Opening the retirement income market to new and innovative products for superannuation consumers could not come soon enough. The tide of Baby Boomers that has swelled superannuation balances to $2.1 trillion has begun passing through preservation age and into retirement.
As retirees begin to fund their retirement with decades of accumulated savings it is critical that the industry rises to the challenge of providing the financial products that are best suited to their needs.
The Financial Services Council (FSC) has been a strong advocate for reforms to remove regulatory, tax and social security barriers that currently prevent superannuation funds and life companies meeting consumers’ needs for flexible but reliable income over the later stages of life.
Retirement is complex and lump sum payments, which have been a prominent feature of the existing system, are inadequate as a retirement solution to meet the needs of consumers.
Whilst lump sums were originally the default retirement choice of those with small balances, they are no longer appropriate for the increasing number of Australians who have accumulated larger balances over the last 30 years and should be able to expect that their superannuation will replace – or be a significant supplement to – their Age Pension entitlement over the full course of their retirement.
Income stream products are required to provide retired consumers with greater certainty and help them manage their financial affairs later in life. Retirees’ needs change over the course of their retirement.
While they are active they will want to travel but later health and aged care will be priorities. All these needs are better managed when a retiree has a sense of certainty about their financial arrangements.
Achieving a suitable balance in social security settings is also critical to the success of the CIPR reforms. CIPRs should increase income, better manage retirement risks, and provide flexibility. They are expected to combine account-based and pooled longevity features and should be offered to fund members by trustees as a real improvement on the status quo.
The FSC strongly supports the measures introduced in the 2016 Federal Budget that began the process of removing tax barriers to innovative retirement income products. These measures have been introduced to parliament following detailed consultation with industry and consumers, and are expected to pass in the coming weeks. We have welcomed indications of bi-partisan political support for these reforms.
Two issues, however, remain unresolved and present a barrier to the growth of the market:
- The social security settings for the new category of retirement income products; and
- The design of comprehensive income products in retirement (CIPRs) that were a key recommendation of the Financial System Inquiry.
The FSC’s overarching position is that the social security treatment of retirement income products should be principles-based so as to allow innovation in that market over time.
Retirement income product sales would be sensitive to any distortion introduced by changes to social security treatment. If social security treatment of new retirement products are not considered in the context of the treatment of existing products they could struggle to find a place in the market.
Achieving a suitable balance in social security settings is also critical to the success of the CIPR reforms. CIPRs should increase income, better manage retirement risks, and provide flexibility. They are expected to combine account-based and pooled longevity features and should be offered to fund members by trustees as a real improvement on the status quo.
The FSC is of the view that the social security treatment of the new retirement income products, which will be some of the building blocks of CIPRs, should be linked to the capital access schedule outlined in Treasury’s final report of the Review of Retirement Income Streams. This principle should apply across the different types of products that may emerge once this market is opened to ensure competitive neutrality across the industry and between products.
Some integrity provisions are essential to ensure that CIPRs and their new retirement product components will provide retirees with larger and more sustainable retirement incomes. This can be expected to bring a dividend to the Government through lower Age Pension and aged care expenses in later years.
A previous Deloitte Access Economics study showed that an average take up of $10,000 of longevity insurance premiums at age 65 would produce savings in government Age Pension and aged care costs of 0.18 per cent of the gross domestic product (GDP) in 2050. In a fiscally constrained environment, and with Australia’s ageing population, such improvements in the sustainability of our retirement system are critical.
Once the tax and social security settings are settled, and the industry fully understands the product options that will be available, an open, policy driven debate can be conducted on the regulatory framework for CIPRs.
There are complex policy questions to be resolved, such as:
- Should all superannuation trustees be required to offer a CIPR?
- Should there be a minimum set of features or required features for a CIPR?
- What processes should trustees go through when offering a CIPR to make sure that it is appropriate for the member?
The Government has indicated that the consultation process around CIPRs will be extensive and detailed. This is entirely appropriate in the context of a complex policy with multiple stakeholders.
Ultimately, however, the industry will be judged on whether it can work together to bring these reforms to fruition. We must spend some time ensuring the policy framework is right, but not so long that the Baby Boomers have all retired and miss out on the superior retirement income solutions that CIPRs should provide.
Blake Briggs is the senior policy manager at the Financial Services Council.
