrive, substantial state involvement is required.⁶ However, retrospective changes to require compulsory annuitisation of KiwiSaver may not be a feasible option. Tax reform, state subsidisation, inflation and longevity underwriting, regulation or even state provision may instead be required to make annuity products more attractive. Another option is to allow the purchase of additional New Zealand Superannuation.⁷

A strong argument in favour of state involvement is that, "Annuitisation prevents the consumption of the lump-sum too early in retirement, and provides for ongoing income to meet future healthcare costs, including longterm care that may otherwise become a cost to the state."⁸

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