Flat white, short black, skim milk latte, soy milk cappuccino, double espresso, macchiato — the list of variations on the humble coffee bean seem endless. Yet, despite the array of choices, I always get exactly what I want because café vendors don’t guess how I want my coffee — they simply ask me.
So what does coffee have to do with superannuation and retirement incomes policy? Nothing except that until now, policy formulation has largely been based on assumptions about how people behave. We have all been guessing what people want in retirement. Nobody has asked consumers what they want.
As retirement incomes policy only has an impact when real people select real products, at the Investment and Financial Services Association (IFSA), we decided it was time to take the guesswork out of policy making and product development. We decided to ask people what they want in retirement to understand what drives consumers.
Twelve months ago, we began a project that examined the way 600 people (baby boomers before retirement and people who had recently retired) approached key decisions on retirement and what ingredients they would like to see in retirement products.
The good news is that the Government and the superannuation industry can provide a variety of menu offerings at minimal impact to the Government’s tax revenue. The bad news is that the research indicates that the products available today do not match the appetites of the retirees of the future. But don’t despair — the gap is easily bridged.
When asked to rank a range of income stream features, people rated ‘transparency’ and ‘control’ highly. A surprise outcome was how strongly people want to carry their own lifetime risk (“the balance of the fund goes to the estate or to your partner if you die early”).
In the real world, people also understand that you can’t have your cake and eat it too. For instance:
n while access to social security benefits is widely desired, people were not ready to sacrifice basic product features just for benefits;
n partial access to capital appears to satisfy their needs, and unrestricted access to capital did not rate as highly;
n low investment risk is very important to some retirees, but it is not critical to everyone; and
n tax advantages are regarded as important in retirement income products, across the board.
We also found that, even in real-world trade-offs, the following features left a bad taste in most people’s mouths:
l no residual money being left to their estate on early death; and
l no possibility of withdrawal of (some) capital, if needed.
We found several distinct groups who shared their preferences for risk, social security, tax benefits, and access to capital:
n Just over one third of the respondents indicated they were more interested in gaining higher returns, and less driven by access to the age pension and other benefits. The ability to access their capital was important to a little less than half this group. The people in this category tended to have higher incomes and more exposure to superannuation than the whole sample;
n About 31 per cent of the sample sought a balance of tax benefits and moderate risk investments. This group were not particularly driven by age pension benefits and tended to be the middle income group of the sample;
n 29 per cent actually sought to maximise social security and tax benefits. These people were spread across all income groups; and
n Only five per cent of the sample were very concerned about investment risk, and had a high preference to maximise social security benefits. This group tended to have lower incomes and were generally older than the sample average.
Some people will order a short black with biscotti, while others will choose to combine their cappuccino with a focaccia. Clearly there are as many retirement incomes preferences as there are combinations on any café menu.
This research gives us a guide to expanding our retirement incomes products offerings. Industry and government can continue to work together to ensure that consumers can choose a retirement income combination that suits their appetite.
— Lynn Ralph is CEO of IFSA.
