With the Retirement Income Covenant coming into effect on July 1, superannuation funds have focused on applying a principles-based framework and strategic approach to providing retirement solutions for their members, rather than just looking after accumulation.
In a roundtable – hosted by Investment Magazine and life insurer MetLife – participants from superfunds, asset managers and consultants discussed how funds have approached the development of their retirement income strategy, how the overall product solution is determined for members, the challenges of providing support for members’ decision making and what further policy and regulatory changes are needed.
Under the legislation, superannuation trustees need to develop retirement strategies to help their members balance the need to maximise retirement income over a sustained period of time, manage risks including longevity, inflation and investment risks as well as provide flexible access to savings over the period of retirement. The legislation is principles-based rather than prescriptive which allows funds to come up with innovative solutions for their members.
Funds were required to publish their retirement strategies on July 1 which pushed boards and executive teams to focus on the outcomes for members. “So that’s a really good outcome of policy,” said David Bell, executive director at The Conexus Institute.
While there is no specific requirement in the legislation to have all elements of the strategy in place for every retired member by July, superannuation trustees are expected to deliver the strategy progressively over time.
The industry has responded with a wide range of strategies catering to the different retirement needs of their individual members. “The diversity of the different strategies has come out. While we haven’t seen the full details, that’s what a principles-based solution will give you. So, I think in a way that’s a good thing,” said Nick Callil, head of retirement solutions at WTW.
“But the question is how long will the diversity last? In other words, will future regulation and arm twisting by APRA make them converge over time?”
The panel was supportive of maintaining diverse strategies as, to date, the aged-based pension has been the main retirement solution for many Australians. “I’d like to see freedom given to a certain extent by the regulators so that we don’t just end up with maybe one more path, and everyone goes oh, that’s the safe route, in that case, we’ll follow that,” said Richard Boyfield, partner at Mercer.
Australian Retirement Trust and UniSuper are among the few superfunds in Australia to have developed a retirement income stream product beyond the account-based pension. ART’s experience in developing its Lifetime Pension product was surprising according to Brnic Van Wyk, head of asset liability management.
“We designed a product that helps people spend as much as possible. That has been very challenging in putting together the strategy because there was no correlation between people buying the product, between balance, or age, or the portion of their assets.”
For most super funds, only a small proportion of their members have a financial adviser so it is really important to get the guidance piece right. “Focusing on products is kind of missing the bigger picture,” said Jacki Ellis, Aware Super’s head of retirement segment.
“It’s more complicated than that. There are layers of different ways we need to be supporting members. I do think that getting that guidance piece and how we help members is really critical to outcomes.”
Aware Super’s member data shows that after stripping away members who have a very small balance, that 55 per cent of members are drawing down at the minimum amount. More than 27 per cent are drawing down on more than 20 per cent of their balance every year and “they will most certainly run out of money”, said Ellis. “There’s a very small amount who are drawing down sustainably at a rate that they can afford.”
“I think that’s quite important to think through, particularly when starting to think about needing to provide more guidance for members around how much they can draw down so that they can get their maximum income, but also have the peace of mind that it will last for life,” she said.
The member experience can be improved if funds have more latitude to provide guidance. “I think if the funds can provide personalised guidance, because rather than waiting for the member to come to us, we can reach out to the member at certain points in time and give them those right nudges. I think that will make the process much smoother and easier for the member as well,” said Ruvinda Nanayakkara, manager product & innovation at Spirit Super.
The support to members needs to be throughout their retirement and not just at one point in time said Mercer’s Boyfield. “It’s about not just at one point, but at being able to make sure that they’re supported at the right times throughout and when they’ve actually had some experience in retirement.”
However, the chicken-and-egg conundrum whether to have advice or product first continues according to Amna Khan, general manager, product, asset management at Insignia Financial.
“An effective retirement solution has to start with the needs of retirees. These needs and their importance vary significantly between individuals or even for one individual over time,” she said.
“To translate these needs into a bespoke financial solution, retirees require guidance or advice.” Khan said it is hard to know whether product innovation will come ahead of advice or if advice would lead to a better product response.
