There are few bigger challenges facing superannuation funds than creating and delivering retirement income solutions effectively and at scale. It’s a challenge that is going to require some big ideas, and some big changes in the way funds think. 

The Investment Magazine Bold Ideas for Retirement roundtable, sponsored by Challenger, heard that not all funds are under the same pressure to develop retirement income solutions – not all funds have the same proportion of members facing imminent retirement, for example – but even for those that face a pressing issue, the solutions are not necessarily overly complex or costly. 

The Retirement Income Covenant says that any retirement income solution offered by a super fund must: 

  • maximise expected retirement income;
  • manage expected risks to the sustainability and stability of their expected retirement income; and
  • provide flexible access to expected funds during retirement.

But even if it didn’t prescribe those characteristics, they would still be exactly the things retirees would be looking to their super funds to provide. The task has simply been given the impetus of legislative and regulatory scrutiny and focus.  

Funds need to decide whether they are in or out; and if they’re in, they need to move swiftly. However, to date, a lack of clear competition between funds on retirement solutions signals a market failure that current policy settings might not effectively address. 

The Conexus Institute* executive director David Bell said a licensing regime for funds wanting to offer retirement solutions could be a step towards improving the quality of solutions on offer, and it would also legitimise the decision by any fund to opt out of being a retirement solutions provider. 

David Bell

Bell said that for any fund “not prepared to cross subsidise to really build into it, that’s quite a reasonable position”, and that the business cases for funds investing the time and money in building a solution vary widely. 

“The business case for investing in creating retirement solutions – really good quality solutions – by funds is really mixed,” he said. 

“For some funds, retirement makes up 69 per cent of their membership; for some other funds it makes up 1.4 per cent of their membership. All those funds are being directed under an obligation to produce a high-quality retirement solution. 

“Everyone’s in a different situation business case-wise, so we are concerned that you’re not going to get good outcomes for all members under that current policy setting.” 

‘No regrets’ actions 

However, Challenger general manager of institutional client solutions Simon Brinsmead said there are some “no regrets” actions all funds can take in relation to a retirement income proposition and advice or guidance to members. 

“A very easy logical way forward for funds to do some heavy lifting here is to create very simple, easy to understand retirement income propositions for retirees that can deliver an income for life,” he said. 

“The way that funds can do this is by creating what we’d call a blended retirement offer – an offer that does combine two very scalable building blocks that provide a huge amount of flexibility for the funds, the two building blocks being the account-based pension combined with a lifetime income.” 

Simon Brinsmead

The second no-regret action is to bring scale to bear on the task of delivering advice or guidance to members. 

“We’d all agree that comprehensive financial advice is fantastic, it does help them in retirement [and] members are better off by having that,” he said, but he added that “comprehensive financial advice is not necessarily fit for purpose for every single member of a fund”.  

“Even if it was available for everyone, the reality is, not all members want, need or can afford comprehensive advice,” he said. 

“Our view would be that what funds could and should do is look at ways to bring scale to the process. This is where a fund could look at the spectrum of advice, not just comprehensive advice but guided choice and everything in between.  

“That spectrum could be used to create a funnel for retirees: on-ramps, off-ramps, up to comprehensive or down to guided choice. So it does bring scale into the process.  

“If we look at the next 10 years or so we’ve got two and a half million members that will be moving or transitioning into retirement. That’s a bottleneck that is going to have to be addressed.” 

But addressing retirement issues isn’t a new challenge for some asset owners – Commonwealth Superannuation Corporation (CSC), for example, has been providing retirement solutions to its members for more than a century.  

“We hear all the time that we don’t have a mature retirement system,” CSC chief executive officer Damian Hill said. 

“Having paid pensions for 102 years, we think there are the building blocks for a mature retirement system.” 

Why so few members are unhappy 

CSC has members in defined contribution and in defined benefit funds, Hill said, and it is worth asking “why are there so few unhappy DB customers?”.   

“The answer that often comes back is single focused, and it says [it’s] because they have adequacy…and the vast majority in the in the DC world don’t have that,” Hill said. 

Damian Hill

“There’s a certain degree of truth to that, so I’m not trying to dismiss that. But if that’s the only response, then I think we’re missing a trick. 

“What our DB customers tell us is they don’t know that they could have a lower income or a higher income…it’s about I know what I’m getting, and I can plan my lifestyle, my retirement lifestyle around that.  

