Retirement Income: Focussing on the endgame

By Patricia Pascuzzo

The government’s proposed My Super “outcomes test” for superannuation trustees running default accumulation funds is significant. It could finally provide the means to nudge trustees toward developing effective comprehensive income products for retirees (CIPRs).

Until now, criticism of Treasury’s proposals for CIPRs has risked overshadowing the ends of long-term policy reform with argument over means. But the move to improve superannuation governance to focus on member outcomes points a way forward for innovation in the retirement phase.

For several months now, Treasury has been seeking industry feedback on one of the key recommendations of the Murray financial system inquiry – the development of CIPRs or ‘MyRetirement’ products, as Treasury prefers they be called.

There is wide acceptance of the need for such products so that the superannuation system achieves what it was set up to do – provide greater security of income for people in retirement while reducing the burden on taxpayers of supporting retirees.

But more than half a year since Treasury’s issues paper was released, the public discussion has become bogged down on specific design issues, particularly in relation to flexibility, portability and the suitability of such products for all retirees.  While many of these criticisms are reasonable and deserving of serious discussion, the issues raised are not insurmountable.

It is worth recalling that it took more than two decades to develop MySuper, the low-cost products for the accumulation phase now offered as default options. So there is no reason to expect that the MyRetirement system will be developed overnight.  It is imperative that we get this right as it is not so much the accumulation of retirement savings that matters for people, but the income this generates in retirement.

In pointing this out, we do not seek to downplay the practical challenges super funds will face in implementing a CIPR framework given the characteristics of their member bases.  These products are not necessarily suitable for everyone, even though there is a tendency to underestimate the difference that modest secure private income can make to an age pensioner.  But that is why Treasury has proposed a non-prescriptive approach, allowing each fund the flexibility to decide how it serves the interests of its particular members.

On the flipside, others argue that the lack of compulsion will lead to funds not bothering to offer CIPRs at all, particularly given the complexity of designing CIPRs for a fund and preselecting one CIPR for each member.

The fact is, however, that getting the system established and working well is not going to happen overnight. The government must first clarify the means-test treatment of new income products and work alongside industry to develop disclosure standards and guidelines to support the framework.

So it’s entirely appropriate to allow time for market development and testing of consumer demand before making it compulsory for default accumulation funds to offer their members a CIPR.  Even then, members would retain the option of not taking up the offered CIPR.

As we have seen with APRA’s new powers in relation to MySuper, the government is prepared to intervene when it considers that industry progress is too slow. The government already has levers at its disposal to ‘nudge’ the market in the right direction. For instance, trustees should be required to develop a retirement benefits strategy that takes into account longevity risk and that specifies what retirement products and options might be provided to best serve members.  In due course it could also introduce an outcomes test for retirement benefits.

The truth is that many savers are ill-equipped to make decisions about accessing their retirement income and how to protect themselves from a range of risks, such as outliving their savings. So the onus lies with policy-makers, industry and those with an interest in helping retirees to ensure they can navigate those decisions.

This is why neither a totally demand-driven market nor a compulsory system is likely to lead to progress. It’s also why policymakers increasingly are seeking out behavioural techniques to help people make better decisions and improve outcomes.

We know from superannuation choice that just giving people a laundry list of product options is not necessarily helpful.  It is surely better to standardise product requirements so savers can make meaningful choices.

At the same time, the framework should allow for a small number of CIPR options that cater for different cohorts.  For instance, the differing needs of each gender provide a strong argument against one mass customised CIPR. With women on average having lower super balances and longer life expectancy, each member should be offered the option of a joint CIPR (or its underlying components) with a spouse.

Furthermore, trustees should be given a safe harbour to allow them to signpost to savers without fear of being considered to be giving advice.  To do otherwise would make the service prohibitively costly and constrain its development. Alongside this, we need clarity around the process for preselecting CIPRs and a broadening of the rules for intra-fund advice to enable the sharing of costs.

None of these issues is a deal-breaker. And it is for these reasons – balancing flexibility and simplicity, encouraging innovation and, most importantly, delivering better retirement outcomes for the Australian people – that we need to stay focused on ends.

 

A version of this article was published in the Australian Financial Review on 27 July 2017.

 

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