Also working with the shrinking financial advisory industry is fraught given the high exit rate of financial planners and advisors, further driving up costs. “The J-curve for that industry to start growing again is five years off…so it’s a long way back,” said The Conexus Institute’s Bell.
“How does the super industry help members into retirement? Partly tapping into an existing network of financial advisers, but largely outside of that,” he said.
However, many superfunds are currently restricted to giving members general retirement advice. “We’re restricted by the current regulations and in our ability to do that and even the idea of scaling with technology. At what point do you need to start moving from general to some personal advice?” asked Louise Aracas, senior product manager, retirement at AustralianSuper.
Aware Super’s Ellis has found its members often are not seeking advice but information or even validation of their decisions and “we need to put the member and the member’s need back in the centre of the discussion”, she said.
“Sometimes it’s just the right information or the right education, or even just a bit of validation in the right way for them that can make as much of a difference to their retirement outcomes.”
The move from the accumulation phase to the deaccumulation phase is a difficult transition for most after decades of being in the work force.
“The psychology of the retiree is that there is no recovery, my money is getting drawn down and therefore, I don’t want to run out. I’ve got no way of recovering because I don’t work,” said Michael Mulholland, chief distribution officer at MetLife.
“So, you’ll have an effect on the drawdown with no way of recovering and reducing account balance as well at the same time and that’s when retirees start going super defensive.”
The key to helping members is to give them confidence they can spend and not just the amount driven by the minimum drawdown rules. “I don’t think people are deliberately spending less because they don’t want to spend more. You know, if we give them the confidence that you’re going to be able to spend this ratio I’m pretty sure most would at least go out and give it a good bash,” said Mercer’s Boyfield.
Asset consultant Frontier’s research found the average drawdown rate of the top 40 funds was at the minimum level according to the firm’s senior consultant David Carruthers. “We know from basic behavioural economics that is what they are going to do. That’s why we as an industry need to help members solve that problem.”
Having a varied membership profile and being able to cater for disparate groups’ retirement needs is important explained Young Tan, manager, actuarial & research at UniSuper. One cohort of its membership are in the higher education industry and enjoying high balances of up to $1 million due to a generous 20 per cent employer contribution rate.
While the other group has a similar profile to the Australian public with balances between $300,000 to $200,000. “Since we’ve opened up the fund, the dynamic has changed gradually, and we’ve been able to cater to both groups.”
There also needs to be more research to understand what kind of expenses are incurred by retirees and how do these spending habits change as they age to help the industry develop appropriate retirement income products.
“What are the other factors that actually influence spending in retirement?” said Spirit Super’s Nanayakkara. “If we get a sense of that, then we can help guide members to figure out what their spending might look like? And figure out what are the right products that they need.”
Spirit Super is working with a bank to delve into the actual spending habits of its customers who are in their 60s to give them better insights into the expenses of their members.
The Retirement Income Covenant is a framework for the industry to devise strategies and products with light regulation from the Australian Prudential Regulatory Authority, provided the industry responds pro-actively.
“What we will see is the regulator reviewing what funds have done and then using the sort of power of persuasion they have to encourage other funds in the direction that they see as being better or certainly encouraging fans who have perhaps done less than others to think about it a bit harder,” said WTW’s Callil.
“I don’t think we’re about to see an immediate ramping up. [But] I don’t think we can rule that out if after a few years, we are not seeing funds actually changing what they’re doing.”
The covenant measures member outcomes compared to other APRA standards that measure product outcomes and it remains to be seen how the regulator comes up with appropriate measures to assess success. While most participants agreed a benchmark test like the My Future, My Super test is inappropriate, the best defence against a heavy-handed regulatory approach is “the funds and the industry doing something,” said Frontier’s Carruthers.
An integrated approach across retirement product with advice and superannuation policy and social security policy would be beneficial to the industry said MetLife’s Mulholland.
“What I would like is the government in retirement income to link government policy with retirement income, pension funds, super funds, with the advice world so that we can actually get a holistic service to customers with superannuation.”