Like many observers of the Australian superannuation system, Joey Moloney, deputy program director for housing and economic security at the Grattan Institute, says it’s clear that the task of creating a world-class retirement system is only half done. 

And, according to a new report published this week by the institute, the job is too big and too important to leave it to super funds’ individual responses to the Retirement Income Covenant. 

The Grattan Institute’s prescription for how to fix the retirement phase of the system, contained in a report published this week, entitled Simpler super: Taking the stress out of retirement, focuses on how to deliver “safe and simple annuities at scale”. Furthermore, it proposes opening the annuity market to government participation. 

“We’ve worked hard to design this front end, we are forcing people into the system, we’re forcing them to save money, we are putting them into default MySuper products, but then we’re kind of cutting them loose at retirement,” Moloney tells Investment Magazine. 

“And, like many people before us, we saw probably the key problem at the back end is there’s just not enough risk pooling [and] that, inevitably, asking people to figure out how to spend down their super over an uncertain time horizon [when] they don’t know what their future expenses are going to be, how long they’re going to live [or] what future investment returns are, is kind of asking too much of anyone.” 

Moloney concedes that none of these insights is particularly original, but they provided a starting point that led to the conclusion that “OK, so the way out of this is basically delivering annuities at scale”. 

The institute’s report makes six recommendations that could help Australians navigate the tricky financial transition from accumulation to decumulation. It focuses on a few specific issues, including the complexity of the retirement transition and a resultant lack of confidence in the system that leads retirees to significantly underspend in retirement – which means the system is becoming “a massive inheritance scheme”. 

It recommends that the government become an annuity provider to overcome what it sees as the difficulty in delivering private annuities at scale. In addition, a government-backed annuity would be simple, and would give members greater confidence in the promise underpinning a lifetime income stream. 

Retirement income solution provider Allianz Retire+ said in a media statement that it welcomed “any discussion that shines a spotlight on the issue of longevity and how retirees plan for this”. 

“However, we believe consumers should have choice, as well as the education and support they require to make informed choices,” it said. 

“This is such a large and important space that there is room for multiple providers, 

potentially public as well as the established private-sector product providers. In our case we are backed by one of the largest insurance companies in the world, with exceptionally robust capital backing and the ability to provide long-term products for retirees.” 

Too slow, too piecemeal 

The Grattan report has quite a bit to say about how effectively funds have met – or more to the point, have not met – their Retirement Income Covenant obligations. In essence, the Grattan report suggests that leaving it to funds will be too slow, too piecemeal and lead to inconsistent responses, meaning a member will largely be at the mercy of the quality of their fund’s offering, unless they go to the trouble of actively choosing an alternative – which as the report also points out, most members are ill-equipped to do. 

“Some funds do offer lifetime income products,” Moloney says. 

“They are a minority of funds, and it’s sort of done at their discretion. Some might argue [the Retirement Income Covenant] is obligating funds to offer these products but it’s not entirely clear that’s the case, because the RIC is just a very high-level principles-based regulation.” 

Moloney said the fact that some funds are offering lifetime income solutions is “directionally, a good thing, but it just didn’t match the scale of the problem as we understood it”. 

“We thought that the maturing superannuation system, to really work and deliver on its promise, needs to deliver this stuff systematically, at scale. This is why we landed on that. The current state of play, where a timid government is just kind of tepidly trying to push funds to do it, some are reacting, some less so that just seemed like that’s and that’s not an acceptable state of play. It’s just not that’s not the systematic design changes that we needed to see in the system.” 

It is not an issue that funds can take years to solve. As executive director of The Conexus Institute*, David Bell, pointed out to the Professional Planner Researcher Summit in December last year, if the superannuation industry takes 10 years to get its act together, around 3.6 million new retirees will have gone through the system, and “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?”. 

Unimpressed 

Clearly, the Grattan Institute is unimpressed by the efforts of funds to date to meet their Retirement Income Covenant obligations, particularly as they pertain to advice. But it’s also a legitimate issue to say the retirement issue isn’t equally pressing for all for funds – those with relatively young memberships and a small proportion facing retirement any time soon may be less motivated to sink the time and cost into developing a solution. 

“I can empathise with funds worried about the commercial proposition,” Moloney says. 

“The thing that really struck me in the research is people tend to anchor really heavily to the things that are put in front of them when it comes to retirement planning or retirement incomes or retirement systems. 

“When a fund is worried about the commercial case for an annuity, then I get that, because people are unlikely to move away from what the system first puts in front of them. And right now, what the system puts in front of people is account-based pension that’s drawn at the minimum. And so, you know, if I’m a fund [I want to know] are we systematically putting the option of annuity in front of people. That’s going to affect whether or not I feel confident putting in the cost of product development.” 

Overcoming the sticking points 

Two sticking points to the greater take-up of annuities by retail investors have traditionally been non-commutability, and the cost of products when interest rates are low. 

“There’s no free lunch,” Moloney says. 

“We don’t at all propose that people should be annuitising all of their super, we’re just looking for a more balanced approach. The benefit in an account-based pension is flexibility, the benefit of an annuity is insurance or risk management. But right now, the super system is maturing and the only thing we’re putting in front of people is account-based pensions, which means that we’re way too long on flexibility, and we’re not putting enough stock in risk management.” 

Moloney says the institute does not propose compulsion, either.  

“Everyone will always have choice over what they do with their super, but we just need a more systematic suggestion put in front of people,” he says. 

Moloney says a mix of account-based pension and annuity “offsets the non-commutability part because you’ve got accessible capital left in your account-based pensions at all times. The need to commute an annuity matters less, because you’ve got accessible capital elsewhere, so you’re more balanced in that respect.” 

Moloney says the institute acknowledges the impact that the timing of retirement can have on the cost of annuities, and the authors looked to Singapore for some pointers. 

“One way you can deal … the sequencing risk that comes from retiring in a low interest rate environment or a high interest rate environment…is a pre-purchasing scheme,” he says. 

“You see this in Singapore. Singapore has an entirely government-run super system. They call it something else, but it’s basically the same thing. Everyone is obligated to annuitise their super once they hit retirement, but people can start pre purchasing it sort of once they’re in their 50s. 

“It’s a similar principle to dollar cost averaging when you’re investing in shares. You’re smoothing out your exposure over time as you lead into retirement, and it’s a good mechanism to avoid the risk of all of a sudden retiring into a low interest-rate environment.” 

*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, the publisher of Investment Magazine. 

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