Trustees set to work maximising retirement incomes
A scramble to implement measures to be more hands-on to help retired members balance retirement risk and reward has begun in earnest.
The Retirement Income Covenant (RIC) encapsulates a decade of thought around the topic of income in retirement.
Parliament passed a bill in February 2022 that requires superannuation trustees to create retirement income strategies that provide more granular detail about how they can assist super fund members in retirement.
The Covenant aims to provide funds with flexibility to design and tailor their retirement income strategy to meet the needs of their specific membership now and in the future.
The clock is ticking for trustees, who need to have formulated their retirement income strategy by 1 July, 2022.
The Covenant outlines a pathway to further develop the retirement phase of superannuation. The covenant places a key obligation on trustees to formulate, review regularly and outline how they play to assist their members to balance key retirement income objectives.
The RIC requires trustees to formulate, review regularly and give effect to a retirement income strategy that achieves and balances three retirement objectives for fund members who are retired or approaching retirement.
These are:
- Maximise expected retirement income over the period of retirement;
- Manage expected risks to the sustainability and stability of their retirement income, including longevity risks, investment risks and inflation risks; and
- Have flexible access to expected funds over the period of retirement.
ASSESSING THE RISKS
The RIC puts the onus on the super fund to help members balance their risk versus having higher expected income.
It comes after the Government’s earlier Financial System Inquiry and Retirement Income Review observed retirees can combine new types of products to generate up to 30% more income. For example, an investment-linked lifetime income stream could deliver higher expected income without any increase in the risk of living savings.
The RIC has placed a significant emphasis on the retirement phase of superannuation, which will drive innovation in retirement products over time, not just within superannuation, but across the retail market, according to Aaron Minney, head of retirement income research at Challenger.
“This presents a significant opportunity for wealth managers and financial advisers. Retirement is often a trigger for people to seek financial advice, so the opportunity lies not only in a wider range of innovative retirement products, but also a growing awareness among retiree clients that retirement is different and requires more tailored and holistic advice,” Minney said.
Financial advisers, just like their retiree clients are craving innovative approaches to capital protection, flexibility and guaranteed income certainty, something that has eluded the retirement savings industry for decades, Adrian Stewart, Allianz Australia Life Insurance chief executive, said.
“The Retirement Income Covenant is critical to accelerating this process in offering consumers choice addressing their specific needs. The effects of which are already in motion with the super fund industry and platforms actively seeking products that deliver these choices ahead of the RIC coming into force,” he said.
Stewart added: “We need more life company participants pioneering with creative product design to offer greater financial security to those in retirement and create a flourishing decumulation landscape.”
FINDING A BALANCE
Balancing the desire to maximise retirement income with the need for flexible access to funds when clients need it while managing the other expected risks to the sustainability and stability of their retirement income is a delicate balance, Deloitte partner Andrew Boal said.
This includes longevity risks, investment risk and inflation risk.
“One of the key considerations is the customer’s eligibility for the government Age Pension. Many low-balance members will be eligible to receive a full Age Pension from the start of their retirement, and this is likely to make up 80% or more of their income in retirement.
“One the other hand, many wealthy retirees will be able to enjoy a satisfactory retirement using the investment income from their savings alone, or with only a limited need to access the capital,” Boal said.
In the middle are the retirees who are eligible for a part Age Pension for much of their retirement.
“This group is expected to grow in size over the next 20 years and particular attention will need to be made to understand their spending needs. In particular, how much they would like to spend during the early, healthier years of retirement and what their spending needs later in retirement will be,” he said.
The paper outlines metrics that can be used by trustees to determine period of retirement end date, safe retirement income, expected retirement income and retirement income risks.
It shows how drawdown strategies based on the period of retirement ending at a fixed age don’t maximise members’ retirement incomes.
“This starts to raise the question: How can superannuation funds measure retirement income when we don’t know how long that income needs to last,” Boal said.
TIME FOR CHANGE
There has been a frustration among financial planners and their clients for more than a decade that there were only really three retirement strategies in relation to super – managed lump sums from super, account-based pensions and basic annuity products, points out the Financial Planning Association of Australia (FPA).
Therefore, the RIC is a welcome requirement on superannuation trustees, and financial planners are excited about the potential innovation in the retirement income space to provide greater flexibility in assisting their clients live their best retirements and achieve their retirement goals, FPA head of policy, strategy and innovation, Ben Marshan said.
IMPLEMENTATION PHASE
There are five key steps to implementing the requirements of the RIC, once the initial strategy document has been drafted and approved by the board, Boal said.
