The crisis of public confidence in the financial planning industry, intensified by the revelations at the Haynes Royal Commission, provides the starkest case yet for a consumer-centric approach to meeting Australia’s retirement income challenge.
Australia’s defined contribution superannuation system asks individuals to manage financial risks beyond their capability. You might think that the complexity of our system, coupled with rising longevity and an ageing population, would be creating a stampede to planners’ offices. But Australians have shown a great reluctance to pay for advice and these latest revelations would appear to make that prospect even less likely.
Regardless of the government’s eventual response to the Royal Commission, the development of the regulatory framework for the post retirement super system takes on added importance. Members who have been in default funds all their working lives cannot be expected to suddenly switch on at retirement and be able to navigate the complex choices they face in the next stage of their lives. We need our fully funded contributions-based superannuation system to deliver outcomes akin to defined benefits. Given the rising numbers entering retirement and the diversity of their needs relative to the accumulation phase, a one-size-fits-all default will not work.
In this context fund performance is not just about delivering high investment returns, it is also about how well funds guide people to make smart decisions among various options, particularly as they approach retirement. We know that giving people a laundry list of product options only confuses them. But taking these decisions completely out of their hands risks stifling engagement further and leaves them open to being taken advantage of.
Empowering consumers does not require turning them into financial experts. It means giving them the practical tools, meaningful choices and appropriate nudges. While there are complex issues to resolve, they are not insurmountable if we tackle the following areas:
- Reducing complexity: We must declutter the system, standardise options and simplify the interaction between super and the age pension. By offering individuals meaningful choices they will be encouraged to actively consider the options available and are more likely to become engaged.
- Clearer communication: Focus on practical retirement outcomes instead of on the technicalities of getting there. Better quality, independent and targeted communication can help individuals take charge of their retirement planning. Showing members their projected retirement income changes the framing and helps them to focus on the result.
- Understanding the consumer: Generate a richer understanding of consumer circumstances and preferences by leveraging consumer transaction data and sophisticated data science.
- Working with behavioural biases: Consumer research shows that consumers do not want more information, they want to be shown what to do. Smart defaults in retirement that work with human inertia and AI decision support tools, offer scope to guide individuals towards better outcomes. Already, new players like Grow Super are employing digital design and the positive reinforcement used in the ‘nudge’ concept to help people make better-informed decisions.
- Effective safeguards: Given the stickiness of defaults and the diversity of consumer needs and preferences, safeguards are needed to ensure that nudges are designed in the best interests of members and mitigate the risk of mis-selling.
- Improved benchmarks: Recognise the limitations of investment returns and track performance across wider criteria. A new CSRI Sustainable Retirement Income Index will help shift attention to broader consumer needs and outcomes.
- Integrated view of retirement: The policy separation of the accumulation and retirement phases stifles the industry’s ability to ensure members a smooth transition to retirement. The Productivity Commission should shift the focus from employers to members and include post-retirement within the scope of any alternative default model.
For the nation, these changes represent a substantial, long-term investment in making our market work more effectively, making our retirement income system more sustainable and making the lives of millions of Australians better.
Patricia Pascuzzo is founder and executive director of the Committee for Sustainable Retirement Incomes, which is holding its leadership forum in Canberra on 30-31 May 2018https://csri.org.au/events/2018-leadership-forum/
Pollinate (2016) Project Superpower Commissioned by Choice and Financial Literacy Australia