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Economics Legislation Committee
Productivity Commission

Productivity Commission


CHAIR: Thank you very much for your patience in waiting today. If you have an opening statement, for the sake of time we might ask you to table it. But if not we'll go straight to questions.

Mr Brennan : No, thank you.

Senator KETTER: If I could start off with your report into superannuation. In fact, this is my only line of questioning for you. I can put other matters on notice. We did have a discussion about this at the last round of estimates. You're on the record saying that one of the issues is that people don't draw down on their balances enough. The Productivity Commission seems to think that there may not be much we can do to ever change that behaviour. You have raised some issues about retirement income. You've talked about the fact that we focus too much on the accumulation phase and there's less focus on the retirement phase, which sees, in your view, a very high proportion of retirees going into account based pensions. You make the comment that the insight of the Murray inquiry was that some portion of an account based pension with a deferred life annuity or group self-annuitised product might be appropriate. I want to take you, firstly, to figure 4.10 of the report, which is on page 233. If you could comment on that in the context of your concerns about outcomes for those people with low superannuation balances, and especially if people with low balances have lower levels of financial literacy to be able to comprehend complex retirement income products that might be difficult to exit or change later on.

Mr Brennan : Some of the specifics of figure 4.10 I might take on notice, but I'll be able to furnish you a response or provide some additional information fairly quickly, I think—not today but hopefully by the end of the week. The broad point that you make is correct. I think you're referring back to some of my oral testimony at the last estimates committee.

Senator KETTER: Yes.

Mr Brennan : It is true, and we make the observation in the super report, that over the accumulation phase for the most part members' needs are fairly homogenous. Most people want the same thing: high returns, low fees, clarity about what insurance they've got through their superannuation et cetera. Once they hit the retirement phase, their needs are much more varied and heterogeneous depending on what other assets they've got, what their risk appetite is, their own sense of life expectancy and their own subjective view about how much money they want to have in something like an account based pension which they know is there and readily accessible in the event of unforeseen circumstance versus how much they might like to protect against what we somewhat bureaucratically call the longevity risk, which is the risk of living a long time—it's a good thing, but it's the risk, in part, of outliving your money.

The CIPRs agenda is partly an attempt to provide a broader array, given that it's something like 96 per cent, from memory, of either members or dollars in an account based pension, a fairly standard product, in the retirement phase. Prima facie that seems like a lot. It seems more likely that people's needs might be better met by some blend of a longevity product with an account based pension. That may be less true for people with very low balances. I think what figure 4.10 is trying to get at is a net present value of what aged pension entitlement you would have for different combinations of a lifetime product, be it a deferred life annuity or a self-annuitised product on the one hand and an account based pension on the other. I'm reading from this that, for the most part, it's really that the age pension means test for those with relatively high balances is a little more generous. It's relatively more generous for those who move a bit away from the account based pension and add some other element, like a deferred life annuity or a self-annuitised product. I'll probably be able to put more flesh on the bones of that. I can get someone to set out what we think the key findings of that are and get that to you on notice.

Senator KETTER: Okay. That would be appreciated. As I said earlier, there is this challenge in the super system that people do not draw down on their balances enough in the retirement phase—is that fair to say?

Mr Brennan : I think that is part of the logic of the CIPRs work. In part, if you are in the position of having all of your money in an account based pension, you have no protection against what I'm describing as longevity risk, so you are effectively self-insuring against longevity risk. Then the natural tendency will be to not spend as much, because you're worried about not only merely outliving your expenses but the large, unforeseen expense that might hit at a later point. To the extent that you can insure some of that risk, maybe it provides people with a bit of peace of mind that would allow them to spend more in retirement, more of that retirement balance, rather than dying with a very large retirement balance, not having optimised the consumption over retirement.

CHAIR: Can I clarify that? The recommendation for CIPRs came out of the Cooper review, if I remember right. That was a while back. The problem has always been that, even though they seem like a good idea, they're very expensive, particularly when long-term yields are very low. Does that remain the barrier to the development of these products?

Mr Brennan : Yes. I confess: I'm not an expert on what the barriers are, but low yields are certainly a barrier because they make the product relatively expensive for the income stream that you get. There are cultural barriers. Most people are familiar with the account based pension, and it probably does provide some peace of mind associated with having the money there. Prior to the budget prior to this one, there was no determined means test treatment. There was for life annuities, but there wasn't for a deferred life annuity or a group self-annuitised product. That is now in place. So there's a more generous tax treatment and there is now a means-test treatment, so at least the ground rules have been determined. I think that does open the way for products to come to market, but we'll see what the extent of take-up is. The other decision the government has made is to defer, on our recommendation or consistent with our recommendation, the timing of the covenant on superannuation trustees to require them to, in effect, provide the CIPR as an alternative.

