It’s always a shame when a good idea is attached to such a bad idea that the initial proposal gets shot to pieces.

A new report by the Grattan Institute examined the attractive concept of “annuities” whereby older Australians can get a regular payment for life in return for an upfront investment.

Unfortunately, the concept was then sabotaged by a daft idea that government-backed annuities could be made compulsory for a wealthier segment of the market.

Needless to say the idea that the government would get into the annuities business – and older Australians would be compelled to hand over a set sum to this enterprise – has been criticised in some quarters.

Still, there is something here. The majority of older Australians feel stressed by inflation and the cost of living and many are find it difficult to keep up with our constantly evolving superannuation system.

In fact the private sector, largely through the Challenger group, already offers annuities. But only an estimated 3.5 per cent of assets held in superannuation accounts come in this form – which tells you they continue to be a marginal option for retirees.

A full competitive menu of private and public annuities that were good value and were offered at a reasonable price would be a welcome addition to our retirement system. Many older Australians who do not like being constantly exposed to market risks and would be relieved to “buy” a future income through an upfront investment of their super.

Since annuities need to be “guaranteed” – and any guarantee is only as good as the organisation behind the offer – there may well be a place for a government annuity scheme.

The National Seniors Australia group said in its response to the Grattan Institute proposal that “we support the establishment of a government-backed annuity system, but it should not be compulsory”.

Historically, there has been a lot of scepticism around annuities and for good reason. Australians in the past had been caught up in substandard products.

More recently, investors have been disappointed with the level of regular income that gets created from the initial investment of substantial lump sums. To some extent this was due to conservative investments and the exceptionally low interest rates of the past decade.

Another problem has been the lack of flexibility. The standout criticism has been that if you die early in an annuity arrangement, your money goes to subsidise others in the product and your estate gets short changed.

More recently, new products allow for “death benefits” whereby residual sums can be passed to the investor’s family, but there continues to be concerns in this area.

Despite these issues, the potential demand for annuities is beyond doubt.

Third Link Investment Managers director Ashley Owen points out: “There is already a very popular government-backed annuity that the majority of Australians are keen to accept; it’s called the aged pension.”

In fact, as any actuary could tell you, the lifetime payments involved in the provision of the aged pension would cost a considerable amount for a private investor to reproduce.

For example, for an income equivalent to a couple getting a combined pension of about $34,000 a year they would need to have an estimated $400,00 actively invested in the markets.

Owen says that many investors – especially wealthier investors targeted by the Grattan Institute – are suspicious of government intervention. They admire the performance of the Future Fund, which basically creates annuity payments for public servants by investing in global markets.

“Perhaps the Future Fund could get into annuities, they’d have a lot of inquiries,” Owen says.

There will always be a price to be paid for seeking the safety of annuities. The problem just now is that the option is rarely explored.

Let’s hope the Grattan Institute didn’t crush a good concept with a silly suggestion.

This content first appeared in The Australian.

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