Retirement guidance should be viewed as a public good.
Retirement planning is a personal, complex and confronting challenge which many people will struggle with, impacting their confidence to spend appropriately and fully enjoy retirement. Every Australian deserves access to a baseline level of quality retirement guidance.
Expectations placed on super funds by the Retirement Income Covenant (RIC) cross into the area of retirement guidance. Retirement income policy appears to be calling on super fund trustees to deliver personalised solutions which cross into areas of personal financial advice. For many super fund trustees this appears to sit outside of their fiduciary responsibilities. The RIC teases the concept of a higher order of super fund, but without formalisation or provision of the necessary frameworks.
The retirement guidance gap
Next year around 250,000 Australians will retire. The majority of these retirees would benefit from quality retirement guidance, which would provide a retirement plan and ensure that risks are appropriately managed. This would provide assurance and the confidence to spend appropriately in retirement, a major issue identified in the Retirement Income Review. While ongoing advice would be better still, providing one-off advice at the point of the retirement financial decision is the initial challenge.
Unfortunately personalised financial advice provided by a licensed financial adviser is not a realistic solution for the mass provision of retirement guidance. Adviser numbers have shrunk significantly (now just above 17,000 advisers), while the industry calls out a range of regulatory and compliance issues which impacts cost and ability to serve.
Financial advice is provided by commercial operators and needs to account for business considerations. It is difficult to see how it matches up with the public good challenge of retirement guidance. The sector should represent the gold standard of retirement advice.
Is a market-based solution appropriate?
So how can scalable provision of retirement guidance be achieved?
Should it be left to the marketplace to find the solution? A marketplace mindset frames retirement guidance as a commercial service rather than a public good. Competition works best in an engaged marketplace, but the lack of response to the YFYS underperformance letters adds to the sizable evidence of low engagement.
The current policy and regulatory settings ensure a sporadic provision of retirement guidance, based on issues such as commercial considerations and the legal interpretation or legal risk profile of industry participants. This hardly represents a solid foundation for the broad provision of quality retirement guidance.
It is time to frame retirement guidance as a public good and review system architecture with the aim of ensuring access to a baseline standard of retirement guidance is available to all Australian retirees.
Could super funds be the solution?
Super funds are definitely a strong candidate to play a central role in providing retirement guidance. Most Australians accumulate through an RSE super fund and trustees are responsible for developing a strategy which transitions their members from accumulation to decumulation.
Funds are struggling to identify the delivery mechanism to match members to appropriate solutions given legal and regulatory settings. Formally positioning super funds to be providers of retirement guidance would ensure broad availability while solving their own delivery mechanism challenges. In effect a determination would need to be made to expand the duties of super fund trustees.
There are many candidate delivery mechanisms, but achieving a quality uniform baseline should be the primary objective. Comprehensive advice is unrealistic given adviser numbers. Other candidate solutions include requiring funds to provide scaled retirement advice, an expanded intra-fund advice model, a broad safe harbor to enable personalised retirement defaults or a safe-by-design standardised retirement guidance service.
Implementing such a reform would create significant challenges. From the perspective of policy and regulation, an outcome would be required which makes the obligations of a super fund (to provide a quality baseline standard of retirement guidance) clear and not open to interpretation.
There are many questions that arise. What type of vertical integration challenges would be created, and can they be managed? What would the regulatory model be, specifically the roles of APRA and ASIC which would become more entwined? How would this impact other parts of the financial services industry such as financial advisers and the SMSF sector?
I suspect that not all super funds would want this higher order responsibility. For many it would increase the complexity of their operating models (consider data requirements, compliance etc.). At present many funds (even some of those with strong reputations) are consolidating mergers, datasets, admin systems etc. and may not be ready to take on higher duties. Nonetheless, the idea is worth exploring in a consolidating industry setting.
Retirement guidance is a big challenge
Once you have a large, established and complex system with legacies, like the financial services sector, it is hard to design and implement effective change. Retirement guidance needs to be framed as a public good. Through that lens it is clear the present system isn’t set up to provide quality retirement guidance for all. Super funds are a candidate, and for some a natural, solution. But even the super fund model has many issues which would need to be worked through.
It has been flagged that the Quality of Advice Review may explore retirement guidance. For this to work retirement guidance needs to be framed as a public good and clear aims established. The solution isn’t a quick fix and should start with determining an appropriate system architecture. Otherwise the most likely outcome is more of the same: partial policy solutions, inconsistent interpretation and adaptation by industry, all resulting in a piecemeal outcome.