Q: Why do you think the industry has been slow to change from a focus on accumulation phase to a “whole of life” approach?
A: Honestly, I think it’s a bit of a puzzle! At the CSRI’s Leadership Forum every year, we hear a lament for the industry’s slow pace adopting the retirement phase as vital to the members and the industry’s future. Jeremy Cooper eloquently led the charge this year. He spoke of the changing demographics and speed of ageing of the Australian population. He also shed some light on the annual retirement rates for Australians at more than 250,000 per year, and the forecast growth of pension phase assets – from over $300 billion today to around $1.3 trillion over the next decade. And let’s not forget, there’s also the high loss rate of members from funds at retirement.
Each of these issues needs attention. They’re all unique challenges for the industry and demand a more considered “whole of life” approach to account for the changing needs of the swelling ranks of Australian retirees in this country.
It’s hard to believe that an industry that spends years cultivating members for the ultimate purpose of serving them with a retirement income, so blithely accepts their departure at or near retirement. Let’s be frank, it’s a burning platform that demands action. Retention is essential for good fund economics.
And there’s evidence that the industry needs to act quicker. Firstly, the slow development of retirement income solutions. Secondly, the industry’s inertia in developing robust advice solutions to help members meet their retirement needs. While most funds have a basic advice solution, the development and promotion of their capability has generally been pretty slow and this leaves the institutional funds open to private financial planner solutions. We can’t continue to have this lack of action.
Naturally, the uncertainty we’ve seen around Government policy has been another key contributor to the slow responses. The David Murray-led recommendations on a Comprehensive Income Product for Retirement (CIPR) were made back in 2014 and we’re still waiting on a regulatory solution. In our industry, there’s always that tension between taking private initiative and waiting for the Government to set the direction.
Q: How would you sum up your views on the Treasury’s consultation paper on the proposed Retirement Income Covenant?
A: I’m really quite positive about it. Firstly, we support the idea of a covenant requiring trustees to have a retirement income strategy. That’s consistent with the Government’s stated purpose for superannuation and hopefully will get the industry moving on a “whole of life” approach with a key focus on retirement incomes.
Secondly, we are also strongly supportive of the requirement for funds to engage their members to help direct them to retirement income solutions that meet their preferences. As people’s needs are so different in retirement, it makes sense for funds to be actively engaging members to help them work out what’s right for them.
Thirdly, the proposal also recommends workable and sensible default retirement income solutions. I thought the framing of the CIPR as a flagship retirement income product for the fund to offer its members as a standard for comparison was an inspired idea. That will enable members to see a benchmark product, with well described features, and then determine whether that is suitable for them compared to other approaches they may consider – either on their own or in an advice setting.
Q: Do you think Treasury’s suggestion for three CIPRs to recognise differences among those who may get a full, partial or no Age Pension works and why/why not?
A: Yes, it’s a sensible approach for reflecting differences between retirees, particularly in terms of whether they will get a full, partial or no Age Pension. For most Australians—70 per cent of retirees get a full or part pension—the Age Pension is a major element of their retirement portfolio and represents a very attractive fixed income component with inflation hedging and longevity protection built in. You can only choose appropriate retirement income solutions with a sense of what Age Pension someone will be eligible for.
There are plenty of other differences among retirees. Professor Deborah Ralston outlined these differences in her December 2016 submission and they include marital status, other assets, debt, needs and preferences. Those differences mean a CIPR will not always be the best solution for a member. However, having it as a benchmark is very useful. As an industry, we’ve got to be working on not just good retirement income solutions but accessible advice to help members work out what’s right for them.
Q: What are Treasury’s expectations for CIPRs characteristics and do you agree with these?
A: Treasury appropriately sets the key features of a CIPR as efficient, broadly constant income, longevity risk management, and some access to capital. We support that. But some of the expectations need a little more work, in our view.
Most importantly, we thought the paper was ambivalent on “real” versus nominal incomes. This is such an important distinction, given inflation can really eat away at the purchasing power of your income. Even at a modest 2.5 per cent inflation rate, purchasing power is reduced by 48 per cent over 30 years. What good will a constant nominal income do in the face of that erosion? Broadly speaking, constant real incomes should be the goal.
Secondly, it’s not clear to me that Treasury has realistic expectations about what acceptable constancy of income means. The suggested bands were too narrow (+/-2.5 per cent from the initial income level). Too much focus on stability of income will mean giving up a higher level of income which can be achieved through a reasonable exposure to growth assets.
Q: Do you think the Government has adequately addressed all areas?
A: The timetable seems right to me, even though there are still details to be worked out. And funds will have a big job to get it set up in the schedule for introduction after July 1, 2020.
One of the areas that should be reconsidered is where minimum withdrawal requirements apply. Given the Age Pension is to be considered, what’s important is the level of income required to provide the broadly constant level of real spending. That consideration would be independent of the minimum withdrawal rates. It may be that for some members the withdrawal rate should be substantially lower than the regulatory requirements.
Q: How should funds determine when to offer a CIPR?
A: I think the writing’s on the wall and the member need is there now. Regulatory details may change but the important aspects are well laid out. It’s time for funds to be moving on the retirement income solutions that best meet their members’ needs.
It’s time to build a plan that incorporates a retirement income product design for a fund’s particular demographics. It should look at member needs and reflect the fund’s best thinking about how to provide solutions to that demographic. We also need a plan that includes an understanding of members’ Age Pension eligibility because it’s important to understand how that influences income product choice. And lastly, the plan must have an engagement strategy for helping members to the CIPR or alternative income solution of their choice. For many funds, that will also mean developing digital and human advice solutions to facilitate member choice.
Jeremy Duffield is co-founder and chairman of SuperEd.
