If the oceans are boiling, is superannuation a blunt tool?

By David Bell

“Given the interaction between super, aged pension, and housing in retirement, and observing that these areas sit in different government portfolios, would you consider establishing a more integrated policy function focused on retirement incomes?”. This was my question to Chris Bowen at a talk he gave last year. The response: “Don’t boil the ocean”. Back in my box!

With the scope of the retirement income system review still to be determined, calls for integrated retirement policy design are becoming louder, showcased in their own different ways by the Actuaries Institute and the Grattan Institute. Both provide strong reminders that: (1) retirement outcomes are funded from multiple sources (super, age pension, other government assistance, other savings, and home equity release); and (2) policy assessment needs to consider the cross-section of household outcomes, rather than the average outcome.

I would add that this all needs to be assessed through the lens of possible economic scenarios: for instance, inflation, wage growth, and housing affordability are all very different now to what they were when the Superannuation Guarantee (SG) was first implemented. And while it may sound like a toxic derivative, the concept of the “range of outcomes squared” pops into my head: we need to be cognisant of the range of outcomes across the population in different environments, while also considering the range of outcomes across generations.

The Actuaries Institute suggests that while each component (super, age pension, housing, and aged care as well)) would benefit from individual review, there is a strong need for an integrated approach to retirement policy. Meanwhile Grattan essentially positions the rate of the SG as a rather blunt tool with which to address the nuanced challenges faced by specific population cohorts. For instance, targeted housing assistance programs may be a more effective and efficient policy tool for certain cohorts.

How many degrees of freedom will the retirement income system review have in recommending the best set of policies for Australia’s retirement system? A broad scope would represent a wonderful opportunity to put in place frameworks which set Australia up for an efficient, socially healthy retirement system which should serve us well for decades to come. However, it does pose “boiling the ocean” challenges: complexity and the potential for unpopular policies. Nonetheless anything but a broad integrated review, will leave a residual collection of “yeah buts”, effectively deferring resolution of retirement policy in Australia.

The stakes are large: it is estimated that the government will spend $50 billion on age pensions this year, close to another $20 billion on aged care and other assistance for the aged, while they will forgo around $45 billion through provision of superannuation tax incentives (a debated number). For context, total budget expenditure is around $500 billion.

How are super funds positioned within a broadly scoped retirement system debate? The analogy to integration as a policy challenge is personalisation as an industry challenge. Yet most super funds provide a rather generic service (an accumulation account), and (with a few exceptions) little retirement solution innovation (which motivated the proposed CIPR framework). Super funds aren’t tailoring to deliver more effective outcomes for members, yet the capability and technology exists. Perhaps it is because of the current industry structure (inflow-focused competition motivating cost awareness and a heightened operational peer group risk focus), or perhaps it is because of regulatory complexity (tailoring starts to enter advice world, and challenges interpretations of the sole purpose test). Super funds collectively risk being labelled as a blunt tool, when so much more is possible.

If the government recognises the value of integrated policy, who in industry will be the integrated provider / coordinator of retirement outcomes for Australian households? The advice industry is shrinking and can’t provide solutions at the necessary scale. Super funds are the logical provider but aren’t putting their hands up and saying we have the technology, engagement and operational capabilities to tailor, let us be a bigger part of the solution.

If super is viewed as a blunt tool rather than something which can deliver much more, then Best-in-Show is definitely in play…

David Bellis Independence commentator and  a former CIO of Mine Super

This article was published by Connexus Financial PTY LTD in Investment Magazine.


Australia slips in global pension fund ranking

Australia has slipped from third to fourth position in the newly released Mercer Global Pension Index for 2018, a survey widely considered the most comprehensive overview of global pension systems.

The study of 34 retirement income systems around the world ranks them by three broad measures – adequacy, sustainability and integrity. Aggregate scores, the weighted average of these, ranged from 39.2 for Argentina, at the bottom, to 80.3 for the Netherlands, at the top.

Netherlands and Denmark are the only countries which Mercer attributes ‘A’ grade rankings, which implies an index value of 80 or above. Australia, which now ranks fourth after Finland, is in the ‘B’ grade category with scores from 65-75. (No country is in the ‘B+’ category of 75-80).

What’s dragging Australia down is the adequacy of our system, where we score just a ‘C+’ as opposed to an ‘A’ for integrity. In fact, the decline in our overall score from 77.1 in 2017 to 72.6 this year was almost entirely due to a markdown in the adequacy measure.

