As industry responses to Treasury’s consultation paper on Comprehensive Income Products for Retirement trickle in, a clear objection is emerging to making the products a mandatory offering for all superannuation funds.
Making it optional for super funds to develop and offer the new breed of pension-phase products contradicts the recommendation of the 2014 Financial System Inquiry, led by David Murray, which proposed the new framework for
the drawdown phase of superannuation.
“CIPRs should be offered as a pre-selected option to all members of Australian Prudential Regulation Authority-regulated funds – not only to MySuper members,” the Murray Inquiry found.
It was that recommendation that prompted the federal government’s December 2016 discussion paper on Comprehensive Income Products for Retirement (CIPRs). In it, the government also proposes re-badging CIPRs with the snappier title ‘MyRetirement’ products. The deadline for submissions in response to the paper is July 7, 2017.
However , as Treasury confirmed to Investment Magazine, at this stage there are no plans to make it compulsory for trustees to offer a CIPR.
The proposal is that MyRetirement products be developed as an alternative option to a lump-sum payout or account-based pension for retiring super fund members. The government has proposed MyRetirement products be manufactured with three main design features in mind: income, risk management and flexibility.
It was Murray’s intention that CIPRs, or MyRetirement products as they will henceforth be known, should include an annuity or “annuity-like” component to combat longevity risk. This element of the regime is also open for feedback.
But before getting into the stoush over what should or shouldn’t be mandatory in a MyRetirement product, it is worth stepping back and looking at the arguments for and against making them a requirement for all funds, both MySuper and Choice providers, to offer them. Note, it was never Murray’s intent to force retirees to select them.
The Actuaries Institute has made a submission to government arguing against making it compulsory, at this stage, for all funds to develop MyRetirement products.
“We do not believe it should be compulsory to offer any particular type of retirement income product until we have had a chance to observe how this development progresses,” the institute’s statement reads.
KPMG made a similar argument in its submission. When asked whether MyRetirement products should be compulsory, KPMG director Katrina Bacon replied, “No. I think that comes down to a fund choice.” Bacon said some funds would remain focused on the accumulation phase.
Founder and director of the Committee for Sustainable Retirement Incomes Patricia Pascuzzo also argues against forcing all funds to offer MyRetirement products to retiring members.
“Before jumping in and making CIPRs compulsory, I suggest that the government has other mechanisms at its disposal to encourage trustees to offer them. The important thing is to ensure that trustees are planning strategically for how they are going to meet the retirement benefit needs of their members and acting accordingly,” Pascuzzo says.
Calls for soft launch
One reason for the financial services industry’s reluctance to embrace the compulsory offering of MyRetirement products is the argument that it would be less risky to develop the market and introduce the regime gradually.
“It will take some time for products to come out that will build up scale. We don’t want to be left with a whole lot
of subscale products [that] then technically fail because they haven’t got sufficient scale,” says Catherine Nance, a partner at PwC and a member of the Actuaries Institute’s retirement strategy group.
A Mercer survey of fund executives (The Mercer Super Fund Executive Report) indicates many funds will simply wait to see how the market unfolds. In what the survey calls “a glaring omission” in super funds’ strategies for how they plan to service their retiring member base, 55 per cent of funds reported that they had no clear strategy for managing post-retirement members.
“Unfortunately, meeting the needs of the post-retirement market looks to have been put into the ‘too hard basket’,” the Mercer report found.
Pascuzzo says the industry can’t be expected to resolve all the complex issues associated with developing a CIPR framework overnight. However, she also acknowledges the danger of taking a wait-and-see approach.
“If too many funds decide to do nothing, the scale and diversification needed to make pooled longevity products work will not be achieved,” she says.
Myriad other challenges
There are several other obstacles to the introduction of MyRetirement products that go some way towards explaining the reluctance within the industry to mandate their offering.
From July 1, 2017, it will be legal to sell and purchase deferred lifetime annuities, which are expected to form a key component of many MyRetirement solutions. However, there are calls for the government to clarify how these deferred lifetime annuities, and other new types of pooled risk products, will be treated under the age pension eligibility assets test.
This will probably be a key to their popularity, given about 70 per cent of retirees currently receive either a full or part age pension at some point.
“No one’s going to buy a product – no product issuer is going to put a product onto the market – without understanding…how it will affect the age pension,” Nance says.
Another concern, which goes to the heart of the need for MyRetirement products, is that some are challenging the Murray Inquiry’s assertion that incomes from them could be 15 per cent to 30 per cent higher than those achieved from drawing down the minimum amount from an account-based pension.
KPMG’s submission states the Murray Inquiry’s assumptions about what CIPRs could deliver “may not play out in practice, meaning achieving higher income may not be realised for some retirees”. To address this, it recommends that disclosure requirements “identify areas of uncertainty and convey the potential implication if reality differs from assumptions”.
Given the risk of products making false promises, a key message of KPMG’s submission is that it welcomes “a safe-harbour design feature that supports trustees in considering the best interests of a cohort of members”.
Management of consumer expectations is another obstacle to the smooth and speedy introduction of MyRetirement products.
“The historic experience is various funds have tried to introduce this type of product that has some kind of longevity protection in it, but it’s been hard to communicate and, therefore, the take-up’s been low,” Bacon says.
PwC’s Nance agrees. “It’s very hard to know what the promise is, I think the lesson that’s been learnt globally is that you have to keep it simple, you have to be clear,” she says.
Urgency for reform
Real though all these obstacles may be, the industry should be subject to serious questioning if it insists on dragging its feet over the implementation of a framework.
A flood of Baby Boomers are now finishing their working lives with sizeable super balances. This demographic shift creates a growing urgency to ensure people’s super savings translate into adequate income during their retirement years. That’s important for individuals but also necessary to ensure that the costly tax breaks afforded to superannuation savings allow the system to achieve what it was set up to do. That is, to shift much of the burden of supporting retirees from taxpayers to individuals.
This article first appeared in the July 2017 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.