OPINION | The government has again extended the deadline – now  July 7, 2017 – for submissions to its discussion paper on a new phase in the evolution of the superannuation system – the Comprehensive Income Products for Retirement (CIPR) framework.

While the industry has had great success in the pre-retirement phase over the last 25 years, longer life expectancies and the increasing number of members reaching retirement age are requiring funds to turn towards developing retirement products to meet the needs of an increasing portion of their members.

Pre-retirement superannuation is relatively straightforward – at least in terms of identifying the goal. Generally, members are looking to maximise savings at retirement whilst taking into account how comfortable they are with investment risk (ups and downs) along the way.

In retirement, the story changes. Different retirees require different things from their superannuation, such as paying off debt, living through retirement or leaving money to their children. These needs are likely to change during retirement. Few would be able to predict what their needs throughout all of retirement will be, even once they are in retirement.

The proposed design of CIPRs is based on three principles: a regular income, risk management and flexibility. But how should these be defined?

Income needs are relative not absolute

Due to the different and uncertain needs of retirees, flexibility is definitely important, but KPMG proposes amending the requirements to focus attention on income relative to needs and to steer away from implying CIPRs should provide regular income at a fixed level.

We are also concerned with the overall objective that CIPRs lead to a higher level of income than the status quo (account-based pension drawn down at minimum rates). Although this sounds like a desirable objective, (Who would argue with a higher level of income as a concept?) the proposed measure is too narrow. Again, it ignores the differing needs of retirees.

If a retiree is drawing down minimum amounts from an account-based pension with the view to leaving a bequest to their children, or is uncertain about the future and wants to keep a safety net, a product that increases income at the expense of the remaining balance wouldn’t be right for them.

In addition, any measure to determine that a CIPR provides a greater level of income than the status quo can be based only on a set of assumptions, which may not play out in real life – leaving the fund to explain the wrong outcome to the member.

The potential complexity of CIPRs heightens the ever-present need for super funds to take care to ensure retirees fully understand their options and potential outcomes. Education and communication are especially important here.

Three key disclosures

In particular, we recommend three key disclosure requirements for CIPRs. First, identify areas of uncertainty and convey the potential outcomes if reality differs from assumptions. Second, describe limitations or conditions for any guarantees. And third, provide transparency regarding the reasons expected income may be higher than alternative solutions.

 To help encourage trustees to dip their feet in the water, it makes sense to support them with a safe harbour that offers protection from a claim that the CIPR was not in the best interest of an individual member. However, trustees will still need to meet their best-interest obligations in relation to their overall membership or the cohort of members for whom the CIPR has been designed. KPMG has suggested the safe harbour work alongside a governance framework that defines and protects quality standards.

The establishment of a CIPR framework represents a good move for Australia and is an important step forward in focusing minds on how to fund retirement. But the devil is in the detail.

Katrina Bacon is a director superannuation advisory at KPMG.

Leave a comment