Super changes may ignite Aussie variable annuities growth

Proposed changes to the superannuation industry in Australia are likely to help beef up the country's small insurance product market, including acting as a catalyst for the take-up of products such as variable annuities – a product that has been slow to take in the country, but that some are now tipping for explosive growth.

One of the effects of the Australian government's Henry Tax Report – which makes post-crisis recommendations to the government for reform, and the last parts of which were released in May – is to increase the compulsory payments that must be made to super schemes, expected to be from 9% to 12%, leading to a rapid increase in the overall funds in the system. Daniel Yap, head of the insurance solutions group at Nomura in Singapore, said his firm believes some of this extra money could be channeled into annuities-type products, including variable annuities via underlying fund structures. Annuities have historically been slow to grow in Australia due to the arrangement of the pensions industry, which has buyers focusing on mutual-fund types of investments.

"If you take a step back and look at Australia, purely from a product demand point of view, there's clearly an aging population, not as awkward now as Japan, but it is there, and with the crisis this problem has been accentuated, given that a lot of people's pensions decreased, typically by 30%," says Thanh Do, vice-president in Nomura's insurance solutions group in Singapore. "You have people who's attitude is waking up to the fact that maybe they do need some guarantee, but the key is how do you sell it? The distribution model is different from the rest of Asia."

Do notes, however, that changes will not come overnight: "It is difficult to switch from a mutual fund-type of attitude to something that's guaranteed, and you've got to pay for the guarantee, so how do you explain that? You're moving into explaining option pricing and things like that."

Asia ex-Japan typically sees a fair amount of insurance products, but in Australia this is muted, with Do estimating that insurance in Australia relative to pensions has perhaps only 10–15% of the assets under management (AUM). Do also notes there is limited bank issuance. Local banks have been less keen to offer variable annuities, mainly because they do not have the capabilities in terms of equity options hedging and pricing for insurance risk, and correlation between equity and interest rates. Local banks hold 80% of the Australian banking market. Do notes his expectation that the local banks, retail funds and industry funds will work with international insurance companies for their expertise, to be able to provide variable annuities.

"You can see a slight shift from a mutual-fund type of product where the investor takes all the risk – the case in Australia until now – and then you're seeing people selling term annuities. Retirement products are shifting from the investor taking all the risks to the product provider taking some risks, with guaranteed retirement products beginning to be introduced. However, this is a small section of the market," says Do, adding that examples of the guaranteed retirement products starting to emerge range from term annuities to simple GMDB or GMIB (guaranteed minimum death benefits/guaranteed minimum income benefits) variable annuity.

Other changes are also set to benefit annuities investment products. Do points to recent plans by the Australian government to reform superfund fees by making full disclosure of the fee structure compulsory. He notes also the complex nature of fees given the intricate sales model and the various level of fees, such as advisory, fund management and administration. "They've been talked about for a while now. If that comes to bear then a lot of people are going to realise they're not going to get the bang for their buck they thought they were. Everyone's happy when there's a bull market but now people are looking more closely towards their returns, because they are closer to retirement and because of the crisis. So, I think variable annuities have a role to play." Fee transparency will help products such as variable annuities, because it will become clear to consumers what they are getting, for example, how much they are paying for guarantees or funds management.