Solving the retirement puzzle is an issue that policymakers, regulators and pension funds around the world are grappling with, all driven by the same underlying issues of ageing populations and the increasing pressure on government budgets to fund public pensions.
Yet for all the perceived faults and criticisms of the Australian system, superannuation funds compare favourably with their international counterparts when it comes to delivering retirement income solutions, an Investment Magazine roundtable, sponsored by T. Rowe Price, has heard.
Spurred by the admonishments of regulators, member advocates and the media, super funds are increasingly aware that delivering good retirement outcomes requires more than just investment performance, and that retirement can’t be solved with product alone.
It’s a shift in mission, mindset and method from accumulation to decumulation and the good news, according to T. Rowe Price global head of retirement strategy Michael Davis, is that a recent visit to Australia has reinforced his belief that “you all are ahead of the world when it comes to thinking about [defined contribution] systems and how you deliver retirement sufficiency”.
That’s not to say the funds he spoke to while in the country were complacent or underestimating the task ahead, and “nobody has said to me that they’re happy with where they are”, Davis said.
“They feel like there are more questions than answers. And I really appreciate that humility.
“But I would also say, I think the world, in a lot of ways, is watching you.”
Davis, a former deputy assistant secretary for the US Department of Labor Employee Benefits Security Administration in the Obama administration, said the maturity of the accumulation phase of super hasn’t necessarily reduced the decumulation challenge. Achieving a healthy account balance at retirement is only the start.
The roundtable noted that retirement planning remains the most complex financial task an individual will ever face, and it’s one they currently must confront without a reliable playbook and often with little or inadequate support from their fund. These individuals are then caught in an advice limbo, unsupported by their fund but at the same time unable to afford the cost of professional advice.
Davis said that answering the retirement question must incorporate not only investment ideas, “but also behavioural finance, because people don’t always say what they’re actually going to do; and sometimes they say they’re going to do something, [but] they do the exact opposite”.
“That’s called human behaviour. Our job is to try to navigate through that and try to architect people to outcomes and get them to the right place. I do think that default policy may have a role in that discussion.”
Davis said default solutions won’t fit every single member precisely, but the aim should be to “do the most good for the most people most of the time”, and allow them at any time to opt out of whatever default they may find themselves in if they wish to direct themselves.”
Manifestly inadequate
Grattan Institute housing and economic security deputy program director Joey Moloney said a report released by the institute earlier this year was premised on the belief that “the policy baseline of the system is manifestly inadequate”.
“The system will always have a de facto default, which are the policy settings that dictate what happens to someone if they don’t otherwise take a particularly active decision,” he said.
And right now that’s an account-based pension with programmed withdrawals at the minimum drawn-down.The conclusion was that’s a pretty terrible policy baseline.”
The institute’s argument was that policy settings should change so members are guided by default to lifetime income streams. It recommended, among other things, that the government become an annuity provider, and members should be compelled to use 80 per cent of their account balance above $250,000 to purchase an annuity, be it from the government or elsewhere.
“What you’re trying to do is just change the way the system presents to people,” Moloney said.
“The main problem we’re trying to solve for in retirement is longevity risk management. People seem really stressed and anxious about managing that themselves.”
AustralianSuper head of retirement Jacki Ellis agreed that “we’re not great at this as a maturing system today [and] there’s more work to be done”.
“But I think it’s too early to say that the private sector can’t solve for this,” she said.
“The key is about how you’re presenting the solution to members. If you talk about lifetime income on its own, in isolation, with members, it doesn’t actually meet their objectives for what they’re looking for because, first and foremost, they need flexible access to capital. That’s actually their primary goal.”
A different story
But if a fund marries a discussion of lifetime income with the capital-access flexibility of an account-based pension, it’s a different story.
“I’ve even been in testing where they’re like, is this a thing that exists today? I want it,” Ellis said.
“We might not have seen an example where we’ve really cracked the distribution of those products…but I’ve seen enough to be really excited about the possibilities.”
