Australians nearing retirement face complex financial decisions at exactly the point where the system offers them the least support, but super funds are responding to calls from regulators and policy experts to do better.
Under the current system, advice is expensive, digital tools are inconsistent in quality and most retirees wind up by default in account-based pensions with minimum drawdowns. But that’s changing as funds increasingly recognise that the fix requires coordinated change by funds, providers and policymakers.
Joey Moloney, Grattan Institute deputy program director for housing and economic security, told a Retirement Magazine roundtable sponsored by T. Rowe Price that a system offering quite structured guidance during accumulation provides little direction to members in retirement.
And where they are compelled to enter a product market there’s a risk that they will not understand what they’re being offered and will choose unwisely. The Grattan Institute has previously proposed that the government become a seller of annuities to address this issue.
When a member retires, they go “from a high level of government guidance to zero”, Moloney said.
“And we’re going to solve that through the mass provision of financial advice at scale in an industry that’s been decimated? [I am] deeply sceptical of that.”
Most members who fall into an account-based pension typically draw down the minimum that they’re required to and have little or no means of managing longevity risk, among other risks.
“That’s a pretty terrible policy baseline,” Moloney said. “People seem really stressed and anxious about managing that themselves.”
He said the system must do more to steer members towards achieving more sustainable retirement incomes: “We should lift the baseline policy settings such that we’re guiding people towards lifetime income.”.
AustralianSuper head of retirement Jacki Ellis said Australians don’t know what good retirement support looks like because the system is still maturing and most have never seen it.
“It’s really hard to know what member behaviour is going to look like in a system where we actually have good experiences and support and we make it easy [and where] it’s not so overwhelming and anxiety-provoking that they just want to stick their head in the sand,” she said.
Ellis said the industry has taught members to judge funds by fees and performance, but that these signals don’t help and “when it comes to retirement, it’s a little bit more complicated than that”.
Digital and modular
Digital advice has emerged as a principal means of meeting the sheer scale of demand for advice. UniSuper chief marketing and growth officer Dani Murrie said the fund is focused on members who fall between public support and full-service financial advice.
“We’re looking at digital advice strongly to help us with what we call the ‘missing middle’,” she said. “Digital is the way to scale that personalisation, and that’s what we’re pursuing.”
Delivering advice at scale means focusing on predictable needs that can be served efficiently and asking better questions.
“Certain times you can actually build a template, or a solution for, and that becomes the scalable solution,” T. Rowe Price global head of retirement strategy Michael Davis said .
“Other times you say, this is not scalable… we’re going to need a person, or we’re going to need something that’s more customised,” he said.
A one-size-fits-all won’t work, but neither will attempting full personalisation, and “what we try to do is personalise what’s scalable and humanise what’s not scalable”, he said. “That’s kind of the framework that we use.”
Members trust their funds more than they trust external providers. Davis said that trust is a strategic asset the system should harness, supported by enhanced policy settings.
“My personal view is I think government should extend more flexibility to supers to provide more advice,” Davis said.
“The supers have built the greatest amount of trust – in accounting terms, you call it goodwill – and you built it over decades.”
Davis said super funds are best positioned to deliver retirement guidance because of that embedded relationship.
“If the goal is to help people retire well, and the super fund has that relationship, why wouldn’t you leverage that?” he said.
“That’s not to say there’s not a role for outside advisers, there’s clearly a role. But it’s also recognising the trust is where the person is already transacting.”
Something like a pension
T. Rowe Price global solutions portfolio manager Richard Coghlan said members respond best to retirement products that replicate the experience of defined benefit (DB) pensions, even if they are personally unfamiliar them.
“People who have DB schemes generally are much happier than people who don’t,” Coghlan said.
“If you put together the top things people pick, you’re talking about a DB scheme sort of outcome.”
Income products tend to fail when they reduce a member’s flexibility. “First and foremost, they need flexible access to capital,” Coghlan said.
Ellis said AustralianSuper has seen that in member testing and “lifetime income products in isolation just don’t pass the pub test, essentially”.
“When you talk about a component of that with an account-based pension or a drawdown account… their eyes light up and they’re like, ‘Oh wow, that sounds really interesting’,” she said.
The system can’t rely on voluntary uptake of complex retirement products and that this represents a market failure, according to Grattan Institute’s Moloney.
“The market design has never really worked well for consumers,” he said.
“We should expect that there will always be a default, and we should make sure it’s doing something useful.”
Commonwealth Superannuation Corporation chief executive Damian Hill said there’s no shared industry view of what “success” looks like in retirement.
“When I am talking to others about our retirement income strategy, and I’m sure everyone’s doing that, what I said to people… is the first thing you’ve got to define is success,” Hill said.
“And we’re getting proposals about, well, we’ve got to be able to compare [retirement offers] first.”
However, a comparison tool such as performance benchmarking must evolve from how it’s applied in accumulation or “you might get innovation constrained if we try to retrofit a two-dimensional accumulation-type performance test to a five-dimensional problem,” Hill said, referring to a five-dimensional framework for meeting retirement income needs developed by T Rowe Price.
Davis said internal data at T. Rowe Price shows member preferences become more divergent as retirement approaches.
“There is more dispersion in the preferences the closer you get to retirement,” Davis said. “That’s an indicator that there is more complexity as you get closer to retirement.”
In addition, the system can’t ignore the emotional dimension.
“What we’ve seen [in our research] is that the stress increases for people at that point,” Davis said. “It’s not just a financial problem; it’s a behavioural one.”
Members are first and foremost seeking reassurance when they retire, UniSuper’s Murrie said.
“The customer doesn’t want a product,” she said. “They want to know that they’re going to be okay.”
