APRA and ASIC’s joint thematic review into how super funds have gone about implementing the Retirement Income Covenant (RIC) reveals insights into the challenge faced by the entire superannuation ecosystem, including industry, regulators and policymakers.
The shorter-term reflections depend on your perspective. The review is clear that many funds haven’t made near enough progress, especially in the areas of understanding member needs in retirement as the starting point for retirement solution design.
Initial commentary has been that the industry is falling far short. However, this is a bit unfair. The review also acknowledged good progress in building out member guidance services and provides examples of leading practice. The caution of funds in moving forward in light of an unsettled policy environment is understandable.
Overall, a mixed report card.
Further, this review came very early in the RIC process, beginning less than six months after the first round of retirement income strategies were published, which came only three months after the RIC was legislated. It would be dangerous to put too much weight on these findings.
The longer-term reflections are worthy of greater consideration.
Dark side of dispersion
The thematic review reveals that significant dispersion across funds is emerging along nearly every dimension.
Dispersion is a natural outcome of a principles-based policy intended to motivate innovation and (possibly) competition. But dispersion also has a darker side: it can result in some members being left behind, and adds complexity to the system.
It could be argued that by highlighting where laggards need to catch up, the review will help to reduce dispersion by lifting baseline standards. We are not so convinced. Our view is that dispersion will increase as leaders build momentum while laggards struggle to overcome prioritisation, resourcing and governance challenges.
We suggest that further policy or regulation is required to at least provide guardrails and ensure baseline outcomes. Greater clarity over exactly what is expected of funds under the RIC would also be beneficial.
Knowing the member
The review highlights the huge scale of the retirement income challenge faced by super funds.
A central theme is that funds need to know their own members to aid solution design. However, the capacity of funds to access information on their members are variable and some funds will need to further develop in this area.
A multitude of issues arise relating to engagement and data management, and then integration of information into solutions and ongoing services provided to members. All this is resource intensive, and does not happen overnight.
Further, personal information will be of most value for matching individual members to retirement solutions. Funds are understandably wary about using such information when engaging with members given the current advice rules – around which the review warns funds to tread carefully.
Many super funds need to restructure their operating models. Super funds have historically focused on an accumulation phase, which is scale-based, lower cost and predominantly homogenous. A significant change in operating architecture and mindset is required to cater for retired individuals with widely differing needs and capacity to engage.
Solution delivery mechanisms
Some funds may have bristled at the language that, when it comes to guiding members to a suitable solution, funds “are in control of the ‘choice architecture’”. The current choice architecture is in a piecemeal state, and frankly does limit what funds can do.
Some pathways (defaults) do not really exist, others require refinement (comprehensive personal advice), and some need and are undergoing major renovation (like limited and intra-fund advice). Many funds are not confident about asking members for personal information and recommend a solution to them, even if the member wants them to do so.
We have sympathy for funds trying to navigate this architecture, and manage business investment, when the component pieces are far from settled.
Relative comparison, not outright assessment (so far)
This review is effectively based on cross-sectional analysis rather than outright assessment of retirement income strategies. It did not explore the actual retirement solutions being offered by funds and the resulting outcomes that they might deliver.
All this is appropriate given the principles-based policy framework and the early stage of development. It also underlines that the regulators have not yet developed methods for assessing retirement income strategies and tying them to member outcomes.
It is near impossible to imagine a retirement system that won’t eventually include some form of outright assessment. There are significant challenges around the form of assessment and required data. The difficulty for APRA is the longer they wait, the harder it will be to build assessment capabilities and data frameworks without requiring the industry to re-engineer.
Expect further policy and regulation
Further policy and regulatory change is a near certainty. The government’s response to the Quality of Advice Review hints at significant developments in advice for super funds. Meanwhile, groups including AustralianSuper have opened up the retirement defaults discussion. As discussed, the regulatory framework may need to evolve to support outright assessment.
A final reflection is that the focus of the review was what funds are doing to build services and solutions for members to use. Is it sufficient for trustees just to make services and solutions available? Or are they obligated to actively attempt to engage each member and ensure they are being directed into an appropriate retirement solution? The scope of the obligation of trustees to their members in this regard might be further clarified.
The challenge of delivering retirement income is taking shape. There are tough decisions and hard work ahead for all involved.
David Bell is executive director at The Conexus Institute, an independent research-for-impact think-tank focused on retirement policy settings.
Geoff Warren is an associate professor at ANU and research director at The Conexus Institute.
The strategy for members in accumulation is pretty much the same for every member i.e. finding the right balance between return and volatility for their investments. Some may argue that there should be a lot less focus on voltility in the context of a decades long investment horizon, but still the strategy could be consistent for all members.
Retirement income strategies are very different. With a median balance at retirement currently around $180,000, the design of a product to produce an income stream is most problematic.The situation is markedly different for members with balances in excess of $1,000,000. Unfortunately a one size fits all strategy just won’t work and in some cases (particularly low balance members) there is no workable strategy. The costs of designing a suitable strategy for each member would be prohibitive. It is likely that any compromises made in designing retirement income strategies for cohorts of members may result in undesirable outcomes in many cases.
Perhaps the only solution is for apporpriate advice to be provided to each individual member. Whether super funds are apporpriately resourced and skilled to do this is an open question.