Commonwealth Superannuation Corporation chief executive Damian Hill said that in many respects Australia is “at the forefront of systems thinking for a mandatory DC system”.
“I want to acknowledge that the debate has moved on in Australia, and more funds are doing something and doing their research,” he said. In addition, a growing number of funds now have individuals with specific responsibility for developing and implementing retirement solutions.
Hill said it’s preferable for each fund to work out its own solution than to be subject to a government-mandated default, if only because every fund’s membership profile is different.
Retirement has been described by T. Rowe Price as a five-dimensional problem to solve, balancing the often-competing issues of longevity, unexpected balance depletion, liquidity of balance, volatility of payments and level of payments.
Hill said it would be unwise to “try to retrofit a two-dimensional accumulation-type performance test to a 5-D problem”, simply because the metrics and the variables of retirement are far more complex than those of accumulation.
It’s those very variables that mean there cannot be “a consensus view across the industry about what success looks like”.
“Quite rightly, we can have different views of what success is,” Hill said.
“The extent to which [government and regulators] are prepared to be courageous and stand against homogeneity and embrace the heterogeneity that’s the coming with [retirement] solutions is going to be interesting.”
Not easy to define ‘good’
The Conexus Institute executive director David Bell said it’s “not easy to define what a good retirement is at a system level, applied to many people with different preferences”.
“But I also think that… you just have to get comfortable as an industry that it won’t be resolved,” Bell said.
The industry does not need a singular vision, and certainly not a government- or regulator-imposed one-size-fits-all solution, but tolerance for variation.
“You have to lead your own way to say, ‘This is what we’re doing, and this is why we think we’re doing a good job for those members’,” Bell said.
Davis said a T. Rowe Price project underway with Massachusetts Institute of Technology to assess equity preferences by age cohort suggests member needs truly do become more complex and individualised as they get closer to retirement.
“What you find is, in the 20s and 30s, [equity] preference tends to be higher, but it tends to be more uniform,” he said. “As you get closer to retirement, that preference tends to become a lot more dispersed.
“That’s an indicator of the level of complexity that people are feeling as they get close to retirement. It’s just one of many examples of this issue, but we do think again, having a more personalised experience as people in their retirement is quite critical.”
Such complexities mean that default product alone won’t be enough. Insignia Financial retirement lead Ashton Jones said the industry must move toward offering “a compelling mass-market solution… that people opt-in to, that they find familiar, that is actually successful”.
“Retirement is the central purpose of super,” Jones said. “It is very easy to get motivated to do this well, because you’ve seen what life is like without super. You’ve seen what it is like to rely completely on the age pension.”
Advice, but not as we know it
Despite the known benefits of advice, many Australians still retire without consulting a financial adviser. Regulatory constraints, cost barriers and deep emotional undercurrents around money have made the provision of advice a perennial problem.
Mercer Australia retirement and partnerships leader Kelly Shay said: “A pain point for us is absolutely getting people to seek help, guidance and advice, yes; and then most importantly take action.
“I think if we measured that gap, between guidance and action it would be massive,” Shay said, adding that that’s due in large part to how the system frames advice.
“We don’t make members experience obtaining help, guidance or advice and then implementing it seamless, I think members want and expect it to be easier.” she said.
Planning for retirement needs to start early in the accumulation journey.
“While we think about how do we solve it for the pre-retirees and retiree cohorts, let’s not forget those who are in accumulation, because that problem is going to continue if we just focus on what’s the product or policy solution in retirement, without looking back and thinking, ‘How could we have done this better for the people in the accumulation phase?’,” Shay said.
Brighter Super head of retirement Jennifer McSpadden said the fund is revamping how it delivers advice.
“We’re changing how we offer advice by making it modular, like a menu of personal advice services to choose from,” she said.
“This means members can pick and choose the advice they need, with clear information on the cost and the situations it suits best.”
But even the best-designed advice pathways still need members to engage, and that’s not guaranteed.
