Annuities on the march

The corporate defined benefit pension plan of the past is a rare beast in Australia these days. Most large employers have been winding these plans down for decades and there are not many left.

Instead, most employees have now accrued savings pots which they must manage themselves, as far as contribution, investment and withdrawal strategy goes. That task is complicated and probably too much to expect the workforce can deal with successfully.

But the defined benefit pension is not dead yet. In fact, it is showing signs of life. Annuities are in principle the same as as a defined benefit pension plan in the payment phase. The investment and mortality risk has been transferred from the individual retiree to the annuity provider.

The life business Challenger has just reported it first half results for 2022/23 and sales of retail annuities were up to $2.1b for the half, which is an 89% increase relative to the previous first half. That is a lot of annuities being sold. That could amount to around $120m annuity income pa being bought by the public in the 6 month period.

Annuities have many advantages for the retiree cohort and as yields have risen, pricing of the annuities has improved and they have become more affordable as a result. It is probably the case that yields have not yet peaked and so I think that the prospects for even more attractive pricing in the near future are looking good. This will be beneficial for many people.