Super funds back APRA on longevity products

Australia’s major superannuation funds have backed the Australian Prudential Regulation Authority’s (APRA’s) proposals to make annuities-type products more affordable by moderating capital requirements.

The Association of Superannuation Funds of Australia has told APRA that it supports the regulator’s proposals in circumstances where the current high capital requirements on longevity products makes them more expensive than in other jurisdictions.

In a submission filed with APRA, ASFA said it also supports a proposal to make the framework more risk sensitive, thereby reducing the need for life insurers to liquidate assets during a market downturn.

It noted that APRA proposed to achieve this through a redesigned illiquidity premium in conjunction with additional risk controls on governance, reporting and assets supporting an annuity and/or longevity product portfolio.

ASFA said more attractively priced longevity products will assist in both the marketing and take-up by superannuation fund members of longevity income products in retirement.

“This applies to both annuities and innovative longevity income products,” it said “At least some innovative longevity income products are supported by life insurance company involvement”

ASFA said the proposed changes will benefit insurers through a higher illiquidity premium that will reduce capital requirements and allow liabilities to be better matched to underlying assets.

“This benefit will flow through to more attractively priced longevity products offered to consumers,” it said.

The ASFA submission pointed to a united approach amongst major stakeholders by acknowledging the contributions of the Council of Australian Life Insurers (CALI) and the Institute of Actuaries.

It said ASFA specifically:

• ASFA supports a principles-based approach which will allow for differentiated action based on experience and sophistication of the life insurer.
• ASFA supports the role of the Life Insurance Appointed Actuary in enabling insurers to determine the illiquidity premium assumptions and stress scenarios that are appropriate and tailored to the insurer’s specific annuity liabilities and assets supporting these liabilities.
• A more prescribed approach could be used for life insurers with less robust risk management processes.
• The assessment of the illiquidity premium not be restricted to Australian assets only.