Treasurer Chalmers is in the process of legislating the definition of superannuation to put an end to the ‘super wars.’
The Government has defined the objective as ‘to preserve savings and deliver income for a dignified retirement, alongside Government support, in an equitable and sustainable way.’
Legislating the definition of super is a step in the right direction but delivering Australians a dignified retirement will be realised through greater access to innovative retirement income solutions.
We have reached an inflection point whereby the sophistication and maturation of the accumulation phase has not been matched on the retirement income phase of life. The Retirement Income Covenant (RIC) has been a catalyst for correcting this imbalance.
APRA has repeatedly called for super funds, insurance companies and platforms to work together and we are now seeing that engagement take place.
Super funds are collaborating with retirement income partners to find the solutions that can assist in solving for longevity risk but historically there have been four key challenges to overcome with traditional solutions:
1. Traditional annuities have limitations providing access to capital when circumstances change;
2. Retirement products have historically sat outside the super funds eco-system with rudimentary integration;
3. Super funds are not life companies and have no access to capital to support long-term guaranteed incomes; and
4. There is limited retirement income expertise available in Australia to innovate and build the next generation of solutions – at the pace required.
So how do we resolve these issues amid this urgent demand for retirement solutions?
Solution 1: It’s time to evolve the account-based pension
The account-based pension (ABP) is an important structure for retirees, but it’s not the only solution. ABP’s can be strengthened with a guaranteed income for life anchoring the portfolio.
By embedding a guaranteed lifetime income solution within an ABP, trustees can support members with a guaranteed level of income and allow members to retire with certainty knowing they will never run out of money.
These ‘embedded’ solutions are now available from life companies to support super funds and most importantly member outcomes.
Solution 2: The role of tools and products in creating certainty
How good would it be to know years in advance what percentage of income members can rely on when in retirement? Currently, asset allocation techniques within an ABP leave retirees’ savings at the mercy of unpredictable markets as experienced last year.
Retirees concerned by fluctuations in their balances often forego holidays, family visits and other creature comforts to be sure they won’t one day find themselves short of money.
At the other end of the spectrum, traditional annuities can provide the certainty in retirement that Australians need but they often come at a cost of flexibility and can seem confusing or opaque despite their benefits.
So, how can super fund trustees select solutions when the available products lack flexibility, are difficult for a retiree to understand or too sensitive to market movements?
Next generation solutions
Technology and connectivity will have a significant role in moving the dial for the retirement income phase.
We have already started seeing next generation solutions coming to market addressing some of these concerns with new entrants to market investing significantly in technology that can be fully integrated with super funds.
The next generation of retirement products will improve even further on the earlier efforts with outcome-oriented solutions designed around core features including:
- Plan with certainty. The next generation solutions will enable retirees to plan for retirement with greater certainty, before reaching the retirement income phase;
- Protected growth. Retirees will be able to benefit from growth and a downside protection mechanism limiting risk exposure – dampening the effects of inflation while offering the potential for the capital growth necessary to fund longer retirement periods;
- Guaranteed lifetime income. Backed by regulated life companies with strong balance sheets and capital reserves, guaranteed income payments will be paid for the life of the retiree;
- Flexible access to savings. Retirees will be able to withdraw all or part of their account balance at any time so that unexpected expenses can be quickly and easily met; and
- Long-term surety. Australians will feel confident that the promises made to them today will still be legally binding in 30 years’ time… and that the financial reserves needed to fund income payments into the future have been set aside.
Solution 3: Pick your partner wisely
The key decision for super funds is whether to develop products in-house or partner with existing providers.
Business cases for in-house development can be challenging given the initial small proportion of members in scope. Further, appointing an end-to-end retirement income provider can accelerate ‘time to market’, assist in meeting the all-important business case, transfer elements of the operational risk ahead of the proposed changes to CPS230, which is aimed at strengthening operational risk management (replacing SPS 231
outsourcing and SPS 232 business continuity management).
By carrying a lot of operational risk Super Funds will need to have higher risk reserves, whereas if you are partnering with a life company who has end-to-end operational and administration capabilities, elements of those risks can be transferred and monitored by the trustee.
Solution 4: Play to your strengths
In Australia, super funds already use global expertise as part of its investment management – the same thinking needs to be applied for the retirement income phase. Super funds must look abroad for skill sets and expertise that already exist in other developed markets.
Global providers will be critical to help bridge the skills gap to progress innovation with tried and tested products that can be adjusted to cater to the Australian financial eco-system.
Super funds, platforms and trustees have an obligation to move forward on their RIC and not just in a statement. Delivering on their RIC is where the rubber hits the road and working in collaboration with world class specialists is consistent with their approach to investment management.
The industry is progressing, but we must get on with the business of developing fit-for-purpose retirement income solutions as a priority.
Adrian Stewart is chief executive of Allianz Retire+.
