APRA puts annuity capital settings under the microscope

Last week, the Australian Prudential Regulation Authority (APRA) announced a consultation related to its findings on the prudential framework for annuities.

“APRA is committed to removing unnecessary obstacles to the development of more innovative and competitively priced longevity products,” it said.

“This is consistent with the government’s objective of expanding options for retirees to manage longevity risk.”

According to APRA, it identified two main issues with its current framework.

Namely, the capital requirements are “relatively high” in comparison with some other jurisdictions, which it said is “making annuities more expensive than they might otherwise be”.

It also found the longevity product framework to be “insufficiently risk sensitive”, which could “exacerbate procyclicality by requiring life insurers to liquidate assets during a market downturn”.

The proposals in the paper aim to address these key issues through a redesigned illiquidity premium, in conjunction with additional risk controls on governance, reporting, and assets supporting an annuity portfolio.

“The proposals aim to strike an appropriate balance between maintaining adequate capital to mitigate risk to policyholders and rewarding sound risk management practices,” APRA said.

The regulator said it is looking for feedback on the proposed changes, including replacing the current ‘one-size-fits-all’ approach with a new approach that can “reflect the riskiness of different asset portfolios”.

“APRA also seeks feedback on associated risk controls that would be appropriate and practically achievable for industry to implement,” it said.

“While APRA does not expect the proposals to transform the market for annuities in Australia, they should facilitate more competitive pricing without unduly increasing risks for policyholders.

“The proposed changes address the call from industry to better align APRA’s requirements with other jurisdictions and to establish a more favourable environment for the potential growth of annuity products.”

Life insurers were quick to support the paper, with TAL Group chief executive and managing director Fiona Macgregor saying it is an “important step to expand access to retirement income products while maintaining vital safeguards”.

“Evolving Australia’s capital settings for retirement income solutions, alongside advice reform and product innovation, will help more Australians retire with confidence,” Macgregor said.

“Importantly, it will help ensure Australia remains attractive to the capital needed to support broad access to affordable retirement income products.”

Similarly, Challenger CEO Nick Hamilton said it was an important regulatory reform that could support greater take-up of lifetime income products.

“Challenger welcomes progress on this important initiative that will improve annuity offerings for all Australians and support guaranteed income being an integral part of the retirement planning process,” Hamilton said.

“The proposals will also improve the financial resilience of life insurers and establish a more favourable environment to grow the annuity market and provide reliable, guaranteed income streams in retirement.”

Submissions in response to the paper are open until 25 July 2025.