Super funds have been on notice for four years to develop retirement income solutions beyond an account-based pension. Optimum Pensions’ new guide to implementing Treasury’s Best Practice Principles (BPP) argues that funds without a lifetime income component in their retirement offer are failing their members and will continue to attract the ire of regulators.

The guide maps lifetime income obligations across Principles 5, 6, 9 and 18. Principle 5 requires every fund to provide members with access to a lifetime income product that is not the Age Pension. Principle 6 requires product settings to manage sequencing, market, inflation and longevity risk. Principle 9 requires trustees to construct cohort-based retirement income solutions, at least one of which must include a lifetime income component. And Principle 18 says trustees must establish an ongoing cycle of measurement and improvement to ensure effectiveness of guidance services, engagement strategies and member data collection.

The principles are voluntary but the paper says that does not make them any less important to improving outcomes for members. It says funds that can’t demonstrate a coherent lifetime income strategy face potential reputational and regulatory risk as enforcement attention by both APRA and ASIC moves further in this direction. Funds that are not already moving down the implementation path are running out of both time and excuses.

Stephen Huppert, a consultant and director at Optimum Pensions who co-authored the guide, says the paper is a direct response to years of discussion without corresponding action. The retirement income policy journey has already been long and arduous: from the Cooper review of 2010, the Henry review, the Murray Financial System Inquiry  of 2014 (and the mooted comprehensive income products for retirement, or CIPRs), and most recently the Retirement Income Covenant, which came into force nearly four years ago.

“You can see a very, very slow edge by the government and Treasury towards retirement incomes,” Huppert says. “There’s a lot more interest in talking about it than doing something about it.”

Three pathways

The guide identifies three implementation pathways: refer, integrate and build. Legacy obligation is the central governance question. Once a member commences a lifetime income product, the fund’s obligations run for their full lifetime. Huppert says many funds will find the integrate pathway, where a specialist provider carries operational and longevity risk, the most practical starting point.

The three-pathway framework is designed to move funds past the question of whether they need a lifetime income product and toward the question of how to implement one.

“What we’ve tried to do in this paper is say, well, actually, there’s probably three main ways,” Huppert says. “They don’t have to create their own and spend millions and millions of dollars. There’s a lower cost, lower risk way of doing it.”

The “refer” pathway involves listing an external provider’s product and directing members to it. It requires the least internal resource but carries the least integration. The “build” pathway, at the other end of the spectrum, involves a fund creating its own product from scratch, giving full design control but demanding significant capital, time, and tolerance for legacy risk.

Huppert notes that at least one large industry fund announced a product several years ago and has yet to deliver.

“Most industry funds, especially, will not do that,” he says. “And those that have been trying to do it are still trying to do it.”

For most funds the “integrate” pathway, such as a white-label arrangement with an external provider, strikes the better balance. Several funds have already gone down this route.

Three layers

The Optimum Pensions paper says that implementation requires decisions across three layers simultaneously: member experience, covering onboarding, portals and guidance; product and rules, covering drawdown pathway design and lifetime income product structure; and administration and plumbing, covering registry, unit pricing and CPS 230 compliance. Cohort design and product design must be developed in tandem, not sequentially.

Huppert says the people inside funds with “retirement” in their title generally understand the urgency, but it’s often further up the organisation where knowledge is a little sketchier.

“Funds have got five or six or 10 people in their funds now with retirement in their title, and at that level, people are getting it,” he says. 

“But what I did get a sense of is that they’re struggling internally to get the attention, to get the budget, to get the prioritisation.”

Competing compliance priorities, including CPS 230, cybersecurity, death claims processing and complaints handling absorb resources that might otherwise go toward retirement income strategy. Huppert says that context is understandable but can’t be used as an excuse.

“We want to see retirement move up the priority list, and move to action, rather than just talking about it,” he says.

Longevity literacy

Huppert says there are deeper problems underlying some funds’ implementation challenges. For example, some funds, and most members themselves, do not reckon with longevity risk. Most retirement calculators project to age 92, a figure drawn from ASIC’s class order, which is statistically likely to be wrong for many members.

“Planning for retirement is about learning how to manage uncertainty, and the biggest uncertainty is how long to plan for,” he says.

Optimum Pensions has developed a lifespan calculator, already used by an estimated 30,000 Australians, that walks members through different longevity scenarios, rather than presenting a single projection as though it were some kind of guarantee. 

There is also the issue of a “bait-and-switch” scenario affecting member psychology. Superannuation was pitched from the outset as deferred salary, or, in other words, money that members would receive at retirement and could do with as they chose. Shifting that framing to income, managed and drawn down across a potentially long retirement, is a significant change.

For some members it will be necessary and appropriate to take some or all of their super as a lump-sum benefit.

 “And we know there’ll be a lot of people that say, you can’t tell me what to do when I retire.”

Huppert says the guide does not propose to mandate trustee or fund behaviour, but is designed to help funds offer the right product, with the right guidance, so that members who would benefit from a lifetime income stream are genuinely able to access one.

“We don’t have a retirement income system in Australia,” Huppert says. “We have a wealth accumulation system. If that’s what we want, that’s fine. But if it’s not what we want, then we’ve got to change the conversation, and it starts at the funds.”

BFID isn’t voluntary

While the BPP are voluntary, the best financial interests duty is not. Trustees of APRA-regulated funds must act in members’ best financial interests, and the Retirement Income Covenant requires them to support all members approaching or in retirement regardless of balance, engagement, or access to advice. 

Treasury’s guidance says the BPP only describe that trustees’ existing obligations look like, and do not create new ones. Where trustees decide not to implement a principle, Treasury’s guidance says they should be able to justify that decision to their members.

The Optimum Pensions paper points out that the Australian Government Actuary estimates that including a lifetime income component can boost retirement income by 15 to 30 per cent over a member’s lifetime. If a fund chooses not to offer one, it will have to put forward a very good argument as to why.