Ensuring Aussies aren’t the richest people in the graveyard

With the majority of retirement savings left unspent when most Australians die, advisers are playing a pivotal role in the growing landscape of retirement income products as industry focus shifts towards the decumulation phase.

Australia has developed a well-deserved reputation for its benchmark $3.4 trillion superannuation system since its introduction in 1991. Recent data from Natixis Investment Managers ranked the country third in the world for finances in retirement, one of the key drivers for Australia’s consistent ranking in the top 10 in the world for retirement security.

While many Australians can effectively accumulate money across their lifetime for retirement, the case isn’t the same for actually spending that money.

A 2020 Retirement Income Review found 90 per cent of retirement savings are left behind when a super fund member dies. A joint study conducted by National Seniors Australia and Challenger also recently found that more than half of those surveyed (53 per cent) are worried about running out of money later in life.

In a bid to improve this statistic, the Government introduced the Retirement Income Covenant (RIC) in July 2022 to support the development of retirement income products, a crucial step in broadening industry focus beyond accumulation and towards the decumulation phase.

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“Over the next 10 years, an estimated 3.6 million Australians will move from the accumulation phase to the retirement phase of superannuation, with somewhere in the region of $750 billion in aggregate retirement savings,” Helen Rowell, APRA deputy chair said in November 2021. 

Moreover, the approximate $55 billion of assets which transition into retirement each year is expected to quadruple to more than $200 billion per annum over the next 20 years, according to Australian Bureau of Statistics (ABS) data.

On 24 August 2023, the Treasury released the 2023 Intergenerational Report. The 296-page document pinpointed the decumulation phase of super as the government’s ‘next frontier’ in the years ahead, with Australians being more ‘frugal’ and ‘conservative’ than they need to be.

Treasurer Jim Chalmers flagged the absence of options when it came to retirement products in the drawdown phase as a large challenge to be addressed, remarking that the Treasury would shape some policy development around retirement income products by the end of the year.
Through the RIC, APRA has urged registrable superannuation entity (RSE) licensees to develop new products to tackle these growing needs during the decumulation stage.

Speaking to Money Management, Simon Aboud, chief product and marketing officer at Allianz Retire+, highlighted how new retirement income products not only solve longevity risk but also address the need for flexibility and market risk.

“The Retirement Income Covenant has undoubtedly shone a spotlight on retirement and pulled into sharp focus the need for greater innovation with retirement income products.

“Specifically, the RIC has identified what objectives retirement products need to address, key issues for retirees such as maximising retirement income, managing risk and delivering flexible access to savings,” he said. 

The Covenant additionally confirmed that one single product cannot meet the needs of retirees, says Patrick Clarke, general manager of retirement solutions at Generation Life.

“You actually need a combination of products to meet the RIC’s three objectives: maximising income, giving access to capital and providing an income that lasts forever. 

“Account-based pensions do a lot of the heavy lifting and will continue to do so, but what's been missing has been a compelling lifetime income product,” he told Money Management.

Financial advisers hold the key

Retirement solutions which deliver a guaranteed income have become a necessary part of an advisers’ offering to older clients, but this wasn’t always the case. 

“[Previously], lifetime annuities have been perceived as offering poor value, so advisers haven't taken advantage of that strategy. Now that you've got more compelling lifetime annuities, advisers will be more likely to implement these strategies for their client,” Clarke explained. 

In January 2022, Assistant Treasurer Stephen Jones stated the RIC is doomed to fail unless there are enough advisers in the industry to convince consumers’ of its worth.

“People will not adopt strategies for which they are unfamiliar unless they have the confidence of someone they trust who says ‘this is the best way for you to deal with your retirement nest egg,” he said at an industry event.

With clients around retirement age being advisers’ ‘bread and butter’ coupled with most not knowing how to spend their retirement income, this is where the real value-add can come from seeking advice, says Aaron Minney, head of retirement income research at Challenger.

