Notwithstanding broad recognition of the need to offer comprehensive income product for retirement (CIPR)-style post-retirement products, some funds are waiting for the “how” to come from government in the form of more detail on CIPRs. Other funds are already moving and have either implemented their own CIPRs or are planning to do so.
An important question is how to measure success and failure in the retirement phase. If a member does their bit (contributes and spends sensibly) but ends up wholly reliant on the age pension in their 80s, would it be a failure for the fund or the wider system? Not everyone would answer this in the positive, but it does focus attention on the purpose of superannuation.
As part of the decision to be in the retirement income business, a fund will need to work out its retirement income philosophy. Retirement income philosophies range from “safety first” to “probability based” approaches: broadly, a scale of strategies that differ according to the level of probability of successfully meeting spending goals throughout retirement.
Many funds think that the main problem in retirement is that their members haven’t saved enough for an adequate level of retirement income. This thinking leads them to conclude that they really don’t need to do much in retirement. After all, these funds say, “Members only have something like $200,000 to retire on, so what’s the point of building a CIPR?”
This sort of thinking could be challenged on a couple of bases. Have such funds really drilled into their member data? Super account balance data are still affected by multiple account problems. Most funds still have far more accounts than members. Also, it is backward looking. It will be 2020 soon (at least, in terms of how long it takes to change things in super). What will member balances look like then?
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These funds are also still thinking about retirement on a single-member basis, rather than asking whether a member is part of a household and what assets they have outside of super. Getting this data is not as simple as it sounds, but this is precisely where self-managed super funds (SMSFs) have had the advantage over big funds for years. SMSFs have always known everything about their members, and almost always operate on a “household” basis and take non-super assets into account. This is an unfair advantage, but is it one that large funds are just going to put up with forever?
The age pension gives us a strong price signal about households. Why else would a single retiree get roughly $22,000 a year in age pension, whereas a couple only get about $33,000? It’s pretty simple. Retirement is more economical when the costs, and risks are shared. Most people still start retirement in a couple household. Technology advances now enable big funds to get more data about a member’s circumstances and play catch up with the SMSFs in this area.
Funds need to be more focused on optimising individual outcomes for members in retirement. Getting another $25 a week for the rest of a member’s retirement through pursuing transition to retirement strategies would be an example. Optimising age pension entitlements for members, via specially tailored fund strategies, would be another.
To date, the accumulation-oriented investment culture of funds has been to see things in terms of fund-level investment returns, rather than the money-weighted experience of an individual retiree. This has been a function of incentives and technology. The problem started with Markowitz, who didn’t see modern portfolio theory as having anything to do with drawdowns or individual consumption until much later in his career.
Then there is a need for a digital strategy. Some funds are even experimenting with digital financial aggregation platforms that can gather individual member spending patterns to inform product design; safe withdrawal rates; online advice and other functionality.
These are some of the big issues confronting funds as they venture into the world of providing sustainable retirement income. Funds are faced with an ever-increasing proportion of members who are looking for a retirement pay cheque from their super fund to replace their salary for the whole of retirement. But it doesn’t stop there. The challenges posed by the cognitive decline of many of these members and their aged care needs loom on the horizon.
Jeremy Cooper is chairman, retirement income at Challenger Limited