“We firmly believe in advice as a part of helping with the help, guidance and advice, and having members who are engaged and make choice as they move from a defined contribution environment to the pension,” UniSuper’s Murrie said.
“It’s then the how it taps into behavioural finance. How do you get people sign up to a lifetime income, when the benefits might come in later in life? It’s how do you take your medicine now, for the benefits that will come in 20, 30, years? That’s the hairy, audacious thing that we’ve all got to put our minds to”.
Much has been made of digital solutions as a means to scale advice cost-effectively. But roundtable participants cautioned that digital alone won’t solve the engagement gap.
Varies by age
Davis noted that member receptiveness to digital varies sharply by age. “Younger cohorts tend to be a little bit more receptive to it than those that are near retirement who want to talk to someone who can advise them,” he said. “For the demographic that’s in retirement, they have a stronger desire for advice, for the most part.”
Jacki Ellis said digital has a real role to play for some members, particularly those for whom embarrassment or anxiety is a barrier.
“There’s so much shame associated with retirement,” she said. “They’re terrified of what they’re going to find out. And do you want to be in front of a human when you find that information out? A lot of people don’t.”
Even so, Insignia Financial’s Jones said, human validation remains critical at the implementation stage.
“All of our research suggests that before a member acts on a piece of digital advice they do want to speak about it to someone,” he said.
“We do think there’s a really important role for a human being, whether it’s an intrafund advice team or a comprehensive adviser, to make the member feel comfortable and help them take that next step to act on the information they’ve gathered or played around with or developed through a digital advice tool.”
Reassurance over product
The industry is gradually recognising that reassurance and instilling confidence, not product alone, is the central member need at retirement.
Brighter’s McSpadden said members are increasingly worried about financial strain and day-to-day costs, not just investment returns.
“Cost of living seems to be one of those things that our members are telling us through research is a real problem,” she said.
“[They are worried about] managing the cost of health care, wondering how they’ll manage to pay for aged care.”
T. Rowe Price portfolio manager Richard Coghlan said the emotional dimension of retirement is often underestimated, and that “people who have defined benefit schemes generally are much happier than people who don’t”.
“[In] our survey data in the United States, if you look at the top things that people pick, if you put them all together, you’re talking about a defined benefit scheme sort of outcome. And I think that if we can dress up our solutions to look more like a defined benefit scheme outcome, that would be very helpful for everybody.”
The roundtable made clear that while super funds are moving – some faster than others – towards better retirement experiences, deep structural and philosophical questions remain unanswered.
The Conexus Institute executive director David Bell said it’s “not easy to define what a good retirement is at a system level, applied to many people with different preferences”.
“But I also think that… you just have to get comfortable as an industry that it won’t be resolved,” Bell said.
What the industry may need most is not a singular vision, and certainly not a government- or regulator-imposed one-size-fits-all solution, but tolerance for variation. “You have to lead your own way to say, ‘This is what we’re doing, and this is why we think we’re doing a good job for those members,’” Bell said.
Bell said he is “quite bearish” on the prospect of high-quality consumer-level competition driving better offerings by funds.
“The starting point is that most members trust their fund,” he said.
“They’re facing a complex decision, financial decision, so are they going to focus on the fund choice, or the retirement decision choice? I think it’s going to be my trusted fund to help me with that retirement decision choice.”
AMP director of growth and customer solutions Julie Slapp said a further issue playing into retirement uncertainty is the near-constant tinkering with superannuation rules undermining confidence in the system.
“We’ve done a lot of consumer testing, and what our members and the broader public say is, for that longer term, the rules will change,” Slapp said.
“If you look at our entire retirement incomes [history], we have a graveyard of products that have not worked. It’s a bit of a travesty. And that is people’s parents, that is their real experience. They believe that in 20 years’ time, that the rules will have changed again and they won’t get that benefit.
“There’s probably people who are going into retirement now where that conversation is a bit easier; but if you’re talking about someone in their late 30s, they just genuinely believe that whatever is the benefit that may have been experienced by generations before them, it just won’t exist for them.”
