Guided choice framework needed for better retirement outcomes

To enable members to take up better retirement outcomes, trustees could use a guided choice framework, according to Challenger. 

Speaking at the Actuaries Summit, Challenger’s technical services manager – retirement and adviser solutions, Melanie Dunn, said the framework was about helping members make decisions that were suitable for their circumstances.  

Dunn said there was an opportunity for funds to deliver an innovative retirement solution as members are looking to their fund for guidance about retirement. 

“This framework would increase the likelihood of members taking up better retirement outcomes suited to them and improving trustee member retention and engagement,” she said. 

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“It does not replace financial advice but sits alongside advice channels.” 

Dunn said trustees would first need to identify a set of member cohorts and the retirement solution likely to best suit members in those cohorts. These cohorts would be based on age, gender, and balance.  

Then, considerations that needed to be identified were: 

Members value income and estate value – solution need to balance providing income for life for those who lived a long time, with the desire to pay bequest for those who did not live as long; 

• Allowance for Age Pension in assessing retirement outcomes; 
• The range of ages which members might pass away and the range of outcomes they would experience; and 
• The set of retirement solutions should include an account-based pension (ABP) along but also retirement solutions that incorporated longevity protection. 

“With the retirement product consideration set the trustee will consider offering their members, at the moment the status quo is an ABP maybe with a variety of options. They can offer growth and flexibility but can lack certainty. 

“On the other side of the spectrum we have the innovative retirement income stream (IRIS) – these are longevity solutions such as lifetime annuity products that offer certainty but can lack growth and flexibility.  

“But we want to hypothesise and want to consider as part of this framework and help trustees understand is that for some member cohorts is would a blended retirement product that incorporates both an ABP and IRIS together as a single product – could that achieve better outcomes for some cohorts?” 

Dunn noted that a guided choice solution that a trustee identified for a cohort did not need to outperform all possible member options but outperform alternatives for members. It did not need to be optimal or tailored to a member’s individual circumstance as that was the realm of personal advice.  

“What we’re looking for is of the possible solutions of the retirement fund, which of those solutions might suit different groups of members better,” she said. 

“So we do need identify the factors that may indicate to a member when the guided choice solution might not be appropriate for them as part of this work.  

“We can identify the solution appropriate or expected to be in the best interest for a group of retirees. But because we only know limited information about them an important part of the engagement process is identifying when that guided solution may not be appropriate for them.”