“There are elements beyond adequacy that are core to the behavioural nuances that are applicable in a heterogeneous environment. And I think that’s what we’ve really got to aim for here.” 

Hill said that in designing its retirement income solutions “unashamedly, what we’re trying to do is provide DB outcomes for both DB and DC customers”. 

“Everything that we talk about, for all our customers, is not about account balance, even though that might be what you’re required to tell them about,” he said. 

“It’s about income, and so [that’s why] the way I describe it is DB outcomes for DC customers.” 

Hill said Australia’s dominant soft default for retirement (an account-based pension) arguably gets “a big tick” on two out of four RIC-related measures, or “levers” – maximising return on capital, and flexibility of retirement savings (i.e. access) – but gets a cross for two others – sustainability of income, and variability of income.  

“If we’re trying to do DB outcomes for DC customers, that requires a change of mindset,” Hill said. 

“If you’re only getting two ticks on return on capital and flexibility, what you’ve got to do is get to a liability-type mindset about that to deal with the other two, and that’s how you get to a blended solution. But you’ve got to attach a liability to that income stream and the return of capital. You have somehow to build that into your equation. 

Deborah Potts

“And if you get that change your mindset, it’s not just for retirement, you can actually leverage that for your DC customers in the accumulation side as well.” 

Focusing on retirement income from the start of a super fund member’s relationship with a fund is key to achieving better results in retirement for the member, because it fosters deeper and more meaningful engagement. 

And that may make them more receptive to guidance or advice. But funds tend to underestimate the degree of financial literacy most members have, said Equip Super head of retirement Sam Higgie, and therefore miss the real topics they need to address. 

“We designed our retirement income strategy, and we got cohorts just like everybody else did,” Higgie said. 

“Once we finished it, I had this great hypothesis that, OK, now that we know what our cohorts look like, and how they can achieve an optimised retirement outcome, how do we market to these people? How do we get them engaged in superannuation, and get them on that path that we’ve identified them for?  

“What came back to me was that all these cohorts mean absolutely nothing. 

“We’re looking to solve this actuarial problem, we’re looking to solve a product problem. I think it’s a bit broader than that, and it is solving a human problem.” 

The financial literacy fallacy 

Higgie said it’s largely a fallacy that individuals lack the financial literacy to engage with their superannuation effectively.  

“I don’t think we give the general public enough credit for that. Everybody pays their bills, they use their credit cards, they have mortgages, you know, they pay off those things. They budget.” 

“They know that a portion of…their income gets allocated to superannuation, they know that it gets invested,” he said. 

“And they understand if they don’t want to make a choice that it gets invested on their behalf. I think we’re incorrect when we keep talking about this lack of knowledge.” 

Rather what members lack is “retirement literacy”, Higgie said, and what they understand less well is “do superannuation funds have retirement products, and how those differentiate from the superannuation phase? Do they have advice services available?”. 

“I think that’s something that we need to spend more time promoting with our members and helping them along the journey,” Higgie said. 

Hugh Morrow

And solving the financial aspect is addressing only part of the bigger retirement picture, SuperEd managing director Hugh Morrow said. 

“A lot of the conversation can zero in on the financial side of retirement,” he said. 

“That’s important, but it’s not the full story. What makes people happy is that they’re solving for the package, and the money is part of it.” 

Morrow said different members prioritise different things.  

“It might not be maximum income, it might be maximum total income and accepting volatility,” he said. 

“It might actually be certainty of income from year to year. And it might be about the bequest – it might be more important that you have the option to give money to the kids. 

“There’s a whole bunch of different dimensions on which people are optimising. Even if there are limited choices, they still need to be informed and supported through that process.” 

Morrow said making it simpler for members to move between funds – especially as they near retirement – is a key to fostering competition between funds and the delivery of better, more fit-for-purpose retirement solutions. 

“The focus has got to shift a little bit and allow consumers to be more mobile, and to encourage more competition, and then we’ll see much greater innovation,” Morrow said. 

“And one of the responses could be well, actually, we only operate up until the point of retirement – that’s all we do as a fund, and we’ve got partnerships with five other funds which are fantastic about drawdown…and we can help you with that migration.” 

Retirement solutions as retention tools 

But other funds will not want to lose members to other providers, particularly at a time when the member’s balance is at a peak. Funds are starting to see an effective retirement income solution as a retention tool, Challenger director of institutional client solutions Stephan Richartz said. 

