The $3.4 trillion superannuation industry is at a pivotal point as it moves from accumulation to decumulation and the Retirement Income Covenant (RIC) is propelling the change.
In a roundtable hosted by Investment Magazine and Australia’s largest life insurer TAL, participants from super funds, asset managers and consultants discuss the important considerations when designing and implementing a retirement longevity solution, the integration of the solution with other sources of retirement income, how to engage members effectively, and some of the policy and regulatory issues faced by the industry.
“Retirement’s time is now. As an industry, we are finally at the stage where we all realize that to deliver on the lifetime value of superannuation, we need to be working together to make sure there are robust and accessible retirement solutions for all Australians,” said Andrew Howard, chief commercial officer, group life & investments at TAL.
“We see a really strong link between protecting people during their working life so that they can earn an income and save for retirement, but also to protect against their living risks and give them the ability to live a good retirement, spend well, and to feel confident about what they have and how far it can last.”
Evolution of the covenant
The RIC legislation adopts a principles-based framework which gives funds leeway to come up with creative and innovative solutions to engage members. “This is the first time for many Australians that their super funds will be actually getting in front of them with a solution and with the support that they need to retire. We are going to be able to reach more Australians through this process,” said Jon Sedawie, head of retirement at Cbus.
The learnings gained through the inclusion of group insurance within the superannuation framework will give the industry insights into how the retirement income covenant will evolve according to Ashton Jones, general manager, investments, retirement & operations at TAL. “We see a lot of parallels between the way in which the group insurance system operates today and the way we expect the retirement income system to evolve over time,” he said.
“The risks that retirees face, once they retire and start drawing an income, are different to the accumulation phase. But there’s still important risks that insurers have a role to play in helping super funds protect their members against.”
Importance of age pension
Most roundtable participants agreed the age pension would make up the bulk of the retirement income for many of their members.
“For around 75 percent plus of our members, the age pension is going to be their longevity product,” said Hesta’s chief advice officer, Joshua Parisotto. Hesta’s membership base comes from the health and community services sectors and the casualization of aged care workers in particular has resulted in low balances. The super fund is exploring options such as deferred annuities and ongoing member contributions to create a longevity product to be accessed later.
Hesta’s research revealed members wanted to connect with online communities who were in similar situations to provide feedback and discussion in their post-retirement phase.
Super funds also need to give members confidence to draw down their account-based pensions beyond the minimum sum. Cbus’s Sedawie said the majority of their members in retirement only withdrew the minimum amount, leaving a substantial amount to their beneficiaries at death. “We haven’t seen that shift in that minimum drawdown, so we’ve got some really big challenges in terms of getting to that confidence point.”
This can be attributed to a concern among younger members that the age pension will not be available in the future. “It may be means tested, but the age pension will always be there. And I think that’s a message we need to get across,” said David Knox, partner at Mercer. By 2050, Australia will have the lowest public pension cost of any OECD country.
One of the difficulties in constructing a retirement product to sit alongside the age pension is as people get older and draw down on their account-based pension, they get more aged pension said Knox. Furthermore, they may not want or have the cognitive ability to make decisions buying new retirement products when they age.
He suggested developing a hybrid benefit when a member will be eligible for more age pension as they advance in years but do not yet have lifetime income from an account-based pension, but conceded “it’s a very difficult mix and from our work around the world , no one’s actually solved this.”
Getting advice and access to the appropriate education tools will go a long way to help members make good decisions around their retirement, given the complexity of some of the products and the need to balance stability with flexibility.
“You can often obviously pair your account-based pension with your annuity. However, what is the right split for the individual? And so at this stage, we think advice is really important at that critical decision point. Because often once you put that longevity product in, you’re locked in,” said Kylie Turner, executive director, superannuation and insurance at Colonial First State.
“Education for members and how they can partner with an account-based pension is really important. It’s having those conversations earlier on [and] more tools to support them.”
Digital tools will have a more prominent role in engaging members according to Hesta. “We’re really interested in digital engagement, that’s our key focus. Getting more members interested in retirement and reducing the barriers is key for us,” said Hesta’s Parisotto.
