By Patricia Pascuzzo, Founder, CSRI
Just before Christmas, a Treasury discussion paper suggested an approach on the regulation of superannuation retirement benefits – so called Comprehensive Income Products in Retirement (CIPRs) or ‘MyRetirement’ as Treasury preferred.
You might well ask why – after 25 years of compulsory super and thousands of pages of legislation, regulation and reviews – this hadn’t already been sorted. After all, isn’t the whole purpose of superannuation to provide income in retirement?
But things are far from sorted. Until now, the focus has been on getting the money through the door and growing the pot, with not a lot of thought given to the benefits that members receive once they actually retire.
However, it’s the income that super generates in retirement that counts. After contributing significantly over the years and in many cases making huge sacrifices, Australians quite justifiably want to know whether they will have enough income to live securely in retirement without worrying about running out of savings.
But even now, there remains a scarcity of solutions on offer to allow retirees to better manage the various risks they face in retirement.
The lack of progress reflects several factors, the main being that the flow of people retiring with substantial balances has been barely a trickle. But as the population ages and the super system matures, that trickle is about to become a flood.
At the same time, the size of member superannuation balances varies greatly among different funds depending on the characteristics of the membership.
Against that background, highly complex and sensitive issues need to be considered in arriving at a suitable regulatory framework for superannuation retirement benefits. These issues can’t be resolved overnight. It will take much time and extensive consultation to arrive at a position that has broad support.
Failing that, we can never be sure that the system will live up to its original promise of improving the living standards in retirement for all Australians while reducing the burden on the public purse.
Treasury has made a significant contribution by releasing a discussion paper that clearly provides a preferred regulatory approach for CIPRs, while also flagging the issues and alternatives for further consideration. This complements the progress it has already made in removing impediments in respect of innovative retirement income products.
Even so, the discussion paper hasn’t generated as much attention within the industry as it deserves and certainly less so that other superannuation reviews going on at this time.
While small superannuation balances are a factor in the underwhelming response, a compounding factor is that the government has openly said it won’t force trustees to offer a CIPR. And if trustees do offer them, they must offer a single mass-customised product to retain regulatory protection.
This relatively limited engagement is concerning because the approach proposed (which may be characterised as “soft-hard”) raises some issues.
The first of those is that by encouraging a single mass-customised product there is the risk of the firm hand of regulation forcing out the invisible hand of the market in driving innovation, with all the risks this entails.
A single mass customised product simply cannot deal with the varying needs and circumstances of members in retirement and would reinforce the gender inequality of the superannuation system.
This occurs because a CIPR provided to all on a joint basis would impose the unnecessary cost of a reversionary benefit on women, who normally outlive their male partners, and on single retirees (who, incidently, are more likely to be women).
Conversely, a single CIPR would deny members of a couple a reversionary benefit on the death of their partner. It therefore undermines the ability of couples to share their superannuation benefits which is essential for adequacy particularly for women who have much lower superannuation balances than men.
A single CIPR product design is also unable to deal with the interaction with the age pension. Whether the member is likely to be dependent on the age pension, a part pension or is fully self-sufficient are important considerations for the design of the CIPR.
These two variables alone, proxied by gender and account balance respectively, would likely result in at least six CIPR variations.
Benefits of Segmentation
So a small number of CIPR options catering for different member cohorts would yield better member outcomes and avoid the anomalies of one mass customised product.
While not proposing to prohibit multiple CIPRs, the discussion paper limits legal safe harbour protection to one mass customised product. This is an acknowledgement that a single CIPR would be unlikely to serve the needs of the majority of members. If this proposal is adopted, it could create the perverse incentive for trustees not to seek to better customise solutions for their membership as to do so they would be forgoing this legal protection.
This problem could be addressed by allowing trustees to offer multiple variations of CIPRs. A precedent for segmentation exists in MySuper with lifecycle funds. And it is important to recognise that members’ needs are even more diverse in retirement.
Preselecting a CIPR for each member also should not be construed as advice as this would make it prohibitively costly. So while the case for a legal safe harbour has yet to be made, similar protections should cover the provision of single and multiple CIPRs to create the right incentives.
Lack of Incentive
A further concern with the soft-hard approach is that trustees may decide that it is all too difficult and that they may as well do nothing. Indeed, industry feedback already suggests many trustees will simply wait and see how the market unfolds.
While this may be a rational response, the lack of engagement will only exacerbate the risks of regulatory-led innovation. We have seen time and again the problems that emerge when governments interfere excessively in markets. And superannuation is a classic example.
Moreover, if too many funds decide to do nothing, the scale and diversification needed to make pooled longevity products work will not be achieved.
As it is, the proposal offers trustees the binary option of following specified product requirements or doing nothing at all. What’s missing is an overarching framework that encourages trustees to make progress at an appropriate pace in helping members’ to transition to retirement.
The missing piece
An appropriate starting point is for trustees to consider the impact of demographic change on the movement of members into the retirement phase and the implications for the fund’s strategy and business plan.
Trustees should be required to develop a retirement benefit strategy for the fund that includes consideration of the needs of the membership and the retirement products and options to be provided. Interestingly, trustees are currently required to have an insurance management plan but not a retirement benefit plan.
This would complement the current trustee requirements to have a written strategic and business plan. Such an approach would have the added advantage of encouraging greater engagement in the government’s policy initiatives, leading to improved regulation and ultimately better outcomes.
While the CIPR discussion paper makes considerable progress on this important issue, the proposed approach risks diving too quickly into solution mode when many in the industry are ill-prepared or are yet to be convinced that they have a problem.
A single mass customised solution simply cannot deal with the varying needs and circumstances of members in retirement and would likely reinforce the gender inequality of the superannuation system.
This could be addressed by allowing trustees to offer multiple variations of CIPRs while maintaining the same legal standing as if they offered a single CIPR.
Instead of offering only extreme binary choices that may encourage trustees to do nothing, the framework should also require trustees to develop a retirement benefits strategy to help nudge them in the right direction.
The time spent debating framework and principles during this consultation phase is time well spent to ensure better outcomes in the long term.