This article was produced in partnership with Challenger
This year Challenger will celebrate 40 years of helping Australians secure a comfortable and certain retirement. In 1985, when the firm was founded, the majority of superannuation fund members were covered by defined benefit (DB) schemes.
By the early 1990s, defined contribution (DC) funds had risen in popularity, enabling employers to effectively shift primary responsibility for funding retirement on employees. Today, only around 16 per cent of APRA-regulated superannuation fund liabilities are within a DB scheme.
According to Anton Kapel, chief executive, Challenger Life and Solutions, the key to improving member outcomes in retirement is a three-pronged approach that includes an account-based pension (ABP), a CPI-linked annuity, and financial advice – but not necessarily comprehensive advice.
The combination, he says, is infinitely more powerful than the sum of its parts.
“Account-based pensions and lifetime annuities are building blocks to blend a retirement income solution that can provide certainty and protection, during a time in life when people are drawing on their savings and risk is not their friend anymore,” Kapel says.
“In some ways, combining an ABP and a CPI-linked annuity is even more attractive than [being in] a DB scheme because members have the guaranteed income stream from the annuity, plus the ability to supplement their regular income or access a lump sum to cover one-off expenses from their ABP, if necessary.”
Coincidently, Challenger happens to be the only life company to offer CPI-linked annuities in Australia, although Kapel is keen to see more providers enter the space.
“The market should be significantly bigger than it is. It can certainly support more providers,” he says, emphasising the size and urgency of Australia’s retirement income challenge and opportunity.
Plenty of work to do
Challenger is passionate about seeing Australia reclaim its place at the top of the Mercer CFA Institute Global Pension Index.
Established in 2009, the Index examines and compares 48 global retirement income systems, based on adequacy of benefits, long-term sustainability and integrity. From the beginning, Australia has been a top performer, although its position has diminished in recent years, “primarily due to reduced net pension replacement rates,” according to Mercer.
In 2020, it slid out of the top three.
“Globally, Australia is recognised for having an excellent accumulation system but there’s still definitely work to do on the retirement phase of the system,” Kapel says.
“Pleasingly, the journey has started, and the retirement income covenant is the first part of the government’s response to push the industry to develop a stronger retirement proposition for members.”
For its part, Challenger is partnering with super funds like TelstraSuper and the Commonwealth Superannuation Corporation (CSC) to deliver flexible, scalable retirement income solutions that are designed to help super funds meet their members’ evolving needs.
For example, last year, Telstra Super launched the RetireAccess Lifetime Pension, which provides a guaranteed income for life, backed by Challenger.
The solution enables members to blend their ABP with either an inflation-linked or market-linked income stream. Importantly, it has built-in protections to ensure that members retain access to capital over a long period, based on life expectancy.
If members need to withdraw, or if they pass away during the withdrawal guarantee period, access to capital is available, reducing a common concern for retirees interested in lifetime income products.
Furthermore, only 60% of the amount invested counts towards the Age Pension assets test until age 84, or for a minimum of five years, enabling some retirees to qualify for a part pension and other benefits.
Advice evolution
As the only provider of CPI-linked annuities in Australia, Challenger is focused on leveraging its head start to build its institutional business.
This highlights the natural evolution of the group’s strategy.
For the first 30 years of life, Challenger focused almost exclusively on the retail advised market, establishing strong relationships with financial advisers.
Retail remains the group’s core market, representing around 80% of business.
Few financial services companies understand the value and importance of good advice better than Challenger, and this knowledge is increasingly important, as more superannuation funds prepare to provide personal advice to members, under the Delivering Better Financial Outcomes (DBFO) reforms.
Challenger is highly supportive of the DBFO reforms, which aim to make advice accessible and affordable to more Australians.
“Historically, funds have avoided personal advice, so much so that they avoided collecting certain member information. As a result, they are generally not set up to guide members to [choose] an appropriate retirement income solution,” Kapel says.
“Legislation has made personal advice a dangerous place to be, but DBFO presents an opportunity for funds to talk to members about retirement and provide advice and guidance.”
Kapel says advice doesn’t need to be comprehensive and ongoing to be valuable. It definitely doesn’t need to be expensive.
“Good advice is invaluable and changes lives. For a segment of the population, comprehensive, ongoing advice is right for their needs, but for a very large proportion of Australians hitting retirement, they can’t afford it and don’t need it,” he says.
“There is a large number of Australians in or approaching retirement, and a relatively small number of advisers, so funds are ideally positioned to offer [advice] and help members construct an appropriate mix of products for retirement in an efficient, streamlined manner.”
In a reversal of traditional institutional influence, whereby institutions use their size to access innovative investment strategies first and set standards, Kapel observes that the pyramid inverts with life insurance and annuities.
Retail investors set the trends and provide invaluable insights for funds into consumer behaviour and preferences.
Based on Challenger’s experience, retail lifetime annuity sales have been “very strong” for the past three years, particularly CPI-linked annuities.
Kapel attributes this growth to the trifecta of Australia’s ageing population, the rising cost of living, and greater understanding of the benefits of inflation-protected income streams.
“More people are retiring and thinking about issues like inflation, knowing how much savings they can spend, and sustainability, and because advisers typically focus on retirees and pre-retirees, they’ve ramped up their education on the importance of building a retirement income stream for life,” he says.
“People don’t just suddenly wake up with a revelation that they need an annuity. It’s usually a nudge or recommendation from a trusted source that prompts them to invest.”
To illustrate the impact of the work that Challenger is doing, Kapel shares the story of 80-something year old grandmother, Ruby*.
After the recent loss of her partner, Ruby started paying closer attention to her finances, including regular monthly payments from Challenger, linked to a lifetime annuity her husband had invested in.
Ruby noticed that these Challenger payments had gradually increased over time, prompting her to call, concerned that she was being overpaid in error.
“She was concerned that we’d made a mistake, but no mistake had been made,” Kapel says.
It turned out that Ruby’s husband had invested in a CPI-linked annuity some time ago and, because inflation has been higher in recent times, she was receiving a larger amount.
“She cried with happiness on the phone,” Kapel says.
*Not her real name
