Superannuation funds identified the value of delivering post-retirement solutions to members more than a decade ago and product design combined with improved technology and changes to the regulatory settings are making this more possible, says Mike Taylor.
The commercial reality of the emerging post-retirement opportunities for superannuation funds was driven home in early August when Challenger Limited revealed in its full-year results the degree to which its annuities products were being distributed to superannuation fund members.
Those results revealed that at least three industry superannuation funds are currently delivering annuities-based post-retirement products to members via their administrator in what is being seen as just the start of a major trend as the Government removes many of the legislative and regulatory barriers which have inhibited the delivery of retirement products.
Challenger’s full-year results announcement to the Australian Securities Exchange (ASX) confirmed that it had grown its annuities sales for the 2017 financial year by 20 per cent to a record $4 billion and that this had been achieved not only via its astute use of distribution channels including platforms such as AMP, BT, and Colonial First State (CFS) but also the delivery mechanism provided by dominant superannuation administrator, Link.
The importance of the delivery of annuities via Link is that it represents proof that such products can be delivered via an administration platform in similar fashion to the manner in which the AMP, Colonial First State, and BT platforms have provided delivery to financial planners.
While the delivery of managed accounts was seen as a driver for platform growth over the past five years, the delivery of post-retirement solutions is seen as the next growth driver, something which has been acknowledged by AMP Limited’s director, superannuation,
retirement and investments, Vicki Doyle.
Doyle has pointed to the development work undertaken on AMP’s North platform as evidence of its recognition of the need to deliver to clients entering the post-retirement phase.
“We’re continuing to invest in developing post-retirement solutions to help our customers receive income streams that take into account longevity risk,” she said. “Critically, we’re also working hard to engage more Australians with their superannuation during their working lives so they are better placed to live the quality of life in retirement they aspire to.”
Doyle said AMP was utilising a goals-based approach to do this given the powerful emotional and practical connection they created for customers with their finances.
“The products, platforms and solutions we’re developing are designed to help customers achieve their goals,” she said.
CFS’ head of product solutions, Sue Wallace reinforced the fact that the company’s platforms had been amongst the first to focus on the post-retirement space, offering access to annuities in 2015.
“CFS is the largest payer of pensions outside of the federal government and has paid pensions in excess of $2.5 billion to retirees in the last financial year,” she said, noting that in 2015, actuarial research house, Rice Warner had reported the Commonwealth Bank was the largest provider of retirement income products.
“The blending of a range of retirement income solutions can be valuable to meet the ongoing and changing needs of retirees throughout their retirement,” she said.
Wallace noted that with current life expectancy rates, retirees could expect to be in the retirement phase for 25 to 30 years so their income needs were likely to evolve and change and be impacted by health, lifestyle and family.
She said this meant CFS would be looking to update its platform offering to meet the changing financial and personal needs of the retiree segment.
Looking at comprehensive income in retirement products (CIPRs), Wallace said the company’s focus to date had been on a retirement solution for default members.
“The building blocks, such as managed funds and annuities, are already available on platforms today,” she said.
“When a member is transitioning to retirement CFS strongly supports financial advice for a member’s individual retirement needs and to establish the right retirement income solution or adapt to changing needs during the retirement phase,” Wallace said.
“Platforms will be well placed to provide both a pre-package (CIPR style) or more individualised solution that will be more suitable to the large percentage of retirees who currently seek financial advice.”
AMP Limited’s Doyle said she believed platforms were integral to the delivery of pre and post retirement solutions and noted the manner in which the company had sought to place new products on its North platform.
“Earlier this year we launched a new offer specifically designed for retirees. It combines a pension payment calculator, with a retiree-specific investment fund, available through MyNorth’s allocated pension,” she said.
“Its aim is to provide retirees greater confidence with spending by calculating the amount they can withdraw each year to ensure their savings last. The drawdown amount is adjusted on an annual basis. The retirement savings are invested in MyNorth Retirement Fund, an actively managed diversified fund managed by AMP Capital, aiming to give them a stable income that will grow above inflation.”
