Ongoing micro-reforms, decumulation solutions, fintech and an end to ideological wars are highlights among the ideas Senator Jane Hume has for improving Australia’s retirement system, many of which can be described as micro-reforms which may disappoint those looking for a single silver bullet big idea.

Many of the ideas shared by Senator Hume were a grounding reminder that Australia’s retirement system is a collection of many interacting parts. Some components of the system were designed decades ago. In that time many things have changed including labour markets, living standards and life expectancies. There will always be a need for ongoing system review and refinement.

For policymakers the dollar savings of a small percentage saving applied to a huge system is a very large number (1 basis point applied to $3 trillion is $300 million). Hume reminded us that politics is the art of persuasion– in this context efficiency-based projects are easier to explain and can be presented as common sense. They also carry less political risk.

The message is clear: micro-reforms will be ever-constant. Funds need to be set-up to integrate micro-reform and maintain the ability to innovate. Funds which can’t keep pace will have to merge, which also fits with policy objectives.

SG and tax reform are high risk areas

Compared with micro-reform, changes to Superannuation Guarantee and tax reform are highly sensitive areas. When applied to major reform, Hume’s assertion that “making your case successfully to the majority of people” could be more difficult because the costs and benefits of major changes affect people differently based on their personal situations.

It feels like retirement tax reform is off the table. But it seems the door is slightly ajar for changing the SG, not right now but in the future. Access to super has inadvertently become a test case. If it generates a groundswell of consumer thinking along the lines of ‘this is my money and I should be able to use it’ then it wouldn’t surprise me to see the idea explored further. It may not just be the level of SG, it could also be the rules around access.

Pension experts globally know that preservation is such a difficult sell (even when accompanied by tax subsidies), hence the staunch ideological defence from those who designed the system. Watch this space.

Principles-based decumulation solutions

I remember when the highly prescriptive version of CIPR (Comprehensive Income Product for Retirement) was proposed: I was a critic. Senator Hume suggested that the government will likely introduce a principles-based approach rather than a prescriptive approach to decumulation.

Initially I found this refreshing. But now I find myself reflecting on CIPR: was it the prescriptive approach or the prescriptions themselves which raised concerns?

A principles-based approach will make it difficult to compare solutions (currently we struggle to compare basic MySuper accumulation defaults) and we may end up with further ‘lottery effects’ (the term used by the Productivity Commission to describe the luck of being defaulted into a good or poor performing super fund). Under a principles-based model the dispersion in outcomes produced by good and bad decumulation solutions would likely be large. Whether or not it is a true lottery effect depends on whether members make informed active choices or whether they are soft-defaulted into these solutions. Perhaps they are highly engaged at that point. But how well-informed are they and will they have access to the right advice?

An unclear future for advice

The financial advice sector is “transitioning to a profession”, the Senator noted. The sector’s business model is challenged and adviser numbers have fallen significantly, while large banks and some large super funds have stepped away from comprehensive advice.

Yet Hume’s vision of a good retirement system is one where affordable advice is accessible, a vision I celebrate. What is the pathway to achieving this vision?

Fintech and single-issue advice appear core to the solution. Hume is attracted to fintech due to its scalability and potential to reduce compliance costs. However, the expansion of single-issue advice represents a giant step into the grey zone. The range of possible advice topics is infinite and I see challenges in areas such as how the scope of single-issue advice is expanded (e.g. issue-by-issue?) and limits to its application (as we run into areas where a deeper dive is required).

I suspect this will be a challenging area for ASIC to develop and oversee.

Findings of Retirement Income Review will be heavily scrutinised by all

I’m excited about what the Retirement Income Review may produce, but I wouldn’t want to be in the panel’s shoes. Their mandate is to develop a fact base, but many of the submissions I saw represented lobbying.

Six months isn’t a long time in the world of research. I hope they are brave enough to say what they don’t know, and call out the areas which require further directed research.

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