The first is to analyse their membership to identify what member cohorts they have that might require different retirement solutions. This step is likely to require some customer data that the fund does not yet hold. For example, to determine Age Pension eligibility.
The next step is to review the product landscape and design suitable solutions for each member cohort.
Next, consider how the trustee is going to help guide members to an appropriate outcome. This may include financial calculators and online tools as well as advice models.
The trustee also needs to think about what other factors will impact a person’s retirement outcomes, such as their changing health and aged care needs, their bequest options and the need to meet one-off expenses.
And finally, there needs to be a process in place to regularly review and assess the member outcomes and refine the retirement strategy for its members, Boal said.
SOLUTIONS EXPLORED
One of the focus areas of the RIC is higher incomes, which will likely see the use by super funds of more income-style investments, Richard Dinham, head of client solutions and retirement at Fidelity International, said.
“A range of solutions or allocations could be used, such as high yield debt, emerging market debt, higher-yielding equity and property trusts.
These types of assets are already in high demand and come with investment risk, and so we may see more diversified solutions, such as global multi-asset income, or diversified global fixed income solutions, Dinham said.
“The other investment aspect of the RIC concerns managing individuals’ longevity risks. For this, we may see greater use of longevity products such as annuities, group self-annuitised arrangements or other insured arrangements.”
However, he warned these products may lack the required flexibility, which could also see the emergence of investment-based solutions to help manage risk.
WHERE DO THE CHALLENGES LIE?
Many welcomed and strongly support the intentions of the RIC to improve member retirement outcomes but some concerns have been raised.
Marshan said: “There is some concern as to whether superannuation trustees who are building products for millions of clients are going to get it right, but over the broad spectrum of super funds, there’s a lot of opportunities to innovate and create novel solutions that address longevity risk, extension risk, market risk, sequencing risk and meeting different term goals, inflation risk etc, which are all concerns over the retirement journey of a client”.
Ignition Advice chief executive for Asia Pacific, Craig Keary, said the obvious challenge is the how.
“It’s well documented that there’s an advice capacity gap, and accessing advice in a timely and affordable manner does have demonstrable benefits for its members,” he said.
“The challenge for super funds is matching their members to RIC products without advice. Given the larger numbers of retiring members involved in coming years, digital advice will be an important part of the solution.”
The integration of digital advice within superannuation will enable funds to bring scalable and intelligent retirement income products to members.
“Super funds have the retiring members, and they have the building blocks, including the Account Based Pension.
“Under the Covenant, they will also be helping members manage longevity risk. The inclusion of digital advice and digital guidance will enable super funds to map members in a scale, leveraging an appropriate mix of the account based pension and longevity building blocks, resulting in a bundled solution that is seamless, simple and with a wonderful experience for the member.
“This will be an important step forward for funds as they seek to cater to members that typically would not have accessed advice,” Keary said.
TOO MUCH TINKERING
There’s little doubt that the industry has up until recently been focused overwhelmingly on the accumulation phase of super. The retirement phase had received little attention, Fidelity’s Dinham said.
“But now the RIC places a strong emphasis on improving outcomes for members in retirement and so firmly focuses the industry on this goal.”
A significant number of participants welcome this new focus, having recognised the lack of previous innovation in post-retirement. But others may find the RIC an onerous change among a raft of other demands, such as fund mergers and managing the performance test, Dinham said.
But not everyone agrees that change is necessarily needed.
Andrew Buchan, HLB Mann Judd partner in Brisbane, believes there’s too much tinkering given that Australia’s retirement sector is already one of the best in the world.
Within the confines of the legislation, we have a thriving retirement income sector based around account-based pensions and annuities, Buchan said.
He admits he’s concerned about what the changes says to a person on the cusp of retirement, but is even more concerned about other issues like the disappearing risk insurance industry and the soaring cost of advice.
The system has legislated savings around choice of funds, income stream options and innovation within sector boundaries.
“I’m just miffed with the raft of legislation we’re producing, and for what reason?”
Buchan added: “Seeking advice (whether from an industry fund or a holistic plan) is about a retiree getting educated about their retirement options, and how they fit with their objective and how the age pension may interact with that.
“I’m not sure how a codified obligation helps the end investor. More legislation costs, which is just passed onto the end investor, which is not welcomed.
“We have innovation on this product happening – for innovation reasons, not for the sake of legislation. Genlife has just released its income stream product, and there’s the Allianz with Retire Plus and Magellan are also trying for a solution,” he said.
“Less legislation and a greater emphasis on research and collaboration on real issues like the National Seniors campaign, and enabling pensioners to do some paid work is good for our society, and is money better spent,” Buchan said.
Nina Hendy is a freelance journalist.
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