Doyle said the solution included a working cash account with between nine to 12 months’ worth of pension so people could be confident their day-to-day spending wouldn’t be impacted by shorter-term market fluctuations.
“Next month we will also be providing AMP advisers and customers with access to Challenger annuities – available across our leading platforms including Flexible Super, North and Signature Super,” she said.
Doyle acknowledges that North is very much an AMP vehicle but believes that it can work for other Australian Prudential Regulation Authority-regulated funds.
“One of the great benefits of North for advisers and customers is the comprehensive product choice it offers. This will continue to be one our primary objectives for the platform and we’re confident it could support APRA-regulated super funds in the future,” she said.
CIPRs – a work still in progress
The Government may have used its 2016 Budget to signal legislative and regulatory changes to reduce the barriers to post-retirement products, but it has proved to be a slow work in progress.
It was only in March that the minister for Revenue and Financial Services, Kelly O’Dwyer released the draft superannuation income stream regulations and an explanatory statement for public consultation and the Treasury is continuing to receive submissions.The minister said the draft regulations were intended to cover a range of innovative income stream products including deferred products, investment-linked pensions and annuities and group self-annuitised products, noting that superannuation funds and life insurers would receive a tax exemption on income from assets supporting the new income stream products provided they were currently payable or, in the case of deferred products, held for an individual that had reached retirement.
“These new rules will remove taxation barriers to the development of new products that will provide greater flexibility in the design of income stream products to give more choice to consumers, while ensuring income is provided throughout retirement,” O’Dwyer said. “The development of these new products is a precursor to the development of comprehensive income stream products for retirement, or CIPRs.”
However, O’Dwyer may be disappointed with the reaction of the superannuation industry to the Government’s draft proposals, with a broad cross-section of submissions pointing to shortcomings in Treasury’s approach.
The industry misgivings were epitomised by the Association of Superannuation Funds of Australia (ASFA) submission which warned that the “proposed CIPR framework – as currently designed – is neither necessary nor sufficient to achieve its stated objectives”.
“There is the risk that a CIPRs framework will be designed that, rather than maximising member benefit, will see little take-up and fail to achieve the necessary scale or desired consumer outcomes,” the ASFA submission said.
The major area of concern for ASFA was that it believed the Treasury discussion paper appeared to be taking an approach “whereby the CIPRs framework effectively will ‘mirror’ (in reverse) the MySuper framework”.
It warned that there were three material differences which would render this premise questionable and lead to some anomalous outcomes:
1. The accumulation phase is materially different to the retirement phase.
• In the accumulation phase there is a common objective of maximising savings for a reasonable/appropriate level of risk.
• In retirement:
- The circumstances, needs and objectives of individuals, which determine drawdown needs, will vary greatly;
- The effect of drawdowns is substantially different from that of contributions; and
- There is a greater range, and uncertainty, regarding the likely time periods over which drawdowns will occur.
2. Unlike MySuper – where the consequences of being in an unsuitable product are reduced net returns, which can be remediated by rolling-over to another product – the consequence of being in an unsuitable CIPR can include the loss of access to capital/reduced death benefits and may be difficult, or impossible, to remediate.
3. Unlike MySuper, CIPR products will be an ‘opt-in’ regime, where members apply for a product, as opposed to a ‘default’ regime.
The Australian Institute of Superannuation Trustees (AIST) was similarly critical of the Government’s approach, also arguing against a MySuper approach.
“AIST does not support the mandating of CIPRs as preferred retirement income products for funds and recommends that trustees formulate their own preferred strategy as part of the construction of a retirement incomes framework,” the AIST submission said.
Also like ASFA, the AIST argued that a ‘safe harbour’ would be necessary in the event that trustees were forced to implement specific products for their members as preferred retirement income products.
“In this event, safeguards must be implemented to minimise moral hazard,” it said.