Advisers reliant on retirement income products to retain clients: KPMG

Being able to offer attractive retirement income products will be essential for advisers in coming years if they want to attract and retain clients, according to KPMG.

The firm’s report ‘The seven drivers of the 2023 inflection point for retirement incomes’ explored Retirement Income Covenant, which came into effect in July 2022, and how the industry could work together to meet customers’ retirement needs. 

Given the shrinking adviser marketplace, those remaining advisers are opting to focus on older, high-net-worth clients who are approaching retirement. Having products to suit their needs would become even more important as these clients moved into the decumulation phase.

“It will be essential for advisers who want to attract and retain clients to be able to access strong retirement solutions, which allow efficient administration,” KPMG said.

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“It will also be advantageous to both advisers and their clients to have compelling strategies that can be implemented in the years leading up to retirement, deepening the relationship at an early stage, meeting the client’s need to take action, and providing peace of mind with a certain income locked in well ahead of retirement.”

With this in mind, KPMG said it expects to see greater integration and seamless administration and information sharing to enable longevity products and account-based pensions to be considered together.

Account-based pensions are currently the most popular option for retirement income as they offer flexibility and full capital access as well as access to high returning growth investments. On the other hand, lifetime annuities are less popular as super fund members are reluctant to trade flexibility for a lifetime income.

In a bid to attract more customers, flexible products are being designed that could work alongside an account-based pension or embedded as an investment option. These could provide the certainty of a guaranteed income with the flexibility to adjust to changing circumstances and fit into existing industry systems.

Recent changes made by providers include clearly disclosed unbundled fees, greater investment choice, income choices, and early commencement ahead of retirement. 

“What hasn’t changed from the traditional products is the income guarantee which provides surety for Australians to retire with confidence. Many of these new products are backed by life companies, meaning the statutory reserves needed to fund income payments into the future have been set aside and the promises made to super fund members today will still be legally binding in 30 years’ time,” KPMG said. 

“KPMG predict that this new style of longevity product will become a retirement income anchor. Rather than being an add-on, we think advisers and members will select the longevity protection product as a central part of a holistic and optimal retirement income strategy, locking in a certain income on top of the age pension.”

On the adviser side, as well as picking the right product for the client, the adviser needs to ensure they manage longevity risk that is a major source of concerns for those who are worried they would run out of money in retirement.

“Advisers can ensure that clients don’t run out of money by adjusting their income, however, this does not mean a retiree has the confidence to live their best life in retirement and to spend based on guaranteed income,” KPMG said. 

“Importantly, it is very difficult — if not impossible — for an individual or their adviser to manage longevity risk without pooling or guarantees. Most Australian retirees are still investing their superannuation into traditional asset allocations in account-based pensions and as a result are bearing both market risk and longevity risk. Research indicates that this is a major source of concern for retirees.”