The CSRI was founded to encourage the sharing of ideas toward building a more sustainable, efficient, equitable and adequate retirement incomes system.
We’re lucky to have attracted some high-profile and highly knowledgeable partners to contribute to our work and help shape the debate.
In this interview, we put five questions to our two lead sponsors for our upcoming 2016 Leadership Forum.
Craig Cummins is a partner at PwC, an active participant in the super industry and a leading adviser to industry, public sector and corporate funds.
Glenn Crane is chief executive of DFA Australia, the local affiliate of global asset manager Dimensional Fund Advisors which manages more than $500 billion globally.
Why did you lend your support to the CSRI?
- Cummins, PwC– “We recognised the opportunity to reflect on all the current debate and ongoing change in government policy and regulation. We see this as a forum to share well-informed and researched policy settings that bring us closer to bi-partisan policies that help maintain and build on the confidence in the current system.”
- Crane, Dimensional – “We’ve been among the leading advocates globally for an income focus in retirement savings plans. The Nobel laureate Robert Merton, who works with us, has visited here, arguing for a shift in DC plans towards an income goal. So we had no hesitation in supporting the CSRI. For us, this is about good policy, good business sense and, most of all, good outcomes for Australians.”
The federal government has now agreed to set an income goal for super and improve the targeting of tax concessions. What should the next priorities be?
- Cummins, PwC– “First, amend the SIS legislation to allow a wider range of more flexible post-retirement products and ensure that deferred annuities are regarded as pensions for tax purposes. Develop a clear regulatory regime for variable annuity style products and pooled products. Second, amend the rules to enable the efficient rationalisation of legacy products. Under current rules, the cost of even a small rationalisation is substantial as it requires ensuring there is no disadvantage to members, as well as appropriate governance, regulatory approval, communication to members, and system and business processes changes. Third, review the means testing treatment for the Age Pension and Aged Care to simplify and provide partial protection (up to a cap) from the Age Pension Means Test for amounts released under home equity release schemes or downsizing.”
- Crane, Dimensional – “Australia led the world in moving to a defined contribution system. And the system is still rated highly internationally. But that doesn’t mean it can’t be improved. The next steps will be defining what comprehensive income products might look like, how they will be benchmarked and the design of the dashboards to accommodate the change in goals. From there, it will be about educating the public about why an income focus makes sense.”
What do you see as the essential elements of a comprehensive income product for retirement (CIPRs)?
- Cummins, PwC – “The system needs to offer flexibility not prescription. There will be no single retirement product that will meet every person’s needs during their later years. The answer will be a mix of products that change as people’s circumstances change over time. CIPRs will need to be different for different groups of members, even within the one fund.”
- Crane, Dimensional – “If you are managing towards an income goal rather than an accumulation goal, there will be significant differences in both how you manage risk and how you deploy your investable assets. For those close to retirement, a market decline like the GFC can be hugely destructive. So there needs to be a balance between asset growth in the early years of people’s working lives and income risk management later on. Managing inflation and interest rate risk are paramount if you are investing for 20 years in retirement and your goal is real income stability. Finally, a successful product will provide people clarity about the retirement consumption their savings can support. That means giving them meaningful information, meaningful choices and, importantly, the flexibility they need.”
What can your organisation contribute to this public discussion?
- Cummins, PwC – “We can contribute practical suggestions based on our broad industry knowledge and that take account of existing policy settings.”
- Crane, Dimensional – “We are already delivering retirement income funds in the US market and developing similar solutions in Europe. So we have a global perspective. But we’ve also got a strong local focus as we’ve been serving clients in Australia for more than 20 years. In Bob Merton and other academics, we have some of the most innovative thinkers in finance working on these issues. We’re well advanced in how to communicate meaningfully to superannuants with an income focus, an area that will be a real challenge for much of the industry. And we’re known and trusted for delivering efficient, transparent and effective solutions that meet a range of needs for many people. So we have a lot to contribute.”
What, if any, concerns do you have?
- Cummins, PwC – “We believe that policy changes to superannuation should be made only every 5–10 years. The ongoing tinkering by government has led to increased costs that are not sustainable in a lower return environment.”
- Crane, Dimensional – “First, the shift in the investment model to an income focus will require a significant change in thinking from trustees, administrators and investment professionals. Second, the shift from collective to individual outcomes may be more complex than some people realise. Third, it’s critical that we set appropriate benchmarks for the goal. And finally, if this is to work, members must be given meaningful information and choices so they have both more certainty about their retirement, but also sufficient flexibility if circumstances change.”