For the five million Australians facing retirement in the next decade, the experience will be vastly different from generations before with more education, product solutions and guidance to help them make the best choices to finance their lifestyles beyond the account balance and age pension.
It is universally accepted Australian pension funds have done a stellar job in accumulation since compulsory superannuation came into being 31 years ago. The scale of the market cannot be underestimated − assets under management are now $3.4 trillion, dwarfing the size of the Australian economy.
Australia’s retirement market is still in its infancy despite the enacting of the Retirement Income Covenant in July 2022. Fund trustees have been under pressure to develop strategies to assist members maximise retirement income.
HostPlus group executive for member experience Paul Watson admitted in a recent interview the industry is tackling the most difficult problem in finance, which is to stretch a member’s money over the course of their lifetime. The industry terms this as longevity risk.
With close to half a million members in retirement or moving into it, AustralianSuper plans to launch its own retirement solution in the next two to three years, its chief officer retirement Shawn Blackmore told Investment Magazine recently.
Similarly, AwareSuper is also developing a longevity product for members, according to head of retirement segment Jacki Ellis.
“We are looking to weave together for members, the right retirement solution to meet their needs and their personal goals in retirement,” Ellis says.
Aware is one of the largest industry funds for members in the retirement phase with $30 billion of assets managed in the retirement phase for over 100,000 retirees. It expects to see an additional 100,000 members retiring over the next four years.
Funds such as Australian Retirement Trust, HostPlus and UniSuper are more advanced in the execution of their RIC strategy.
The $240 billion ART was formed through the merger of SunSuper and QSuper which both had their own retirement products. These legacy products will be merged into a single one next year according to its head of advice Anne Fuchs.
From July 1, ART will standardise the retirement income bonus which each product offers for members who roll over their accumulated savings in superannuation into an ART retirement income product. The bonus will rise to $9,000 from July from a range of $1,000 to $7,000.
Meanwhile, UniSuper is among a smaller cohort of super funds who manage money in both defined contribution and defined benefit schemes. The fund has over 42,000 retired members drawing an income. Close to 80 per cent of these retirees are in its allocated pension product with the remainder spread across its defined benefit product and fixed rate indexed pension, representing around $28 billion of assets under management.
“We’ve already had a longevity product that’s unique in the market that we’ve had for 20 odd years,” UniSuper’s head of product & advocacy Ian Lorimer tells Investment Magazine.
“Our focus is around current product enhancements tweaks and packaging our longevity solution alongside our flexible account-based pension in a way that helps members understand it can help them meet their income goals and provides easier accessibility.”
He adds the fund takes a “holistic picture of retirement” and identifies what matters most for members. “Is it more around guidance or help moving into retirement,” he says.
The fund’s member research shows 67 per cent of members want UniSuper to assist them choosing a retirement solution, 15 per cent want some form of recommendation and 5 per cent want to pay for advice.
It will be launching a retirement hub and two retirement calculators which incorporate new technology to improve the member experience. These include human centred design principles and user testing, accessibility standards that will give every member the ability to equally navigate the website and tools, and heuristic review to ensure that members can self-learn without a lot of assistance.
“What we are doing is mapping out the whole life cycle journey of the members in terms of retirement, including the planning for, moving into and the various phases of the ‘in’ retirement phase,” he says.
Gaps in education
Perhaps more than product choice, Australians lack education about retirement planning.
“One of the critical gaps that we see in the Australian market is not around product design is around education,” Renee Voutt, MetLife head of group product says. “Retirement planning is not clearly understood by Australians and they do rely on the safety net and the age pension.”
She adds it has been difficult for Australians to understand they may not live longer than their retirement savings.
“There’s a really important role for both insurers around educating around insurance but also educating around retirement savings and what that means for people who actually purchase [a retirement] product generally,” she says.
The Quality of Advice Review recommendations to expand the scope of advice that super funds can give members could help some way to bridge this education void.
“Having the right type and level of advice as you approach retirement is an important factor that people should be thinking about,” Allianz Retire+ head of institutional solutions Fintan Thornton says.
“We’re very supportive of anything that helps Australians get access to good quality and an appropriate level of good quality advice as they approach retirement.”
This view is also shared by AMP’s general manager – retirement solutions Ben Hillier. “It’s important to recognise there are many Australians who don’t receive comprehensive financial advice,” he says.
“It’s why we’re focused on developing retirement solutions which can be delivered to members through their superannuation fund and in alignment with intra- fund advice.”
Evolving product development
The RIC has essentially three key considerations and these are to “maximise retirement income including the age pension, manage inflation and
longevity risks to the sustainability of retirement income, and giving flexible access to capital,” Generation Life’s general manager for retirement solutions Patrick Clarke says.
The RIC has fundamentally changed the role of super funds from product distributors to product developers.
“It is going to be the super funds that are the drivers of new products in the market and specifically to members,” Challenger’s general manager, institutional client solutions Simon Brinsmead says. The company is the largest provider of annuities in Australia.
There are various ways funds can do that – including building the entire product or partially and outsourcing certain components such as insurance. “Ultimately whatever they bring together, it is going to be the fund [that] delivers the holistic solution to members,” Brinsmead says.
Super funds also need to consider whether they have inhouse capabilities to manage the de-accumulation assets. AusSuper and Aware have said they will leverage their in-house investment capability to do alone.
Some life insurers will be able to manage longevity risk through reinsurance and administer the product to enable the fund to manage the assets, says Generation Life’s Clarke.
Huge asset base
Another key issue is the considerable size of the asset base. There is $55 billion a year moving across from accumulation to de-accumulation, according to Allianz Retire+ chief product & marketing officer Simon Aboud.
“The primary problem that we’re solving is how do you secure a guaranteed income for life but not give away the flexibility to access your remaining investment,” he says.
However, UniSuper’s Lorimer raises concerns of what he perceives as an over-focus on product development. “One of the things that concerns me in the industry is the focus on trying to develop products and then fit those products to members’ needs,” he says.
“They’re going backwards and the wrong way as opposed to starting [with what the member needs] and the product mechanics should be ‘under the hood’”.
There has been criticism of the slow response by industry despite the RIC coming into effect last year.
“Getting retirement product design right for the long term, on an individual basis for different funds and different member cohorts, is naturally going to take some time initially,” TAL general manager for investments, retirement & operations Ashton Jones says.
But he is seeing “real momentum” within the superannuation industry around retirement solutions.
“There will be competitive advantage for funds moving early with good retirement solutions for their members,” Jones says.