With compulsory superannuation starting only 25 years ago, the relative immaturity of the system has led to a focus on accumulation. As the former cottage industry has swollen into a $2.1 trillion powerhouse, that focus is transferring to the deaccumulation stage, as Australia undergoes a demographic shift to an aging population.
A range of industry, government, consumer and academic experts at the Committee for Sustainable Retirement Incomes’ (CSRI) Leadership Forum discussed the five separate components that need to be considered if retirement solutions are to be adequately developed.
Link Advice chief executive Ross Bowden gave an indication of the scale of the issue. Link Group administers approximately 10 million accounts for industry super funds in Australia – yet only 154,000 of these are account-based pensions.
The pressing question for super funds, and all those concerned with adequacy in retirement, is how to build financial products that will effectively meet the diverse needs of retirees.
Following a recommendation of the 2014 Financial System Inquiry, led by David Murray, the government has said it will make it a requirement for all default super funds to offer retiring members comprehensive income products for retirement (CIPR). These clumsily named CIPRs will need to integrate with the three-pillar structure of the retirement income system (the government funded age pension, compulsory saving through the superannuation guarantee, and voluntary superannuation saving), as well as the wider retirement ecosystem, which includes housing, aged and health care, and financial advice.
The CSRI suggested three design principles were needed in every CIPR. Firstly, longevity risk protection, probably involving some form of mortality pooling. Secondly, CIPRs would need to provide regular and sustainable income streams. Thirdly, there would need to be the ability to account for cognitive impairment at older age, so that income can be provided with little to no intervention.
However, for the development of products to really proceed, the Department of Social Security needs to clarify how the income stream would impact the means test and age pension. To help resolve this, assistant treasurer Kelly O’Dwyer told the gathering the government would likely release a consultation paper outlining CIPR requirements in more detail by the end of the year.
StatePlus chief executive Graeme Arnott warned that as CIPRs begin to hit the market, many people will choose the “default” pre-selected for them, and as such, it was critical to get the design right.
The government-funded age pension is the social safety net of Australia’s retirement income system and how CIPRs interrelate with it will be critical to their success.
As previously reported in Investment Magazine, HESTA thinks about the age pension as almost serving as a bond in members’ finances, because it gives a low but reliable income stream.
Annuities maker Challenger, which is has taken a lead role in developing CIPRs with a number of super funds, talks about the age pension as a base in its income layering strategy.
The government has promised to change the tax rules to reduce regulatory restrictions to the development of a market in deferred annuities.
However, in its policy paper A holistic view of the retirement income system – overview and summary the CSRI states “the new assets test to come into effect from January 2017 effectively has too high a taper that discriminates against annuities, and is likely to encourage behaviour aimed at avoidance”.
It recommends consideration should be given to introducing a merged means test that would encourage retirees to draw down their assets, and would more broadly support the adoption of CIPRs and annuities.
Housing – the unofficial fourth pillar
There is broad agreement among stakeholders that housing needs to be considered as the “fourth pillar” in the retirement income system, as home ownership was a significant determinant of adequacy.
One of the challenges was how to structure products for those who were asset rich (homeowners) but income poor. The ability to access this equity could conceivably lead to more security and the ability to cover other costs, such as aged care.
One of the delegates at the Leadership Forum pointed out that current legislation makes it very difficult for homeowners to free the equity in their house, through downsizing for example, as if they chose to do so they would be penalised under means testing and stamp duty.
As such, governments needed to examine policies to both remove market impediments and protect retirees from financial abuse by those who would seek to game the system for their own commercial interest.
In addition, as the 15 per cent of retirees who were not homeowners frequently faced significant financial hardship because of rent, it was important to look at what assistance could be provided to them.
Aged and health care
Aged care has emerged as a major priority in retirement planning, according to CSRI chairman Dr Michael Keating.
“We really do need to think and design [a] retirement income system around the demands that will be made on people for aged care,” Keating said. Keating was previously involved in establishing superannuation reforms during the Paul Keating government.
With an estimated 50 per cent of Baby Boomers needing residential aged care at some point in their later years, there will be increased pressure on the budget as the government provides financial support in this area. As a result, there is a policy aim to shift more of the costs towards consumers.
With current legislation, retirees are able to pay for aged care costs either from their income or assets (the home being the most common), however care providers have the power to influence this in their own commercial interests.
“As a result, there needs to be better coordination of aged care policies with retirement income policies, most notably the treatment of housing in the means test and aged care,” CSRI chief executive Patricia Pascuzzo said.
Financial advice and communication
There is no element of compulsion in CIPRs, according to Jenny Wilkinson, head of the treasury’s retirement income policy division.
“It is very important that everybody understands that nobody will be defaulted into a CIPR, and an active choice will need to be made by the member to take it up,” Wilkinson said.
As a result, super funds would need to offer guidance to members to assist them in making an appropriate choice, which would likely require the rules for scaled and intra-fund advice to be modified.
With a suite of products needed to service the different needs of members, it will also be necessary to allow consumer-friendly product comparison. CIPRs fail at the first hurdle with an acronym that is only mildly better than what would have come from shortening “retirement income products”.
The forum put forward a new acronym that would easily lend itself to communication and marketing with delegates responding favourably to “Sustainable Lifetime Income Products for People in Retirement” or SLIPPeRs.
This article first appeared in the November print edition of Investment Magazine. To subscribe and have the magazine delivered CLICK HERE. To sign-up for our free regular email newsletters CLICK HERE.