Taking the slow boat towards CIPRs
The development of Comprehensive Income Products for Retirement (CIPRs) seems to be moving at a glacial pace.
Only a few years ago product providers, superannuation funds, and other stakeholders were quickly filling in submissions to the Government’s consultation on the development of a retirement income framework, and product providers such as Challenger were raving on about its CIPR solutions.
Fast forward to 2019, there is still no legislation on a framework for these products, and only some funds have started developing products while others have not started.
CIPRs seem like they’ve been put on the back-burner thanks to distractions such as new Age Pension means testing rules introduced on 1 July, 2019 – to help the industry develop innovative products to help retirees manage the risk of outliving their income – and the Government looking to introduce the retirement income covenant.
However, this covenant was supposed to be introduced by 1 July, 2019 which included the requirement for trustees to offer CIPR products by 1 July, 2020. As of writing, the government still has not yet legislated the covenant but has pushed back the CIPR date to 1 July, 2022.
The further the government pushes the framework down the priority list, so does any detail with CIPRs.
Rice Warner chief executive, Andrew Boal, told Money Management that he was not aware that a lot of super funds were proactively working hard to create CIPRs as they were preoccupied with dealing with regulatory requirements.
“Some funds have annuities on their platforms that members can choose but not a lot of work is being done to develop a CIPR that incorporates an annuity into an overall retirement offer,” he said.
“Some funds are looking at altering the investments within their existing account-based pensions and how that is synchronised with the Age Pension.”
Boal noted half the reason CIPR development was so slow was because it had been put on the back-burner and half because funds were waiting for legislation to be passed.
“To some extent there’s an element of ‘wait to see what it looks like in case we have to redo the work’ and so if we’re expecting legislation to come soon then it would be prudent to wait,” he said.
However, Willis Towers Watson head of retirement solutions, Nick Callil, believes there will be a spate of product announcements in the retirement income space by leading funds over the next six to 12 months.
Callil said while government activity was sluggish big funds with resources realise that independent of government retirement income was also a business issue.
As retirees were a growing part of super funds’ membership base they needed to look after these members and protect those assets to maintain scale.
“I would be surprised if most of the leading funds did not announce a product or an intention to create an enhanced product over the next 12 months,” Callil said.
“Retirement is complex and no doubt there is reluctance to take a step forward but when the bigger funds start rolling out products it will create a powerful incentive, or safe zone for others to do the same.”
Without a framework, Callil said funds needed to investigate lenders, look at different retiree cohorts and what sort of products they should be offered. These elements, he said, needed to be addressed by the time the guidelines were released.
DESIGN DESIRES
Callil noted that funds and product providers needed to think about better spending of accumulated assets in the early stages of retirement and longevity when designing CIPRs.
He said retirees with meaningful balances were being too frugal and not enjoying their savings as retirees were often defaulted to minimum drawdown rules. Retirees often had more money in their account in their 80s than in their 70s and funds needed to find a mechanism to promote better spending. However, funds had to keep in mind that the mechanism needed to allow retirees adequate savings should they live past their life expectancy.
Aberdeen Standard Investments Australian head of retirement and product strategy, Jason Nyilas, said he was concerned that super funds and product providers had not designed enough within retirement income products and the ones available were not similar in approach.
“Some are enterprise based, some are retail based, some may or may not focus on lifetime, and some even include reverse mortgages,” he said.
“There are so many different shapes and sizes it makes it difficult for advisers to understand and select something that best fit their clients’ needs.”
Nyilas said the solutions were not flexible or certain enough for the ‘tsunami’ of people looking to retire over the next decade, given their various circumstances leading to retirement.
“If you combine flexibility and certainty you can achieve a product that is flexible, gives high income, and has features in place to guarantee you income,” Nyilas said.
“That’s not an easy ask for a product provider because it requires a lot of sophistication but it is what the ask is.”
Nyilas noted that an important component of this was affordable advice and said technology would be key.
Agreeing, Boal said retirement income products needed to provide more certainty.
“The products need to meet the needs of a whole lot of people but perform differently for each person,” Boal said.
“One of the things funds need to grapple with is the role of longevity protection. There is a large sector in the industry that is not convinced that annuities that offer good value for members.
“However, retirees are currently typically underspending in retirement mainly because they’re uncertain on how much money they need and how long they’ll live.
“We need retirement income products that provide more certainty so that retirees have the confidence to spend.”
Boal said deferred lifetime annuities or some other kind of pooled longevity protection would have a lot to offer for retirees, particularly for retirees in the middle bracket in terms of assets.
“In that means-tested ground between $300,000 to $800,000 – these are the people that will really benefit in longevity protection,” he said.
“For people with less than $300,000 the Age Pension will provide around 80% of their income and people who have above $800,000 are probably in a better position to manage their own longevity.”
Boal noted that advisers needed to really think about helping retirees with spending safely.
“How much retirees can afford to spend safely – that’s the key question people are looking to get assistance with. Hopefully products will come into the landscape soon that can help support the answering of some of those questions,” he said.
For Callil, advice needed to be focused on the right part of the whole retirement journey which was getting people to understand what their needs were, how to transition to retirement, and tax regimes.
Callil believed there was no need for further tax or social security changes for CIPRs to work or to help take up of the products as the “main planks were in place for these products to be launched”.
Callil referred to the fact that innovative retirement products had the same tax treatment as other products such as annuities, and social security rules had recently been amended – the means test.
“Now we need direction from government to take the lead and no doubt it’s been a long wait period for CIPRs but funds have realised that it’s time to move,” he said.
He said the industry and government needed to look at:
- A retirement income objective that concluded that the retirement provision should be in income form and that capital balances should be spent down over retirement;
- Retirement income estimates that were mandatory for super funds with some sensible limited exceptions at the fund and individual level;
- Careful use of the term ’income’ which could confuse members with the dual meaning of investment earnings and income received from a fund during retirement phase. ‘Drawdown’ or a similar term would be a more appropriate term to refer to amounts paid to retirees in pension phase;
- Well-designed drawdown rules to ensure they were not too conservative and did not promote inappropriately low spending; and
- Better retirement products to allow retirees with meaningful balances to spend their savings more confidently earlier in retirement only if they are sufficiently comfortable that they will not run out of money in advanced old age.The complexity, Callil said, in retirement was far more than in the accumulation phase and the objective of retirement income needed to look at the whole system rather than just superannuation.
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