The principles-based approach of the Retirement Income Covenant gives funds the flexibility to focus on the best outcomes for individual members, but challenges remain in measuring success and providing tailored advice according to experts.
Jacki Ellis, head of retirement segment at Aware Super, said the Retirement Income Covenant represented an evolution in thinking from earlier, more prescriptive approaches like the shelved proposal for a Comprehensive Income Produce for Retirement (CIPR).
The covenant had landed the industry at a “more nuanced view of retirement” which recognised the individual and personal experience of retirement, she said, speaking on Conexus Financial’s Future of Super podcast, sponsored by AIA.
“I think one of the things that make [retirement] so personal is…the objective–how much you want or need in retirement to have the retirement that you want and meet your goals,” Ellis said. “And that’s a very personal question, and different individuals will answer that in different ways.”
It is difficult to see how a single “prescribed, almost default structure” like the CIPR could meet members’ needs here, Ellis said.
Research at Aware Super had found helping members make the “right decisions at the right time”, and develop appropriate structures and strategies for their personal circumstances, “can easily be as impactful to their outcomes in retirement as…being with a fund with strong performance,” Ellis said.
A principles-based approach allows trustees to understand their membership and make available the products, strategies and guidance members need, Ellis said. It shifts thinking from products to outcomes delivered to members. It allows flexibility over the course of retirement which could be three decades or more. And it allows funds to innovate to meet the nuances of their membership.
An approach like this is critical for large, diverse funds like Aware, Ellis said, noting that while doing member research to develop Aware’s own retirement income strategy, she was struck by how much variation there was on fundamental questions like risk tolerance and the importance of safeguarding savings.
But developing standards that are comparable at an industry level is a major challenge, she said. It remains a critical challenge to find the right measures for success in such a flexible model, with Your Future Your Super legislation focusing more on the success of individual products.
“Now there’s this real call to action to think about the outcomes we’re actually delivering at the individual member level,” Ellis said. “I think that’s really important because it highlights those trade-off decisions and just how impactful they are to members’ retirement outcomes.”
Also speaking on the podcast was David Bell, executive director of independent think tank The Conexus Institute. Bell said he had reviewed more than a dozen retirement income strategies from the nation’s biggest funds, and was amazed at the differences in the approaches funds were taking.
He said the practice of grouping members into “cohorts” varied significantly, and there were questions in his mind about how best to use that concept.
“I see some of the more leading funds talking to the individual, but using cohorting to inform business strategy,” Bell said.
But uncertainty remained around the role of advice and guidance, and how funds can help members reach the right solution for them, he said.
“There’s a lot of uncertainty there,” Bell said. “You can read some of the language among some of those retirement income strategies is that, when you read between the lines, [it suggests that] ‘Yes we’d like to do more but we’re a little bit constrained at the moment until we see where the Quality of Advice Review takes us.’”
Good advice is critical to helping members life the life they can afford in retirement, Ellis said, noting a large number of members are drawing down their balances at the minimum rate, and 40 per cent actually ended up with a higher balance after eight years than when they started.
“They probably don’t realise that they could afford to live a higher quality of life,” Ellis said. “The key is to make sure that we’re empowering members to be able to understand what they could afford to live on and give them that confidence.”