Retirement income covenant to shape adviser strategies
While the approaching retirement income covenant will not directly apply to financial advisers, there will be new products and new ways of thinking that advisers will need to be across, according to Challenger.
During the Association of Financial Advisers (AFA) conference, Challenger chair for retirement income, Jeremy Cooper spoke on the topic of using the changing retirement landscape to build a sustainable retirement offering.
The new obligations expected to start on 1 July next year would oblige superannuation trustees to offer strategies that help retired and retiring members maximize their retirement income, manage the risks to the sustainability and stability of the retirement income and flexibly access their savings during retirement.
“What it does not mean is just shooting the lights out, taking a whole lot of risk and expecting higher returns than expected,” said Cooper.
“It’s going to be focusing more on consuming the capital component of those savings to generate extra spending for the retiree and that's where some of the new product ideas and even the way people think about retirement income is going to change.”
When talking about committing to lifetime income streams, Cooper said advisers would need to have more nuanced discussions than just how much short-term risk a client could tolerate.
He pointed to six factors of consideration for advisers, demonstrated by US retirement income academic, Wade Pfau’s ‘safety first’ concept, which aimed to help advisers understand their client’s income ‘style’.
The six factors advisers needed to understand were where their client fit on a spectrum of:
- Risk appetite;
- Active versus passive decision making ambitions;
- Time commitment to their investments;
- Propensity to want to spend in retirement;
- Timing of their spending and;
- Liquidity of their income, for example, how much would be earmarked for a particular reason like aged care.
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