In February, submissions to the Government’s Retirement Income Review Consultation Paper were starting to show several themes around the positive impact of superannuation on retirees’ living standards and the economy, addressing equity in the system, disparities in outcomes— such as for women—and the barriers to access.
However, in just a few short weeks in March the world changed beyond recognition due to COVID-19.
Australia’s real-life experience of COVID-19’s speed and the exponential manner of the spread has still been a shock – emotionally, socially and financially. It has been surreal yet very real.
Good risk management is key for changing situations
For the superannuation industry, there is a parallel in older Australians being most at risk from COVID-19 and financial and personal circumstance changes.
But managing risk is not always easy. A crystal-clear core objective – human interests first with a robust industry governance framework in place supported by all sectors of the industry is what’s needed. With multiple indicators of what future outcomes are, meticulous independent investigations when anything goes wrong, clear policies and procedures must all be implemented automatically to ensure speed.
The countries with the best early success in limiting damage from COVID-19 were Singapore, Hong Kong and Taiwan, despite having close links with mainland China where the virus originated. Their success came from:
- assessing their past (SARS) experience and planning
- putting in place a framework which could cope with the next pandemic
- monitoring, and
- taking action quickly when the data triggers were reached.
Strong governance framework is needed
What can Australia’s retirement system learn from the fallout from COVID-19?
Having a robust governance framework in place, with clear pre-determined responsibilities and accountability from the fund trustees through to the executive team and individual is critical. Enterprise risk management for superannuation funds is designed to minimise risk and maximise the opportunity for better outcomes for members.
A crisis highlights the benefits of ongoing, active and focused risk management. The challenge is to keep it up, including resourcing to minimise the detrimental effects of the next disruptive event. APRA has been working hard to convince funds of the importance of a Chief Risk Officer with power and resources for years. Strengthening of Prudential Standard SPS 220 will continue.
The lessons from COVID-19 so far are that those countries where there were clear roles and divisions of responsibilities with detailed plans already in place across medical, financial and political, fare best – particularly in the speed of response and clarity of messaging. The greater the risk management, including pre-planning, the quicker and more effective the responses. Having the discipline to stick to the agreed hierarchy helped avoid mixed messaging and confusion.
For super funds, diligently living APRA standards SPS 510 Governance, SPS 530 Investment Governance and SPS 220 Risk Management has been to members’ benefit. And as part of the ‘post-COVID-19 return to normal’, funds should take the opportunity to revisit and enhance these critical pieces in light of the recent experience.
Post-retirement risks need to be considered in terms of member needs and expectations. Retirees are much more vulnerable than accumulation members because contributions have stopped and there is less time to recover from reductions in account values, be they from falls in investment markets, poor investment strategy or execution thereof, or poor options available to them.
The rise and fall of assets
COVID-19 is a timely, albeit unwelcome, reminder, that asset values can fall steeply and do so suddenly. Uncertainty has made for extremely volatile markets, with liquidity much reduced in several markets.
A highly liquid cash component is an essential part of post-retirement investment strategies to accommodate the continuing regular payment cash outflows required to retirees. Discipline is required during the good, bull market rising years, to maintain good liquidity. Critically in an investment strategy, there should be no need to be forced to sell assets, and thus likely miss out on the long-term price recovery.
Asset classes are expected to rebound in due course, and that income, after an initial hit in this instance, is expected to build again as businesses recover over time.
The Government’s unprecedented monetary and fiscal support for the economy reduces the long-term risk to economic growth and will help asset values and income returns recover. For post-retirement, the age pension as a guaranteed income has shown its enormous value as a safety net in reducing investment risk in its totality for many retirees. While sudden market downturn can increase the risk of retirees’ superannuation running out, the age pension safety net component works to strengthen Australia’s whole retirement system. The Government has a crucial role in providing this security so that retirees, and funds on their behalf, can invest more in growth assets for the long term and not switch to cash in short term downturns.
The COVID-19 March market crash has illustrated that, as during the Global Financial Crisis (GFC), it appears unlisted valuations have declined less than listed, although those assets are illiquid and cannot easily be sold to raise funds for member benefits. However, provided they form part of a balanced portfolio, with other assets including cash providing liquidity, that is appropriate.
Longevity risk and product design
While COVID-19 has the potential to increase deaths in older people, these effects are likely to last only a year or two, with some of these deaths bringing forward deaths of more vulnerable older people, and a vaccine expected to be developed in that time. Therefore average long-term life expectations should not be significantly affected. The morbidity effect of COVID-19 on superannuation is greater through disability income and TPD insurance, but these affect accumulation members rather than retirees.
Products with longevity pooling are designed to pool short term fluctuations in mortality such as COVID-19 to the benefit of those who survive, which partially offset the investment losses. Guaranteed annuities however are expensive in low-interest-rate environments so there may be greater take-up of such pooled longevity products in the future.
An investment strategy for post-retirement, which includes reasonable levels of growth assets is still sound. The current situation reminds us of the importance of investment strategy being as tailored as possible to the individual member – their specific needs and related goals.
Looking at inequality in the system
While not directly impacting retirees, the ability for members experiencing hardship to access up to $20,000 is a double-edged sword. Immediate cash support risks long term reduction of retirement balances and income, especially for those with the least equitable outcomes on low balances. Where will this shortfall be picked up? It will most likely be through the age pension and future taxpayers. There is a need to re-double efforts on improving current low balance inequity for women and gig economy workers after COVID-19.
COVID-19 has seen a double whammy on retirees. Firstly they are much more at risk health-wise and secondly receiving a direct, immediate hit on their finances from any investment in growth assets. Anxieties are heightened.
Communications need to reflect reality and be clear, assuring members and discouraging them from any quick decisions on liquidating growth assets thus limiting recovery in later years. Especially for those in their 60s who still have long lives to live.
Stepping up technology, innovation and creativity
We’ve seen the volume and depth of data on COVID-19 tests publicly available in real-time. We’ve also seen countries in Asia use technology including apps to meticulously track people’s movements and warn people of new cases close to them, leading to effective distancing and early quarantining, dramatically slowing the spread of the virus.
In Australia, in superannuation there needs to be a new balance between individual privacy protection and the public good, to enable quicker sharing of relevant detailed data. The more open data available across the industry, the more the power of creative minds can be unleashed to improve outcomes – be it from more open competition or more time and cost-effective administration and servicing.
Now is the time for greater leadership
The superannuation industry’s primary objective for current and future retirees must be to enable and provide the best possible retirement outcome.
In the current COVID-19 environment as fund members and stakeholders, including trustees and staff alike, wrestle with issues around basic living and economic survival, now is a time to lead with purpose and humanity. Success must be measured by the way the superannuation industry positively touches the lives of people. COVID-19 will pass, there will be recovery, and the industry having learned what lessons it can, will be even better prepared to support members next time.