The Grattan Institute has proposed direct government involvement to improve retiree outcomes and deliver government a better return on the substantial taxation incentives provided to superannuation. Grattan’s bold and broad-reaching measures portray a very different future retirement system to the industry-led system that we envisage. For an industry-led system to persist, it needs to deliver quality retirement products and services in good time, and not facilitate laggards.
Dismiss Grattan’s work at your own peril: Grattan are highly-respected and carry influence – after all they proposed what is now the Your Future Your Super performance test.
Same symptoms, different recommended treatments
There is near universal agreement on the symptoms afflicting the retirement system as it stands. Grattan emphasise the complexity of retirement matched against a systemic shortage of advice and guidance and an inappropriate range of products. The Retirement Income Covenant isn’t motivating an industry-led solution in reasonable time. And time is important: this year 250,000 people will retire.
Grattan proposes a suite of measures, including government-provided annuities, recommending to members they annuitise 80 per cent of their balance over $250,000, establishing a government guidance and advice service, a ‘top 10’ list of super funds for retirement, and performance testing of account-based pensions (ABPs). In effect a bigger role for government, more prescriptive regulation and a constrained role for industry.
The Conexus Institute’s starting point is an industry-led retirement system. This isn’t ideological. Super funds operate in a fiduciary manner to provide highly regulated products and service huge numbers of members. They have the capability and capital to innovate and meet the retirement challenge. We consider super funds as the most logical cornerstone of a quality retirement system.
However, parts of the industry need to pick up their game. Laggards should not be tolerated. We remain steadfast to our proposed Retirement Licensing Regime as a mechanism to ensure this happens. It would also protect retirees by setting minimum requirements for super funds, while precluding funds that don’t meet those standards from being able to provide retirement offerings.
An industry which is held back by laggards is vulnerable to higher level reforms, such as those proposed by Grattan.
Industry, hindered by slow reforms, struggles…
It takes time to develop a quality retirement income strategy (RIS), something that is sometimes overlooked by commentators. There are also policy and regulatory barriers that need to be addressed to enable funds to complete their RIS to a high standard. These include:
- Moving beyond the RIC principles to provide more guidance on what is required from funds (partly addressed in Treasurer Jim Chalmers’ recently announced retirement reforms).
- Developing frameworks for RIS assessment.
- Reforms to enable funds to provide an appropriate amount of guidance and advice to retiring and retired members, a highly difficult challenge that government is attempting to address.
- Tackling the product-based frictions which make account-based pensions unattractive for many retirees (relating to activities such as making contributions and switching providers).
Unfortunately, industry hasn’t made sufficient progress on retirement. Some funds have significantly expanded their capabilities, particularly in guidance, affordable advice, and the use of personas. However, in aggregate, industry needs to do more, and unfortunately there are many laggard funds, as highlighted in individual analyses undertaken by APRA and ASIC, Super Consumers Australia, Chant West and The Conexus Institute.
…but that doesn’t make government solutions a panacea
Just because industry is struggling doesn’t mean that government will do any better.
Government is not immune from the difficulties of governance, IT and data management, customer servicing and the specialised activities within the legally and technically complex financial services sector. It’s not hard (or necessary) to call out examples. There is also a question of moral hazard for government to consider.
And while not defending industry, developing product and services in complex and reforming regulatory areas is difficult and takes time. Industry has taken some steps, but government would be largely starting from scratch.
Industry needs to stand up to the Grattan challenge by delivering
Grattan envisages a different retirement system: more government, less industry, more prescriptive measures for funds, and more business risk (through a top 10 mechanism). We’re sure they aren’t the only smart group of people who hold alternative views to an industry-led retirement system.
But many in industry, such as AustralianSuper and UniSuper, picture a bigger rather than smaller role for super funds in retirement.
For industry to defend itself, two things need to happen:
- Super funds need to demonstrate, through expanded capabilities, that they are progressing towards delivering excellent retirement strategies as soon as feasible. In our view this requires making retirement a top two business priority.
- There needs to be a mechanism for removing laggards and ensuring every retiree is serviced by a good retirement provider. We believe a Retirement Licensing Regime would do that.
If industry doesn’t deliver and laggards are allowed to persist, then the case for re-shaping the retirement system, perhaps as proposed by Grattan, will only grow.
David Bell is executive director of The Conexus Institute. Geoff Warren is a research fellow at The Conexus Institute and an honorary associate professor at the Australian National University.
The Conexus Institute is a not-for-profit think tank philanthropically funded by Conexus Financial, publisher of Retirement Magazine.
