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Challenger sitting pretty in annuities space

The Association of Superannuation Funds of Australia (ASFA) has released a research paper titled: “Changes to regulatory settings for financial products dealing with longevity.” The focus of the paper is what the ASFA perceives to be current impediments to the annuity industry in Australia and includes seven suggested steps the government should take to improve annuity offerings for superannuates.

The benefit of an annuity as the ASFA puts it is that it can “ensure all Australians have adequate income to fund the lifestyle they want in all of their post-work years.” This is achieved by annuities having a structure which creates a defined income stream throughout retirement right up until a person’s death. In contrast, the problem faced by most superannuates is that they have no guarantee that their savings will provide enough income to fund their entire retirement.

The firm leading the charge here in Australia and hence best positioned to benefit from any regulatory changes that encourage more retirees to consider annuity products is Challenger (ASX: CGF). Challenger is the largest provider of annuities in Australia and has seen its Life division’s assets under management increase by 13% over the past financial year to $10.2 billion.

AMP’s (ASX: AMP) strong position in life insurance, income protection and wealth management also positions it as a leading contender in the annuity products space. However it would not take long for other large financial service providers, particularly Westpac (ASX: WBC) and Commonwealth (ASX: CBA), to increase their presence in the annuities market as well, should regulatory changes warrant.

Foolish takeaway

The beauty of annuities is that they deal with the issue of longevity. The downside of the current defined contributions scheme in Australia is that superannuates have no idea how long they need to make their super last. This effectively forces retirees to over-save and underspend or risk finding themselves short of funds in the later stages of their life.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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