“Until recently, this was not the case,” he said. 

“Until recently it was all about getting members onboarded in accumulation, in many cases as a default nominated super fund. Now it appears that funds are very interested in retaining members at a point where from a FUM perspective the members are most valuable.” 

Stephan Richartz

Richartz said funds that connect their members with a retirement solution at the point of retirement will have members for life. “A very strong retirement solution proposition is absolutely important for superannuation funds, notwithstanding the obligation that superannuation funds have to provide the best possible outcomes for the members,” he said. 

Funds with members who have significant account balances at retirement face a different economic calculus than those whose members tend to have lower balances.  

REST chief member officer Deborah Potts said only 15 per cent of its members are aged over 50 and only 135,000 members are aged over 60. The average account balance when a REST member retires – which is usually between the ages of 60 and 64 – is just $100,000 (and men have about 27 per cent more than women). 

Potts said a distinguishing feature of the REST membership is that it will largely rely on the Age Pension for income in retirement. 

“For us, some of the best things we can do is engage with them early,” Potts said, and to keep it as simple as possible. 

“A typical female retail worker who’s 60 and earns $48,000 a year could spend an hour with an adviser to set up a [transition to retirement strategy] and could get the benefit of that,” Potts said. 

“She doesn’t need to contribute any extra money, and she would benefit from an extra $12,000 in her account. That’s the equivalent of an additional three months’ work.  

“That’s how simple we need to make it for our members, because three extra months working on your feet is real.” 

The first interaction is crucial 

Potts said REST has found success engaging with members digitally, and the first interaction is critical. 

“We know from our data that someone who engages – even if it’s with something as simple as a piece of digital advice on investment choice – is six times more likely to engage again and do something else,” she said. 

“And that’s what we want – for them to come back and engage with their account regularly.” 

At the other end of the member-balance spectrum, the $130 billion UniSuper is striving to become the Netflix of Retirement by pursuing a hyper-personalised engagement approach so members can “make an informed decision that’s going to better their retirement outcome”, said UniSuper’ retirement solutions lead Giacomo Tarantolo. 

Giacomo Tarantolo

“Retirement isn’t one size fits all, it’s personal,” Tarantolo said. 

“We need to deliver information in the right form, be it through video, apps, online platforms, experiences or text at the right time, so that members can make an informed decision about their retirement.  

“We believe we’re here to provide answers to the questions that the members have, rather than making those decisions for them. That active, informed decision-making is probably the best form of default.” 

Tarantolo said that is why UniSuper is doubling down on two areas: digital experiences and financial advice. He said the latter will be integral to what some members want from their fund, “but that obviously comes at a cost”. 

“UniSuper is in a very fortunate position: the average balance at retirement is $550,000,” he said.  

“When you’re paying $3000 or $4000, for advice at the point of retirement, it’s less than 1 per cent of that balance. As you move down to those lower balances, the decision to pay for advice is a much more expensive one. And arguably, they’re the ones that need the most help, so we need to find a way to help them.”  

Tarantolo said he is hopeful that the QAR reforms might help to do that. 

Homogeneity versus personalisation 

Clearly, a fundamental difference between accumulation and retirement is that in many respects accumulation is homogenous whereas every member’s retirement is different.  

TelstraSuper chief customer officer Tim Anderson said an effective solution must “accommodate different perspectives and those different pathways”.  

“When I’m in the office, I sit right next to our contact centre and our retirement guidance team. I hear conversations every day that highlight that we’ve got members with a full breadth and depth of awareness and understanding, to members with very little awareness and understanding,” Anderson said.  

“There’s a whole lot of complexity that as an industry we throw into the mix. For example, just the terminology on the pathway to retirement, such as concessional contributions, non-concessional contributions; and then we’ve got retirement caps, all this different language we use to make it more complex and difficult.  

“We’ve built our service around those three different pathways; around self-help, so those people who want to do it themselves; assisted help, so those people that need a little bit of guidance and structure; and then full advice to help.”  

Anderson says surveys show that the happiest members in the fund are those in retirement, so clearly something is already working for them. Anderson also recognises that the retirement phase is increasingly competitive.  

“Members with an account-based pension…can move at any given point in time, either in or out of the system.” 

*The Conexus Institute is an independent think-tank philanthropically funded by Conexus Financial, the publisher of Investment Magazine.

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