Discussion over retirement “defaults” has been heating up. However, it is often unclear what the industry is actually asking for. We decided to find out by interviewing representatives from 16 superannuation (super) funds representing different parts of the system. The report can be found here.

We encountered a diverse range of positions on the topic, but with some areas of agreement. Particularly notable was broad support for trustees suggesting retirement solutions to members to spur them into action, and a call for enabling contingency accounts. 

But first up, some terminology needs addressing.

It is clear that the word “default” is creating confusion: everyone seems to have a different conceptualisation of what it means in a retirement context. We have thus decided to focus on terms that better describe the nature of the mechanisms involved.

We adopt “pre-set” retirement solutions to describe standardised offerings designed for either all members or particular member types that are not personally tailored. We also adopt “opt-out” versus “opt-in” to distinguish between pathways where members are placed into a solution, versus where members are invited to consider a solution that they then need to accept.  

We discovered that many (but not all) funds are receptive to these terms.  

Key themes and issues

We first describe some of the key themes and issues that emerged from the interviews before highlighting areas of agreement.

• What is needed to support all members is central – The central issue is: “what range of mechanisms is required for super funds to effectively support all their members?”. Essentially, the “defaults” debate can be boiled down to the types of pre-set retirement solutions and spectrum of pathways for providing those pre-set solutions that is needed for super funds to service their memberships. 
• Extent of member disengagement is pivotal – The size of the cohort of members who will take no action for themselves is pivotal to the need for opt-out pathways. A related issue is the number of members who would benefit from being presented a pre-set retirement solution that they can readily accept with minimal input. However, the size of these cohorts is unknown. More research is needed. 
• Importance of engagement – All participating funds view engagement by members as desirable and preferable. For many funds, the idea of suggesting pre-set solutions is viewed as a mechanism to spark engagement, although some funds also view suggestions as a kind of backstop.
• Wide dispersion in regulatory risk tolerance – The dispersion in regulatory risk tolerance across funds is striking, especially regarding whether and how members could be guided towards a retirement solution outside of a formal financial advice process.

Limited support for an opt-out approach

Only three out of 16 funds we spoke to support placing members in pre-set solutions on an opt-out basis, although another three funds are willing to consider opt-out pathways if certain conditions are satisfied. Key objections to opt-outs in retirement include the risk of placing members into an unsuitable solution and implementation hurdles such as the need for bank account details to pay income. As one participant put it:

“Opt-out really only works when you know your members well enough. Just knowing final superannuation balance isn’t the answer.”

Suggestion pathway receives broad support

Thirteen out of 16 funds support the concept of trustees suggesting pre-set solutions to members on an unsolicited basis as a type of “first offer” or nudge. The main motivation is spurring members to take action over their retirement. As one participant put it:

“Except for the very small amount of people who are going to go through proper financial advice … we’re leaving it too open for them to find their own way without some kind of suggestion. I think that’s problematic.”

Perceptions vary over the potential role of suggestions, however. Seven of the 13 funds that support suggestions view this pathway as a mechanism to spur further engagement. Others see it as a way to present a basic solution to members for consideration.

We also encountered differing views on how suggestions could be enabled under the regulatory regime. Some consider suggestions as prohibited by anti-hawking rules and the proposals for targeted superannuation prompts under tranche 2 of the DBFO reforms. Others thought that suggestions could be accommodated under the existing regime if done judiciously. Many funds are quite uncertain.     

Multiple pre-set solutions preferred

A substantial majority of funds consider it important to offer multiple rather than single pre-set solutions. The underlying view is that some level of tailoring is required to cater for member differences in the retirement phase. 

Just one fund argued that a single pre-set solution suffices. Three out of 16 funds were primarily focused on enabling personal choice and saw only a limited role for pre-set solutions.    

Support for enabling contingency retirement accounts

Many funds see significant potential for member benefit from contingency (“rainy day”) accounts that are exempt from the minimum drawdown rules, including offering them as a component of pre-set solutions. Contingency accounts were raised by eight funds although not listed as a discussion topic.

The possibility of enabling contingency accounts is typically raised where discussion turns to how it may be inappropriate to “default” members who want to use their super as a source of funds they can access as and when needed, rather than to generate regular income. One participant saw contingency accounts as a solution for low-balance members:

“If you could have an account-based pension with a $100k contingency balance, you could default every single accumulation member below $100k straight into that. (This gets over) the problem that, once you’ve got to do drawdowns, you (need) bank account details. For the small balance members, bang, there’s your solution.”

A message for policymakers

Policymakers should take note of the clear consensus among super funds that members would benefit from trustees having the ability to suggest pre-set retirement solutions on an unsolicited basis and to offer contingency accounts exempt from the minimum drawdown rules. 

These are not new ideas. The Conexus Institute has long argued the need for trustee direction to assist some types of members, e.g. see Pathways for directing members into retirement solutions of November 2023. Treasury itself raised the possibility of a contingency account (called a capital reserve) in its Retirement Phase of Superannuation: Consultation paper of December 2023. 

What is new is that our interviews indicate a majority of super funds support enablement of both mechanisms as a way of ensuring the retirement needs of all members are met. Meanwhile, policy is seen as a major inhibitor. A close look at the policy settings seems warranted. 

Dr David Bell is executive director and Dr Geoff Warren is research fellow at The Conexus Institute, a not-for-profit think-thank philanthropically funded by Conexus Financial, the publisher of Retirement Magazine.