The Retirement Income Covenant was in the spotlight at the recent IBR Conferences Post Retirement Forum, with a focus on how funds have developed their retirement income strategies and, most importantly, what comes next. All agreed that a retirement income strategy should combine support and guidance with retirement income products to help their members reach their retirement goals.
There is so much more in retirement.
A common theme throughout the two-day event was the recognition that retirement differs significantly from the accumulation phase and that members need more from their superannuation funds as they transition from full-time work.
“Investment returns are (almost) everything in accumulation but there is so much more in retirement”.
Geoff Warren, ANU
When saving for retirement, there is a single objective – to maximise your balance at retirement, with consideration to managing investment risk. In retirement, however, there is a much broader range of risks spanning both financial and non-financial matters, including:
| · Longevity Risk | · Inflation Risk |
| · Excess Withdrawal Risk | · Health Expense Risk |
| · Long-Term Care Risk | · Frailty Risk |
| · Financial Elder Abuse Risk | · Market Risk |
| · Interest Rate Risk | · Liquidity Risk |
| · Sequence Of Returns Risk | · Forced Retirement Risk |
| · Unexpected Financial Risk | · Public Policy Risk |
Many of these risks were referred to during the two-day conference, with speakers highlighting the challenge of helping members understand and manage these risks.
To cohort or not cohort, that is the question.
Many presenters and panellists pointed out the importance of not treating members as one homogenous group when considering their retirement income strategies. The nature of retirement means that superannuation funds need to take a more tailored or personalised approach to support their members through the journey.
Representatives from Aware Super, Australian Super and Cbus mentioned developing different cohorts to place their members, acknowledging the need to know more about them than they currently do. Furthermore, most recognise that members will move between cohorts as the fund learns more about them or their circumstances change.
In antithesis to this approach, Nick Callil, WTW, presented his analysis of retirement income strategies, reporting that 41% of the retirement income strategies he looked at did not mention cohorts. Of those that did, many funds based their cohorts on age and retirement phase (43%), while other factors included account size, age pension status and advised status.
During the conversation, a few participants said they would also like to include behavioural factors but acknowledged the challenges associated with that aspiration.
Ruvi Nanayakkara, Spirit Super, stressed that the first step must be understanding your member. This understanding needs to blend qualitative and financial aspects rather than look at each set of issues separately.
In our view, superannuation funds should be developing retirement income strategies for different cohorts, which aligns with the requirement of to consider different cohorts of members.
Longevity products, anyone?
In my presentation, The next steps in the evolution of retirement income strategies, I reminded the Forum that the Henry Review in 2009 identified a key structural weakness in Australia’s retirement income system as “the failure to provide products that would allow a retiree to manage longevity risk”.
However, of the retirement income strategies reviewed by Callil, only 13 superannuation funds expressed the intent to develop longevity products. Acknowledging that the publicly available summary of a fund’s retirement income strategy might not express its full intent regarding retirement income products, this is still disappointing.
New products are emerging that provide protection against longevity risk, and several sessions at the Forum were dedicated to discussing these products, including; Rose Hasna, AMP Australia, talking about the MyNorth Lifetime Suite and Grant Hackett, Generation Life, about the Generation Life LifeIncome product. Both these products are available from financial planners only and provide income for life.
Hackett stressed the importance of managing longevity risk with the following example: A healthy, well-educated female entering retirement today, who had an affluent career and has high-quality housing, is just as likely to live beyond age 100 as she is to die before age 80.
Maybe, the reason for superannuation funds not considering longevity products is their complexity. Victor Huang, Milliman Australia, reminded us that one of the challenges arising from these innovative retirement income products is the need to present them in language that is simple as possible even though they might be complex under the hood.
We’re in the peace of mind business.
“Retirement is complex – how can we give more “guidance” to retirees?” asked Andrew Boal, Deloitte. The challenge of helping people transition from full-time work was raised throughout the two days.
Several participants mentioned their members are looking for the confidence to spend in retirement. Jeremy Duffield, Retirement Essentials, quoted fellow participant Mark Spring, Active Super, who often says that superannuation funds are in the peace of mind business.
“We’re in the peace of mind business.”
Mark Spring, Active Super
A common refrain was “How do we make advice more accessible and affordable?” and many of the participants referred to the current .
Louise Aracas, AustralianSuper, said, “We can develop the best products and services but what members are looking for is help and guidance to be able to be confident about their decisions”.
David Bell, the Conexus Institute, presented his recent research into the role of guidance and advice in retirement income strategies. This research found that over half of Australians are sourcing their financial advice from what might be called informal channels, with 26% asking family, friends, or colleagues and 25% looking for information online via search or in forums.
The main reason for not using a financial planner is related to cost, with 44% saying they could not afford it and 29% saying that they felt financial advice did not represent value for money.
Rest of life planning
In the last panel of the Forum, David Williams, MyLongevity, said rather than talking about retirement planning,” we should be talking about “rest of life planning” and that the goal should be to help Australians make the best of their longevity.
One thing everyone agreed on—people are now living longer than ever before and should plan their finances to give them the confidence to spend so they have peace of mind and enjoy retirement.