When superannuation works well for members, it works very well. It’s simple (for the member), efficient enough, and for three decades has become a proven mechanism for accumulating savings.
When the system doesn’t work well, it can be a minefield of administrative opacity, inefficiency and sub-optimal outcomes for members.
That’s seen in delays in handling life insurance claims, or when funds fail to consolidate member accounts, or when there are protracted delays in switching investment options or valuing assets.
Right now, the retirement phase of superannuation does not work as well for members as it could, and certainly not as well as the accumulation phase. There are no default options in retirement. Each retiree’s needs become deeply individualised, based on household structure, income requirements, age pension eligibility, other Centrelink considerations, risk appetite, additional sources of income, and other issues besides.
It needs to work better, soon. Right now, there’s around $4 trillion in super funds, including something approaching $3 trillion in APRA-regulated funds, waiting to be converted into retirement income, and that figure is growing.
The 2024 Researcher Forum, hosted by Investment Magazine sister publication Professional Planner in the Blue Mountains in early December, heard that super funds have by and large harnessed the benefits of scale to deliver efficient though largely homogenous accumulation services, but they’re going to have to discover another kind of superpower to meet the bespoke needs of members when they retire.
Financial advisers, on the other hand, have struggled to deliver accumulation solutions at scale (though they’re getting better at it through a combination of managed accounts and technology) but have excelled at guiding individual clients through the deeply personal complexities of retirement.
The best solutions for retiring fund members must meld the scale and systems of super funds with the personalised expertise of financial advisers.
Chant West general manager Ian Fryer told the forum that “someone who doesn’t have their own adviser [will] be in their fund, and they’ll get close to retirement, and they might have a couple of webinars on retirement talking about the products, but they’ll have very little guidance about what investment option should I be in; how much money will I get, including age pension; how much can I draw down sustainably for the rest of my life”.
“There’s very little input along those lines,” Fryer said.
“There’s a lot of intra fund advice, but hardly any fund provides advice other than for a $5000 fee on those reasonably simple issues: how should I invest my money; how much income can I draw down; what’s my total income, including aged pension? They are the fundamental questions that I’d argue many retirees need to get answered, and they’re not getting answered now.”
This is big
A vast, unprecedented demographic shift is underway as Baby Boomers career headlong towards decumulation, like some entitled runaway train. It’s a generation that’s grown up in a financial services system created largely by them, for them, and they’re not going to settle for second-rate solutions right when it arguably matters most.
The Conexus Institute* executive director David Bell said that funds were born into and matured in an era of relative simplicity: default settings, efficiency driven by scale, and prescriptive policy frameworks.
But the Retirement Income Covenant, introduced in 2022, changed the game. Funds now bear a responsibility to deliver tailored solutions, but the regulatory architecture under which they do that remains vague. Bell said it’s principles-based, not prescriptive. This creates enormous potential but also massive uncertainty.
“You’ve just told a whole industry that was conditioned on rules and defaults to say, ‘Oh, you go ahead, be creative and deliver on this’. It just doesn’t work,” Bell said.
“We’re nearly three years in, and we’re not particularly close to having the retirement piece of superannuation solved so, from a policy perspective I think you’ll gradually see more prescription come in.”
And there’s another problem. Even if funds could figure out how to harness financial advice to give members what they want and need, there simply aren’t enough advisers to meet demand. Add to this the issue that the financial advice industry – or profession, as it demands to be called – has been tied up tight by red tape, and the resultant inefficiencies have played a role in pricing advice out of reach for many Australians.
Morningstar head of fund ratings Matt Olsen told the forum that many retirees face risks they are generally ill-prepared to manage – among them longevity risk, sequencing risk, and interest rate risk. Most retirees can’t assess, let alone manage, those risks themselves; it will be a combination of good product and sound advice that gets them through.
“There’s a need for good, high quality building blocks for a retirement portfolio,” Olsen said.
“There’s a need for good research around all the building blocks. And I think another challenge facing retirees is…heterogeneous [retirement] offerings, where there’s different approaches – so which one’s the best?”
Olsen said this suggests the best path forward is collaboration between super funds and advisers. And it will require the right policy settings by the government to start to rebuild the ranks of advisers, decimated by the regulatory upheaval of the past 15 years.
The hard stuff
While advisers provide personalised strategies for those who can afford to pay, Fryer raised an inconvenient truth: most super fund members will get to retirement without access to quality advice and rely instead on intra-fund advice or, even worse, almost no guidance at all.
Fryer argues super funds must do better.
“The outcomes that you get from a range of different choices is going to vary so widely because the drivers of different optimal outcomes are so varied – things like household stuff, other assets, the list goes on,” Fryer said.
“That’s the reason why industry funds don’t do it. Well, industry funds are good at the easy stuff: if you give us the money, we’ll take care of it, invest it well, et cetera. They’re not very good at hard stuff, and this is the hard stuff.”
