Finally, 32 years after the introduction of compulsory superannuation contributions in Australia, we are seeing a serious move to transition our retirement savings system into a retirement income system.
Last week saw the release of two important papers from the Federal Government. The first was a discussion paper, Retirement phase of superannuation. This paper seeks views on how the superannuation system can best provide the security and income Australians need as they live longer and healthier lives in retirement. The second was the final response to the Quality of Advice review and is part of the government’s Delivering Better Financial Outcomes package.
It is 18 months since the commencement of the Retirement Income Covenant. The two core pillars of a retirement income strategy are:
- Retirement solutions; and
- Support and guidance.
When releasing the first paper, the Treasurer, Dr Jim Chalmers, said that the government is “looking at how to improve the retirement phase of superannuation so that the system delivers a better retirement for more Australians“. We believe this is well overdue.
The discussion paper asks the fundamental question: if retirees are concerned about running out of money in retirement, why do so few Australians use lifetime income products that help them manage the risk of outliving their savings?
“Super funds need to do more to understand their members’ retirement needs and provide products and services tailored for their retirement.”
Dr Jim Chalmers, Treasurer
From our perspective, there are two parts to answering this question. First, there is the demand side. That is why people don’t buy lifetime annuity products if they can help them be more confident in retirement. This phenomenon is often referred to as the Annuity Puzzle and is the topic of our recent White Paper.
Then there is the supply side. That is, why don’t financial services institutions offer lifetime income products? This question is one of the three key areas examined by the “Retirement phase of superannuation” discussion paper. They are:
- Supporting members to navigate the retirement income system;
- Supporting funds to deliver better retirement income products and services; and
- Making lifetime income products more accessible.
The paper says, “Funds need to provide well-rounded products that are appropriate for the complex risks and decisions members face, and that balance all three of the retirement income covenant objectives”.
We are pleased that the discussion paper doesn’t just focus on products. Planning for retirement is complex. Just presenting a superannuation balance and a range of products will not work. It is as if we expect a retiree to become their own Defined Benefit Actuary and Chief Investment Officer overnight.
When releasing the discussion paper, Dr Jim Chalmers, Treasurer, said, “Super funds need to do more to understand their members’ retirement needs and provide products and services tailored for their retirement.”
Support and guidance
Australians need access to better tools, information and guidance to make suitable choices at retirement confidently. That is where the second of the two papers comes in.
The Quality of Advice Review was tasked to consider how the regulatory framework could better enable the provision of high-quality, accessible and affordable financial advice. Michelle Levy, Chair of the Review, provided the final report to the Government 12 months ago, in December 2022.
“With five million Aussies at or approaching retirement with more money than ever before, these reforms will help people make informed and safe financial decisions”
Stephen Jones, Assistant Treasurer and Minister for Financial Services
The challenge of planning for retirement is central to the Government’s response, which comprises three streams:
- Removing onerous red tape that adds to the cost of advice with no benefit to consumers
- Expanding access to retirement income advice
- Exploring new channels for advice
The government acknowledged the significant role of superannuation funds. It announced that it would develop legislation in 2024 that will allow trustees to play a pivotal role in assisting their members to better prepare for retirement.
When releasing the final government response to the Quality of Advice Review, Stephen Jones, Assistant Treasurer and Minister for Financial Services, said: “With five million Aussies at or approaching retirement with more money than ever before, these reforms will help people make informed and safe financial decisions”.
Solving the Longevity Equation
We agree with Jim Chalmers that “the problem is most retirees do not have access to the appropriate products to help them maximise their super over their lifetime”. We are encouraged by the life insurance companies and superannuation funds that have launched innovative lifetime income products in recent years.
With these new retirement income products available, where do financial planners and superannuation fund trustees go to learn about the latest thinking concerning retirement risks and be able to put it all together in a way that best supports individuals?