Reviewing retirement income

As society continues to progress and evolve, it is necessary to review the structural systems in place – if they are prepared to deal with current needs – and to establish what potential issues there might be in the future that can be dealt with now.

As observed by AMP in their submission to the Review: “when AMP was founded [in 1849] life expectancy was around 30 years of age. Average life expectancy now is 80.76 for males and 84.85 for females and is expected to continue to increase.”

We’re in a time where people are living longer and their retirements are being extended; although some situations can allow longer working careers, this is not going to be the case for all.

On 27 September, 2019, Federal Treasurer, Josh Frydenberg, announced a review into the retirement income system, based on a recommendation from the Productivity Commission in the report Superannuation: Assessing Efficiency and Competitiveness.

The stated intention of the review was to cover the current state of the system and its future performance as Australians live longer and the population ages.

There are plenty of issues needing to be addressed including if people were retiring with enough money, if the system was working efficiently enough, and whether regulation was holding back the industry.

Current COVID-19 issues notwithstanding, the system was already due for an overhaul.

IS THIS REVIEW WORTH IT?

Matt Rady, chief executive of Allianz Retire Plus, said, despite the abundance of reviews that had already taken place in the industry, the review was warranted.

“The fact this one is specifically focused on the retirement component of superannuation is well overdue,” Rady said.

“When you look at the submissions, there are some recommendations that are valuable, whether it be [about] the gender bias in the system, taper rates or that people are not being incentivised to contribute to their super.”

“The issue I have is there’s a degree of urgency to this I hope the Government really focuses on, because the reality is retirees need a much greater degree of certainty around their financial wealth in retirement.”

Rady said vulnerable people in the community – from a health and financial perspective – are suffering a “double whammy”.

“Their priority right now might be health, but when you see volatility in markets like right now, you can see the need to insulate people from market downturns and having their retirement savings withered away by market disruption,” Rady said.

Rady said the benefit of this review was that it differed from the Productivity Commission, which was focused on assessing the performance of funds in accumulation.

“If you look at [other] previous reviews, it’s focused on either the efficiency of participants in the system or whether the super guarantee is enough,” Rady said.

“That’s a great debate, but at the end of the day, the purpose of superannuation is to look after people in retirement and there hasn’t been a specific review focused on the retirement part of superannuation, at least not to my knowledge.”

Brett Jollie, Aberdeen Standard Investments (ASI) managing director in Australia, said even though it’s another review of the income system, it was still good to get a factual base for policy making which was the objective of the review.

“However, I would say it further defers any concrete policy implementation around retirement,” Jollie said.

“But we’ve now being looking at retirement policy for quite a number of years, including the financial system inquiry in 2014, and we haven’t seen any concrete developments since then.”

FINDING THE FOCUS

Jollie said there needed to be a comprehensive end-to-end solution that’s not just about investment products or product solutions.

“It’s about a full end-to-end solution which focuses on the framework, financial education, advice and guidance,” Jollie said.

“How do we satisfy individual wants, needs goals, risk profiles and provide flexibility, clarity and certainty in retirement?”

Jason Nyilas, ASI head of retirement and product strategy Australia, said there needs to be work done on personalising the whole experience for members and individuals coming into retirement.

“We need to drill down more clearly on what the retirement needs are, which in today’s landscape people don’t do,” Nyilas said.

“Super funds do provide retirement solutions, but the personalisation level isn’t there, so we need to bring that aspect through digital and adviser solutions in order to join that up and have a direct line of sight with investment solutions that fulfil those personal needs.”

Nyilas said one of the things he hoped for was more clarity over Pillar One and Two: the relationship between age pension and superannuation (Pillar Three covers voluntary savings).

“I’m keen to understand what the income review thinks about that and what direction we think we should take as a country,” Nyilas said.

“Do we follow the New Zealand system, do we do more of the UK or US systems, or do we stay in our existing system and stop tweaking it?”

Raewyn Williams, Parametric’s managing director of research Australia, said people were still advocating for an articulation of the purpose of superannuation, what the objectives were and what does a good retirement look like.

“While there are different views about how we might frame that, the one takeaway from all the submissions [to the review] is everyone would like to see policy that starts with the ‘why’,” Williams said.

“Why are we doing this and why should we believe in what the purpose is, and then good policy will come off the back of that ends up being framed.”

John Maroney, Self-Managed Superannuation Fund (SMSF) Association chief executive, said making advice more efficient and available needed to be addressed. 

“One of the main concerns I think a lot of people have is it’s a very complex system, it’s very difficult for people to understand and engage,” Maroney said.

“That leads to a very high need for financial advice for people particularly approaching or in retirement.

“That’s becoming more difficult to receive because there’s a lot of advisers leaving the system and the cost of regulation is going up steadily.”

Maroney said there was plenty to learn from the SMSF sector as it was more mature, in terms of the amount of retirement income coming out of their sector as a proportion of members in their sector.

“A lot of the issues our sector has been dealing with for the past five or 10 years are issues other sectors will need to deal with over the next 10-20 years,” Maroney said.

“There are a lot of lessons about how to manage retirement income drawdown in our sector that will be very important for the whole system.”

Ranjit Thambyrajah, managing director of Acuity Funding, said there wasn’t enough of a focus for people to invest globally to generate better returns. 

“The problem with the super fund industry at the moment, is that the returns are nowhere near enough to actually cover the costs incurred as people get older,” Thambyrajah said.

“The cost of care in the retirement industry is very expensive, and the Government tries to move away from it, expecting people to take care of their own.

“One of the best ways to give the best care is to actually tie it in with your retirement fund and that hasn’t happened.

“But you can’t achieve that if you have such low gains, because there isn’t sufficient money being gathered for the fund.”

Rady said innovation in the retirement income sector was not easy, which was unfortunate given the weight of money and opportunity in the area.

“There are just very few organisations globally that are prepared to have the appetite or patience to use their capital to support these types of initiatives,” Rady said.

“Ultimately you have to provide value to retirees in this space and you can’t make extraordinary profits in this game.

“From a policy perspective, we need to find a way to reduce the barriers of entry because at the moment the more people playing in this space, the better.”

THE COST OF ADVICE

For advisers, the cost of advice was the biggest issue for the future of retirement income, and future retirees might struggle to deal with costs.

Ben Marshan, head of policy and standards at the Financial Planning Association of Australia (FPA), said the review needed to address the cost of advice.

“Financial advice is of critical importance to retirees, and for Australians preparing for their retirement, the regulatory costs to provide advice are escalating dramatically,” Marshan said.

“As well as this, there are restrictions on how you provide advice and what advice you can provide to retirees who want simple answers to questions.”

Marshan said the FPA had asked the Retirement Income Review to highlight the challenges members faced in helping Australian consumers when it came to how much it cost to provide advice and the restrictions around doing so in a cheap and efficient way. 

“We would like to see an acknowledgement that the way regulation has been developed around financial advice has been very ad hoc and led to these costs and regulatory inefficiency issues,” Marshan said.

“Secondly, there’s a drive through the Royal Commission recommendations to limit the flexibility consumers have to pay for financial advice.

“We’d like the review to respond to that and highlight that consumers, particularly around retirement, need flexibility in how they pay for advice to ensure they have access to it.”