The development of a broad array of retirement products should not be first priority for the industry and could drive up the cost of financial advice, according to Deloitte.
In its submission to the Treasury’s Superannuation in Retirement consultation, the consultancy discussed the barriers that could develop from an excess of retirement products such as development costs, incentives, competition and legacy products.
Much focus has been placed on the encouragement by APRA for firms to develop retirement products under the Retirement Income Covenant (RIC), with firms such as Challenger and Allianz Retire Plus creating their own solutions to meet the investor needs of maximising income, providing access to capital and managing risk.
The government introduced the RIC in July 2022 to support the development of retirement income products, a crucial step in broadening industry focus beyond accumulation and towards the decumulation phase.
Approximate $55 billion of assets that currently transition into retirement each year are expected to quadruple to more than $200 billion per annum over the next 20 years, according to the Australian Bureau of Statistics data.
However, Deloitte said all these different products are causing confusion.
“We note that almost every lifetime income product offered is different and therefore simple comparisons between them are almost impossible, especially for non-advised members. In fact, some products have been developed to be distributed by advisers alone.
“When it comes to retirement products, it is difficult to simultaneously achieve product innovation and standardisation. A careful balance therefore needs to be tread.
“In terms of regulatory barriers, the discussion paper mentions several barriers relating to the development of new products, however we believe that allowing for new product features should not be a priority, especially given the implications of a large heterogenous product set on the cost of effective advice and guidance, product development costs and legacy product risk.”
Instead, it called for a standardised product building blocks which would be simpler to develop and easier for members to understand.
The Deloitte submission detailed four benefits that would come from standardising the building block of lifetime income product development. These are:
- Reduced product development costs (including associated advice/guidance tools), and therefore increased supply at the trustee level.
- Easier standardised disclosure, resulting in anchoring or a network effect within the industry – contributing to improved retirement literacy.
- Simpler product comparisons using online tools and calculators. Lifetime income products could even be added to retirement estimates.
- Easier transfer of lifetime income products between funds (especially in the case of fund mergers), resulting in fewer legacy products and a reduction in fees for members.
This was echoed by Morningstar CEO Kunal Kapoor, who said the proliferation of investment options in recent years has indeed provided choice but has had the knock-on effect of leaving investors overwhelmed. In line with this, Morningstar opted to launch its own ratings of superannuation funds for the first time.
“All of this helps the investor but certainly increases their choice, and we have to work even harder and up our game to demystify that,” he said.
Could not agree more with this article. These new products that have a level of lifetime income built into them with market exposure are incredibly complicated to understand, let alone then explain to a client. Is the wheel really broken? Keeping annuity and account based pension products separate seems to be working fine for most clients.