Retirement income products offer greater flexibility to access capital, enabling Australians to start the income at their own choosing.

Longevity solutions such as the Allianz Guaranteed Income for Life (AGILE) offer protected growth to manage risks during the accumulation phase. In the decumulation phase, clients receive a guaranteed income which grows alongside markets but won’t decline if markets fall.

“This protects clients from experiencing the full effect of volatile markets in the lead up to and during retirement.

“Another critical element of these next generation solutions is integration with a super fund as
an investment option and as part of an account-based pension which traditionally has been
difficult,” Aboud added.

Moreover, these solutions need to mitigate other tangible risks such as high inflationary pressures. 

“Advisers have been reminded of how quickly inflation can eat away at the value of income. What they need is an option that protects against inflation. They are now looking for a solution that manages those risks properly,” said Minney.

At its essence, retirement income products enable clients to confidently spend their savings to live an enjoyable retirement, whilst mitigating the underlying fear of longevity risk. 

Data from the Association of Superannuation Funds Australia (ASFA) last month revealed the annual expenditure needed to reach a comfortable retirement rose to a record high of $70,806 per year for couples and $50,207 for singles. 

“When developing AGILE we spoke with advisers, retirees and super funds, and this was the major question – how can we provide certainty for clients or members to enjoy their retirement with confidence?” Aboud questioned.

In May 2023, Allianz Retire+ announced a partnership with Link Group to give PathFinder, a retirement platform for funds and their members, access to a suite of next generation products, including AGILE.

The chief product and marketing officer noted the overwhelming positive response from both advisers and funds to the product.

“It was important when developing AGILE that we invested in the infrastructure to create a product that could fit as an investment option for super funds and within an account-based pension. 

“It was critical to build the technology to allow a retirement income product to sit within the ecosystem of the clients or members it serves. This investment will further support the increase of product innovation through collaboration with platforms and super funds,” said Aboud. 

AGILE offers the ability to lock in a guaranteed rate of income while clients are still in the accumulation phase. This allows advisers to construct retirement strategies years in advance, a feature that previously was unavailable with traditional products.

These solutions are particularly relevant for Australians planning ahead before retiring and clients seeking a guaranteed and flexible access to income to complement their retirement savings.

“We want to equip advisers with a suite of solutions to address the needs of the clients now and as retirees’ needs change into the future,” Aboud continued.

Clarke echoed this sentiment, adding that the role of an adviser is to also address emotional concerns and anxieties that retirees have when entering the decumulation phase. 

The road ahead for retirement solutions

One year on from the RIC’s implementation, a joint review by APRA and ASIC of 15 trustees to evaluate the RIC’s progress found  a ‘lack of urgency’ in their approach to enhancing retirement outcomes for members.

Problems included variability in the quality of the approach taken, data gaps in the information needed to develop a retirement product and a lack of metrics to track progress or assess retirement incomes.

The two regulators made it clear to trustees that they “must step up and deliver well-considered strategies” for their members, indicating they want to see more products in the future.

Aboud explained: “Australians are ageing and we need to support advisers and super funds by providing the right tools to work with clients and members to plan for retirement before the age of retirement.”

On a personal level, he added, delivering certainty of income reduces household anxiety while simultenously supporting economic growth and potentially lessening reliance on the Age Pension.

“Retirees are yearning for financial consistency to better plan their retirement. Equipping advisers and super funds with the best tools to deliver certainty and flexibility is critical to delivering better outcomes for Australian retirees.”

The increasing number of clients seeking advice for retirement security will continue driving demand for lifetime income solutions, evident in Challenger’s FY23 results. Domestic annuity sales increased by 53 per cent to $3.6 billion, largely underpinned by popularity amongst advisers.

Clarke commented: “We've been a gold medalist in terms of saving for retirement in this country. We now need to be a gold medalist in helping people spend their retirement savings in an effective way.”