Advisers remain central to solving the retirement income challenge. They have the relationships, trust, and expertise to navigate individual circumstances. Olsen said
that over a long period of time working with individual clients, advisers have developed solutions to providing income in retirement and solving the inflation and longevity risk issues.
“I’ll say [to them], ‘Well, what do you do for retirement with your clients?’,” Olsen said.
“And they say, ‘Well, you know, we take their income goal and we multiply it by 20, and that’s what they’re going to need their starting balance to get to before they can retire’.”
Olsen said advisers commonly set up “bucketing approaches, having some money set aside for two years of cash needs; then some diversified fixed interest for another five years; and then the remaining growth assets to try and offset longevity [risk]”.
“Consultants develop frameworks where you [place] 20, 25 or 30 per cent into a deferred lifetime annuity, and then keep the remaining 70 per cent in an account-based pension, and potentially, if you want even more flexibility, have maybe 12 per cent per cent in cash and less in the account-based pension,” Olsen said.
“They’re typically the broad structural elements. And then on an approved product list…we need products that can hedge long-term interest rate liabilities, because if the interest rate falls, the income falls, or the present value of the liabilities goes up; and products to hedge inflation risk.
“That may be an inflation-protected bond or some sort of real assets. There’s market risk and longevity risk. Longevity risk is obviously offset by growth assets, or potentially an annuities product; and then the sequencing risk issue, where it hurts if you’re drawing down already some capital, and then you have a drawdown in the market, it’s exacerbated, so how can you have some downside-protection-type elements?”
Olsen said it’s not unusual for licensees or researchers to draw up income approved products lists (APLs), “which would take, say, 700 products, and whittle it down to say 300 or 400 products in those broad buckets, and maybe reduce emerging markets or small cap-type products out of the equation, and then try and classify an APL into those various areas”.
But the product landscape is changing. New “retirement in a box” solutions have emerged to address market risk, inflation risk, sequencing risk and longevity risk in a single product.
There are also some “really interesting, innovative products, so called reverse-insurance”, Olsen said.
“Instead of paying premiums and getting a lump sum if you die, you get an income top-up along the way, and then when you die you have to pay some capital back to the insurer that’s provided you with that income top-up,” he said.
“Some good innovations have come, I think, in response to that regulatory stimulus.”
This is where the research community can add value by bridging the gap between product complexity and usability in an adviser’s hands. As Olsen said, advisers don’t like complexity. They need tools, frameworks, and insights that simplify decision-making. Product comparisons, risk assessments, and clear benchmarks for “retirement success” will help advisers confidently recommend solutions that align with clients’ goals.
Collaboration is key
The 15,000 or so financial advisers remaining in practice following the regulatory changes of the past 10 to 15 years cannot deliver nearly enough advice to satisfy demand. And super funds aren’t geared up to offer bespoke services to members at scale. But their strengths are complementary.
Super funds bring the benefits of operational scale; some have developed deep data-driven insights into their membership; and they have a lot of members. Advisers are skilled at delivering personalised strategies and need support – principally digital advice capability – to deliver more of it.
Still, it needs more bodies to work effectively, and it is to be hoped that measures contained in Tranche 2 of the government’s Delivering Better Financial Outcomes reforms will lay the groundwork for entities such as (but not only) super funds to hire a so-called new class of adviser (NCA – the final terminology is yet to be determined), and also reduce red-tape on advisers, potentially freeing them up to deliver advice to more people.
NCAs will be subject to lower standards than professional financial advisers and planners but can play a role in delivering better guidance and advice to members than they currently have access to.
But a significant factor in how quickly collaboration is fostered – setting aside for a moment that no draft legislation has yet been released, and it’s unclear whether Parliament will sit again before the next Federal election – is how highly super funds prioritise the retirement issue in the first place.
“I always think the superannuation industry needs to be cattle-prodded along, and needs to have, ultimately, a threat to really make something the highest priority,” The Conexus Institute’s Bell said.
“There’s so many priorities for super funds, consolidation, scale, sustainable growth; then you’ve got all the investment models that are evolving, and then you’ve got services.”
Bell said the Institute is not necessarily saying all funds must make retirement their number one priority – some have a greater proportion of their members nearing retirement than others, and for them the issue may be more pressing – but overall, time is of the essence.
“At the moment you’ve just got principles-based [rules and], no strong nudge, we think that’s a travel-easy space where you could just go along at some sort of pace, show a little bit of progress.
“We’ve had funds says to us, give us 10 years and we’ll get there. In 10 years, you’ll have 3.6 million new retirees having gone through the system. How many of those were being provided a really decent piece of advice or guidance which left them in an appropriate solution, which had them feeling comfortable and confident as they went into retirement?”
* The Conexus Institute is an independent not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Investment Magazine.
