APRA’s decision in late May to include aspects of operationalising the Retirement Income Covenant in its prudential guidance on member outcomes is further evidence, if any were needed, that it is becoming increasingly serious about super funds needing to do better on retirement income strategies.
APRA beefed up Prudential Standard SPS 515, Strategic Planning and Member Outcomes, to make it clear that measuring and reporting on aspects of a retirement income strategy will from July 1 next year be integral to what constitutes sound practice by registerable superannuation entity licensees.
As super funds continue to push forward with their retirement income obligations – in some cases at a glacial pace – SPS 515 reiterates that a fund’s business performance review must at the very least assess and demonstrate whether the fund’s strategic objectives are being met.
It says this must include an explanation of what has driven the assessment, and the outcomes achieved for different cohorts of beneficiaries, including “beneficiaries who are retired or approaching retirement (and sub-classes of those beneficiaries)”.
UniSuper chief executive Peter Chun tells Investment Magazine the fund has defined and refined three clear success metrics for its retirement income strategy: adequacy, confidence and advocacy.
Critically, these metrics are all relative – they are not absolute measures, but specific to each member. And as a result of this characteristic, they’re also potentially applicable to other funds. But as with anything of this nature, the real trick is in the execution.
Chun says the fund’s aim is to deliver a member an income in decumulation equivalent to 70 per cent of their pre-decumulation income. Right now, about 80 per cent of UniSuper members who move into decumulation with the fund achieve that goal.
Insights into the cost of living
He says the fund also aims to give members insights into cost-of-living issues, so they have greater confidence to spend the income they receive. And finally, it measures advocacy to determine what members themselves think about the services and products the fund has provided.
The foundation of the first two measures is an ability to collect, interpret and then act on data – including the member’s current situation, likely future income needs, and spending patterns in retirement.
For example, Chun says, the fund can identify a 45-year-old member and, from their contributions to the fund, make an assumption about their income.
“Often they don’t give us the salary, we work out the salary,” he says.
“We take 70 per cent of that salary, then we project it to age 67. We use some assumptions, and then we forecast that dollar amount and the account balance [needed to] last till their life expectancy, at 70 per cent of pre-retirement income. Eighty-one per cent of our members are on track for that.”
The first success measure is more or less a mathematical exercise, albeit based on a replacement-rate assumption. The second measure is much more grounded in emotion.
“Money is a very emotive topic, often it’s not just about the dollars, it’s about how people feel,” Chun says. This is where big data comes into play and to gain a competitive advantage UniSuper has established a relationship with an unnamed bank to provide data on consumer spending.
“You can imagine Australian banks have a lot of rich information about how people are spending through different phases of their life,” Chun says.
“We’ve got 650,000 members, we only have 50,000 members in retirement so our own data can only get us so far. But [with] this particular organisation, we have access to two million of their customers and their spending data.”
Chun says this plays to the concept of personalisation – he’s used the analogy to Netflix many times – and data is the enabler. It allows the fund to give members insights that are far more granular and also far more relevant than, say, the ASFA Retirement Standard, which is fine as far as it goes but is inevitably an average.
“Everyone’s journey in retirement is different,” Chun says.
“It’s not like accumulation. In the accumulation phase you don’t need to absolutely know their circumstance or their specific needs, but in retirement, you do.
“Why we’re very passionate about having spending data is it’s very rich information we can [cut to] help our members understand what Australians like them are actually spending in retirement.”
Confidence to spend more
Chun says that “rather than averages, rather than just theoretical numbers”, the fund can tell, for example, a 69-year-old member living in Adelaide that individuals in the same general age group and the same general location spend X on living expenses, X on healthcare costs, and so on. The aim is to give members confidence, where they need it, to spend more in retirement and enjoy the best lifestyle they can.
“With this data [we] have expenses by at least 10 categories, split between essential spend and discretionary spend,” Chun says.
“Essential spend is groceries, housing, healthcare; discretionary is eating out, leisure and entertainment. We have the average; we have the top 10 per cent spend; we have the bottom 10 per cent spend.
“With actual data, actual behaviour, we can help them feel more comfortable to spend, and that’s what we believe we’re doing a good job at.”
And finally, the fund measures advocacy – how well its own members think they are prepared for retirement, and how confident they are that the money they’ve accumulated will support them well.
This is reflected primarily in the CoreData Best Possible Retirement research, which Chun says shows members of self-managed super funds generally express the highest levels of retirement satisfaction (they’re hardly going to admit otherwise), but among APRA-regulated entities, UniSuper ranks top.
“I think the thing that really delighted us was our score improved, whereas the industry went backwards because of the cost-of-living pressures,” Chun says.
The CoreData research found that the perceived amount that members need for retirement increased by 27 per cent year-on-year, from $630,768 to $802,198, due to cost-of-living pressures.
On average, a UniSuper member will retire with an account balance of $550,000 and an integral part of the fund’s retirement income strategy is the availability of comprehensive financial advice to support members as they transition to retirement. Chun says that overall about 72 per cent of money in accumulation moves into a UniSuper retirement income product when a member retires; of the 28 per cent that doesn’t stick, most is withdrawn as cash. A fraction goes to other retirement income providers. About 60 per cent of all money that moves to decumulation within the fund is advised.
