To some the date is a key line in the sand, a time for funds to promote or defend their franchise. To others, it is just part of their journey. Either way, there is no doubt the July 1 deadline for publication of fund retirement income strategy has focused the industry on achieving a new member-focused reform.
The good news is member surveys from Frontier and others show a high degree of member confidence in the funds, citing them as their most important source of financial advice.
By July 1, funds must post on their websites their retirement income strategies, which in itself is a marked change for a sector that has focused primarily on returns and member balances.
Herbert Smith Freehills’ Ruth Stringer noted the requirement dates back to David Murray’s 2015 Financial System Inquiry so it’s not like the industry was put on notice at the last minute.
WTW’s Nick Callil wonders, given the user friendly guidance attached to the deadline by APRA and ASIC, just what would happen if funds don’t meet the deadline.
The answer, it seems, is the regulators will come down with more draconian and specific rules and, at the very least, according to HSF’s Stringer, the retirement incomes strategy question will become a key focus of their regular reviews of the different funds.
Starting the process
Consultants approached by Investment Magazine report most funds are well down the track in producing something, even if it is simply a strategy outlining they will do something.
Callil says, the key issue for the funds is this is one of the few times they have been asked to actually do something, to put their head on the block.
The starting point is knowing your member and, according to Deloitte’s Andrew Boal, the key is having the right data. The next step is how to protect members from bad outcomes, which gets into the complicated area of advice but also an increased level of engagement with members, he said.
While the regulator has called for the strategy to be implemented, Stringer underlined, “the regulator can’t tell us what our members want”.
Defining cohorts is not so easy depending on the membership base and consultants warn a grouping around member balance can be highly misleading. HESTA, as an example, has a lot of members who are nurses with a big variation in retirement plans and indeed ability to set the date themselves.
People with the same retirement balances may have different sources of non super income, don’t own their principal residence and may be retiring at a different time. In addition, consultants note “size has nothing to do with whether you have a good retirement”.
The key with cohorting is putting together people with similar desires. The principle also assumes members actually know what they want, which funds consistently report is not always a given even if the studies show increased engagement as retirement looms.
The July 1 deadline may feature new products but most see the exercise more as a get to know your members process first with products coming later. Mercer’s Tim Jenkins said, “this is part of the journey and product integration will follow.”
The very fact funds have to explain their strategies publicly is why some funds say the exercise is a potential line in the sand moment for funds.
The risk in making strategies public
Someone with $500,000 in their account balance can look at what the fund has in mind and decide to go elsewhere and if more people do that the fund will find itself with a gaping hole. They also have more easy access to knowing what is available elsewhere, which is where the marketing opportunity lies. This explains the reluctance of some to flag intent at this stage.
Australian Super has 2.6 million members, 520,000 of whom are over 50 with an average balance of $200,000 against the average balance for all members of $150,000 and 650,000 members under the age of 25. Over the next five years, 250,000 people in Australia will retire of which, 30,000 are its members.
The aim of the exercise focusing trustee attention on their retirement strategy is, according to Challenger’s Jeremy Cooper, the closest thing we have to a definition of what super is, and that is “is to provide workers with a source of income in retirement”.
“This puts an onus on trustees to offer retired members a retirement pay-cheque for life which is what most think superannuation is about,” he added.
Further, Cooper said trustees should assist members in drawing down their balances.
Fund directors extend focus beyond returns
One fund executive said, while the focus of much of the industry’s management is on accumulation and returns, fund directors are more acutely aware of the retirement income covenant and energised on the issue than management.
In part, this may be a function of age and the board’s position in the workplace but the push is also coming from the looming deadline for funds to come up with their response which shows it has some understanding of what its members want. That is not such a bad outcome.
In a survey of 3500 members of five profit-for-member funds AvSuper, Care Super, First Super, UniSuper and Vision Super, Frontier came up with two key conclusions. Most members want to be engaged with the fund and drawing up cohorts based just on account balances is meaningless.
This means the fund has to ask its members more thoughtful questions: what other others sorts of income they have, whether they own their home, what they want from their balance in retirement, when they plan to retire, what they want from the fund and the list goes on.
The survey found 60 per cent of members want their fund to provide some sort of advice, over 50 per cent expect super would be their main source of income and over 80 per cent thought super would at the very least cover their living expenses.
The number one concern of fund members was the risk of longevity, followed by ensuring high returns and flexibility.
Fifty per cent want the fund to assist in finding a solution, and one in five want the fund to recommend a product. The latter is akin to a default fund but further the question of assistance is complicated by the rules around specific and general advice which is subject to a separate government review.
The key point from the Frontier survey is members actually expect some sort of assistance and direction from their fund and increasingly want to be engaged: 50 per cent wanted the fund to assist the member into a product, 20 per cent said just leave it to me I know what to do, and 10 per cent wanted personal advice through an adviser.
Frontier’s David Carruthers said, in laying down their strategies funds should establish their retirement income principles, specify their approach to the three key objectives in income, risk and flexibility and note future objectives.
Just how the industry responds looms as a defining moment for the funds.