With the Retirement Income Covenant (RIC) legislated and the Quality of Advice Review looming, the question arises as to the role of superannuation fund trustees beyond just developing retirement strategies for their members.
An emerging flash point is how trustees might assist members to find a suitable retirement strategy in the absence of them taking comprehensive financial advice.
Some retiring members will be unwilling to pay for advice, yet reluctant or perhaps incapable of engaging with financial decisions in retirement. The latter could be someone who would get confused when presented with a financial plan or a ranking of products, or is suffering cognitive decline.
Meanwhile, concerns exist around vertical integration within super funds. However, the question arises of who is going to look after this type of member at no or minimal cost? It is difficult to see how any entity is better placed to do so than their super fund. The retirement framework should be set to allow super fund trustees to provide this service.
Fund trustees as fiduciaries and product providers
The issues might be seen through the lens of whether super fund trustees are performing the role of a fiduciary or product provider. In effect, they perform both functions within the current system; and I am using this delineation to capture the tenor of their role and obligations in various situations. For instance, in accumulation they play more of a fiduciary role with respect to default members, and more of a product provider role in the choice world.
The legal and regulatory framework also has both elements. Fiduciary obligations appear in terms of the foundations in trust law and best interest duties, the sole purpose test, and member outcome assessments. The RIC has a fiduciary flavour, requiring trustees to “assist… beneficiaries to achieve and balance” the objectives of maximising income, managing income risk and flexible access to funds.
Meanwhile, the Design and Distribution Obligations, disclosure requirements and the Your Future Your Super performance test seem to align with treating trustees as product providers that should be subject to product suitability tests and competitive pressures.
Some commentary appears to assume that super funds need to be treated as product providers. I am far from convinced that this framing should dominate policy formulation. First, competition and choice is often prone to market failure in financial services due to low financial literacy, information asymmetries and disengagement. Second, some (not all) members may be better off in a fiduciary relationship.
Meeting the retirement challenge
The need for clear framing around the role of fund trustees is heightened as we move towards delivery of retirement strategies. The complexity of retirement sits at the centre of the challenge.
Retirement solutions, which comprise a joint investment and drawdown strategy, need to cater for substantial member differences. Dimensions that can impact significantly on the strategy include age, total assets encompassing those outside of super, homeownership, partnered status, objectives and risk tolerance.
Furthermore, members will differ in the way they want to engage with retirement decisions. Some will be happy to pay for comprehensive advice. Some will prefer to choose for themselves, perhaps with reference to decision support tools. Others may just want someone to look after them, at little or no cost. Others may not choose at all.
The challenge is to design a system that caters to the differing needs of all retirees through the development of an appropriate range of both strategies and mechanisms for matching members to suitable strategies.
Allow trustees to play both roles
My thesis is that catering for the full range of retired members might be best achieved by allowing fund trustees to play either a fiduciary or product provider role, depending on the member. This would be a counterpart to the default and choice divide seen in accumulation.
My concern is that positioning fund trustees solely as product providers would not only be a poorer solution for some members. It might also lead to a dysfunctional retirement system by encouraging development of a plethora of product from which members would need to choose and meld with a drawdown strategy.
They would do this through either paying for comprehensive advice, or with reference to product information and decision support from automated advice services, product ranking lists, and perhaps the opinions of others.
However, advisers, members and decision support services would all be confronted with a large range of retirement products with differing features that are difficult to compare. While this would be a world of choice and competition, it would also be one of product proliferation and complexity that may be hard to navigate.
On the other hand, placing funds in a largely fiduciary position also raises issues.
It places trust in trustees to always act in the best interest of members, and eschew any personal benefit. It would largely neuter any competitive pressures, encouraging members to not look elsewhere and potentially lock them due to switching difficulties.
However, it could help skirt the problems associated with product proliferation and complexity. Trustees might construct tailored strategies by combining a set of basic investment building blocks (for example growth portfolio, defensive portfolio, and longevity protection) with a bespoke drawdown strategy. On the other hand, catering for various member types through embedding strategies within discrete products might lead to product proliferation and legacy product issues.
Both the fiduciary and product provider models have advantages and disadvantages. Why not accommodate both, and leave members to choose how to engage with their fund, i.e. as a trusted fiduciary, or a provider of product.
What needs to happen
The retirement savings system is already configured to accommodate fund trustees playing the product provider role.
Meanwhile, the current advice rules make it difficult for trustees to fulfil any fiduciary role in the retirement phase. The RIC requires trustees to develop strategies, but the question remains open on how they might match their members to suitable strategies and hence satisfy their obligations in an effective manner. A mechanism is needed by which trustees can collect the required personal information and make a recommendation at no additional cost to the member. This may require some sort of regulatory carve-out.
The Quality of Advice Review might directly address the question of whether certain types of members would benefit from being able to request their fund to recommend a retirement strategy, which could be considered a form of embedded advice. This would cater for those members who would be better off engaging with their fund as a fiduciary; and avoid restricting fund trustees to only being providers of retirement products that might lead to a less efficient system overall.
Geoff Warren is an Associate Professor at the Australian National University, and undertakes research on superannuation and retirement. He has also worked in investment markets for more than 20 years, and currently sits on a number of investment-related advisory boards.