Senator KETTER: The alternative to the account based approach is the annuity products. At the moment, would you agree that there is very limited competition in that space?

Mr Brennan : I would probably take that on notice. That could well be the case. There's one significant player in the market that offers those annuity products, but I would have to check. I'm not an expert on what is the level of competition in that market.

Senator KETTER: Do you have the view that, because of the nature of the product and the market, the question of limited competition may well be an issue going into the future?

Mr Brennan : The question of whether there is adequate competition?

Senator KETTER: Yes.

Mr Brennan : Quite possibly. I would, again, have to take that on notice. I may not come back with a definitive view about the level of competition, but we might have a view. Let me take that on notice.

Senator KETTER: Page 234 of your report goes to some extent to this issue. The question, Mr Brennan, is: would you agree that we need to be careful in the transition to other retirement income products?

Mr Brennan : I think that is a reasonable reflection of the recommendation that we made—that there was merit in delaying the timing of the introduction of the covenant to ensure that the policy settings were put in place carefully.

Senator KETTER: Looking at your report, is it reasonable to draw the conclusion that those on low account balances will probably continue to prefer the flexibility of an account based pension as well as the annuity pricing being non-competitive at the small scale, and those on high balances won't value annuities; they'd prefer to wear the risks themselves. That presumably leaves a cohort in the middle, where annuities might be beneficial.

Mr Brennan : That is all possible. On the situation in relation to low-balance retirees, it's fair to say—and I reflected on this last time in my testimony here—I think opinions are mixed. But there is certainly a view that, for those with relatively low retirement income balances, the sort of annuity that would be purchased for that lump sum would be a fairly small increment to what would probably be a full age pension and, therefore, it may not be particularly attractive. It may be for other reasons, but it may prove more attractive for them to keep that money in an account based pension. Beyond that, I wouldn't really venture a view about the relative attractiveness of the account based pension versus lifetime products for those who are of high or middling balances. I think it'll depend a lot on individual circumstance.

Senator KETTER: If that's the case, what do you say about the desirability of designing a system which defaults most or all people into some sort of CIPRs? Do you think that's misplaced thinking?

Mr Brennan : I would characterise our recommendation as not perhaps quite as strong as that but just to express a note of caution, that it's a complex area and it warrants careful implementation.

Senator KETTER: What do you say would be the path forward in this area?

Mr Brennan : We recommended a delay to the covenant—I'm trying to recall the date—which was subsequently taken up by the government. I'm just trying to find the appropriate recommendation. We talked about it last time, didn't we? It was recommendation 10 on page 69:

The Australian Government should reassess the benefits, costs and detailed design of the Retirement Income Covenant — including the roles of information, guidance and financial advice — and only introduce the Covenant if design imperfections can be sufficiently remediated.

We then go on to talk about a couple of the other things that the government should do. I would characterise that a little less strongly than your description. I think it's a kind of call for caution in the implementation, given the complexity and given the challenges of having an appropriate covenant for what is effectively a very broad and heterogeneous range of retirees.

Senator KETTER: In the assessment of the benefits, costs et cetera which you talked about, what are the sorts of questions or issues that would be helpful in thinking about a future system?

Mr Brennan : I think it does boil down a bit to some of the things that you're referring to. What is the scope to effectively default people into a CIPR? What's the form of the CIPR? Is there something that can operate as an appropriate default, given that, as we know, defaults tend to be quite sticky, so people may not necessarily exercise a lot of choice to depart from that product. It would be, to some extent, what is right for different individuals, given their retirement income balance. And to some extent—and I'm thinking through it—the interactions potentially with the age pension means test are also going to be a factor for most people, because they will probably have, in some instances, assets outside of superannuation which might also interact with the age pension means test in respect of a CIPR, which is different to the assets test in respect of an account based pension.

Senator KETTER: You highlight in that particular recommendation the need to consider equity impacts. Would you like to elaborate on that?

Mr Brennan : I think it's a core part of any assessment of a policy that you have to take account of the equity impacts. I think that's probably two things. That's a reflection of potentially the needs of people with lower retirement balances but it might also be a reflection of the need to ensure that you have products that are suitable and easily understood by people who don't necessarily have high levels of financial literacy.

Senator KETTER: Thank you very much.

CHAIR: If there are no further questions for the Productivity Commission, we'll let you go. Thank you very much Mr Brennan, Ms Bell and Ms Davidson for joining us today.