Engaging members early and not just when they are about to retire is important to enable better decision making. “We see a very clear path for what we can do in retirement, and also pre-retirement…waiting until retirement is far too long,” said Ben Hillier, general manager of retirement solutions at AMP. “It’s actually not just about longevity risk, it’s about adequacy for better consumption. But you need to solve longevity to get people confident, so solving for longevity is crucial.”
Communicating to different segments is also key. “Digital is obviously going to play an important role, but really how can we help people and in particular tailoring that help to different segments as well? So those leading up to the early stages, and then the later stages of retirement,” said Colonial First State’s Turner.
Developing a retirement system
Developing solutions and tools incrementally could be a sensible way to start building the retirement system, he said
Danielle Webster, general manager, customer & solutions, Link Group. “Let’s incrementally build out the ecosystem and learn alongside the members and feed that back in. It’s an iterative approach. There is no one perfect product, there is no one perfect experience, there is no one bundle of services.”
The package of tools should give members an understanding of their costs as well as their income in retirement. “There are products, there’s experience, there’s tools, how do you actually combine them all together? And then it is around the layering. It is about starting back from understanding, building out member cohorts, and then actually working through and understanding how to make the tech work at scale,” she said.
Issues and opportunities
One of the issues impeding member awareness and communication is the lack of consistent language in retirement. “The barrier we have is there’s just not a language of retirement income, like there is about home insurance, car insurance, term deposits, banking products,” said Cbus’s Sedawie. “We actually need to, as an industry, lift the knowledge that there’s a category and, once we’ve done that, we can differentiate and there’ll be a market for it.”
Building a language around retirement to help consumers understand the system is important said Richard Boyfield, partner at Mercer. “I think that’s a great thing to aim for as we have an understanding, as an industry, but the general public doesn’t.”
Portability and managing legacy products need to be factored in. Funds need to make allowances for members who start with one longevity product provider but want to move to another further down the track.
The experience from group insurance will again prove instructive said TAL’s Jones. “We have a model in group insurance today for pooling member premiums effectively and there’s portability in that system. Funds have the decision to move insurers if they so choose, so there should be no legal impediments or barriers for us constructing a similar solution architecture in the retirement phase.”
Trustees will also need to come up with a way to assess retirement products which will prove to be challenging. “How do we assess and decide what solution we want to put on our menu? And then how do we actually assess whether it’s performed in different ways?” said Mercer’s Boyfield.
The Your Future Your Super performance test measures funds’ performance on a retrospective basis while their investment strategy is forward looking. “How is a fund actually going to assess what products and what solutions work? And then there is actually going to be an assessment, which is the retrospective look back, which is potentially a test yet to come out,” he said.
The Quality of Advice review under Michelle Levy has proposed giving super fund trustees the authority to decide whether to provide advice, potentially paving the way for super funds to offer personal advice to members.
David Bell, executive director of The Conexus Institute noted in the recommendations. “There’s also a real quirk because if you give the guidance for free, it can be done through a call center but as soon as you charge a fee, it has to be done by an adviser.”
If super funds demonstrate the value of advice, the take-up from members would increase, said Mark Spring, strategic implementation manager, Active Super. “Advice is the ultimate outcome. If you actually explain how complex some of these things are, and why it’s actually going to help them, I think we’ll get over some of the hurdles why people don’t get advice. They don’t actually understand the value.”
The recommendation will also lead to more innovation within the industry. “It opens the industry up to further innovation in the space to thinking about platforms, digital engagement and tailored advice, and we will see new partnerships and new innovation,” said Sam Wall, general manager, master trust & insurance products, Insignia Financial.
“There’s a whole range of features you can build within the product, but they’re all for nothing if you can’t get that out to the members. So that’s why we believe in personalized advice or intra-fund advice,” though he added Insignia Financial had to work through a number of implications.
One of the proposals from the Levy review is the change to the “best interests duty” test to an obligation to provide “good advice” which AMP’s Hillier believed is positive as one of the objectives of the current regime is trying to correct unethical or fraudulent behavior that cannot be easily done through legislation. “The current regime is actually attempting to fix things that can’t be easily fixed through regulation, you can’t stop the criminals with more regulation and more disclosure,” he said.
“I think the pendulum is swinging back to somewhere sensible and it’s quite a good outcome. If someone can be better off than they were before with this advice, that’s great.”