Discussion paper

Financial systems, their institutions, markets and regulatory bodies, are constantly evolving in response to the changing dynamics of technology, politics, demographics and cultural norms. These pressures are evident in Australia today where Australia’s ageing population provides a challenge to both public resources and the financial services sector in terms of meeting the needs of this generation of ‘baby boomer’ retirees who are the healthiest and wealthiest in the nation’s history. Coincident with increased demand from the older generation is a wave of digital disruption, which provides opportunities for innovation and customisation in developing retirement solutions. This paper examines four key areas of concern for older Australians: retirement income steam products; options for managing the wealth stored in the family home; and financial aspects of providing for aged care and later life health costs. In doing so the paper explores areas of public policy and regulation, which may act as a barrier or catalyst to the private sector provision of financial products and services to assist older Australians with these challenges.

The paper finds that the provision of financial services and level of innovation with respect to each of these needs varies considerably. Where retirement income steam products are concerned there has been an increased focus on post-retirement guidance and products. This should accelerate with the much-anticipated removal of regulatory barriers through the Review of Retirement Income Stream Regulation, which will open the way for products such as deferred lifetime annuities.

On the other hand, current policy settings tend to impede rather than assist the development of equity release products to aid ‘asset rich, income poor’ retirees. While older Australian store around half of their wealth in the family home, policy setting provide a significant disincentive to drawing on this equity, and as a consequence, there is an evident lack of effective equity release products. Reform in the aged care sector demonstrates that a market driven, customer-centric approach, with a strong social safety net, can incentivise the private sector to participate in the provision of aged care services, although we have yet to see much innovation in financial products to assist with this potential cost. Where health services are concerned, the sheer complexity of the system, the lack of demarcation between the provision of public and private health insurance, and community rating in health insurance hinder the delivery of financial products to assist older Australians in preparing for and managing health-associated financial risks.

Over time, unless these policy barriers are addressed, the financial system is unlikely to evolve to provide the full range of integrated income and wealth-based solutions needed to assist an increasingly self-reliant population of older Australians.

This paper is one of three in Stage 3 of the Australian Centre for Financial Studies (ACFS) program: Funding Australia’s Future.  Initiated in 2012, this program aims to better understand the changing dynamics of the financial system and its impact on role in future economic growth.

The first stage of the project, completed in 2013, analysed the interaction between suppliers of funds, financial sector participants, and end users throughout the economy. 

The four papers from Stage 2 explored these issues further and provided valuable input to the Financial System Inquiry on how well Australia’s financial sector serves the economy (especially households and business), and how effectively it links the sources and uses of finance for the benefit of Australian society. 

This third and final stage of the project, launched in January 2015, explored three specific challenges to the financial sector highlighted by the Financial System Inquiry, Tax System Review and Intergenerational Report. While quite diverse, each of the topics in stage 3 has a bearing on important issues for the future of the financial system and its role in serving the economy. 

Stage Three was supported by a group of stakeholders comprising: Accenture, the Association of Superannuation Funds of Australia, Challenger Limited, IBM, Industry Super Australia, National Australia Bank, Self managed Super Fund Association and Vanguard Investments, as well as the Treasury.

A key objective of this project is to ensure the papers bring together a diverse range of insights and opinions from all areas of the Australian financial services sector, however in accordance with the ACFS Code of Research Conduct, the final outcomes are independent.

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