“The Australian index value fell significantly primarily due to a toughening of the assets test resulting in a reduction in the net replacement rate and the inclusion of the level of household debt as part of the adequacy sub-index,” Mercer explains.

It suggests the following changes for Australia:

Moderate the asset test on the means-tested age pension to increase the net replacement rate for average income earners
Raise the level of household saving and reduce the level of household debt
Introduce a requirement that part of the retirement benefit must be taken as an income stream
Increase the labour force participation rate for older groups as life expectancies rise
Introduce a mechanism to increase the pension age as life expectancies rise

For more information on the index, including the full report, click here.





Seeking Income Security for Older Australians – The CSRI Leadership Forum 2018


Following the government’s announcement of important policy changes relating to post retirement, leaders of the superannuation industry, policy, academic and community circles converged at the CSRI Leadership Forum in Canberra on 30-31 May 2018 to discuss the ramifications of these proposed reforms.

The Forum brought together a broad range of perspectives in debating the role of super funds in implementing these policy changes to serve the needs of consumers.  The highlight of the forum was Nobel laureate economist Robert Merton’s presentation of a feasible blueprint for funding retirement.

These discussions also provided a timely perspective on the broader implications of the recently released Productivity Commission report on superannuation efficiency and competition.

Some important themes were evident in the discussion. First, the importance of changing the framing of superannuation from wealth creation to retirement incomes in communications by government and industry. Rather than a singular focus on maximising returns, super funds and advisers should reframe the goal for consumers to achieve a given income replacement rate at retirement. Risk in this context is reframed as not meeting that required income level. Jeremy Cooper showed the reasons why we have a “burning platform” and need to get moving.

Second, the member is not an investor and should not be treated as such. Rather, she is a consumer that needs to be empowered, as urged by Patricia Pascuzzo.  This is achieved through simplified choices, communicated through non-technical language that focusses on outcomes that the consumer understands. Engagement with the member needs to be a whole of life process not just at retirement. Consumer income needs become more diverse in retirement and that means they need a greater degree of customisation.

Third the importance of learning from the problems experienced in the superannuation accumulation phase while also recognising the unique differences of the drawdown phase. The need in the future for regular monitoring and recalibration of the post-retirement system to make sure it remains true to its objectives so as to avoid the cost and instability of a major overhaul further down the track.

Broad areas of agreement among participants at the Forum included:

  • Importance of a retirement income framework to require funds to have a strategy for supporting their members in retirement.
  • Benefits of pooling for achieving higher and more stable incomes for retirees.
  • Need for comprehensive income products in retirement (CIPRs) to be simple enough for the member to understand and make a choice without necessarily requiring financial advice. Those consumers with peculiar needs and circumstances or seeking more tailored solutions would have access to advice.
  • Role of fintech and robo-advice as change drivers that will help empower consumers in the context of diminished trust in institutions.

As would be expected from a gathering of such wide perspectives, there were also many points of contention. There was divergence as to the degree of specificity in the design of CIPRs, whether it was necessary to mandate super funds to provide them and, if so, over what timeframe.

At the heart of the issue is the wide divergence among funds in their capability to provide retirement income solutions to their members.  For those funds who are in a position to provide their members with a greater degree of customisation than is feasible with simply three flagship CIPRs, a requirement to provide a CIPR would impede the ability of funds to develop a more tailored approach for their members.

Drawing on the forum discussion, Jeremy Duffield suggested five or so action items for delegates to consider to move a retirement income focus up the industry action plan agenda:

  1. Put in a (supportive) response on the Retirement Income Covenant Consultation paper, by the June 15 deadline.
  2. Organise for success and develop a retirement income strategy – make an organizational commitment to Retirement Incomes by creating a retirement “agenda” across the organisation and by appointing a senior executive to oversee Retirement.  First task would be to work out the Fund’s retirement strategy.
  3. Identify the fund’s preferred approach to retirement income strategy for members.  Work out your product solution in the anticipation of CIPRs coming through.  Anticipate CIPRs, don’t wait for it.
  4. Work out member engagement and advice strategies.  Develop customer journeys for pre-retirees through retirement.  Remember the second principle of the Retirement Income Covenant and develop engagement approaches to get members retirement income solutions which meet their needs.
  5. Note and support CSRI Sustainable Retirement Income Scorecard approach to benchmarking best practice in retirement solutions.
  6. Develop the right metrics to motivate the focus on great retirement services and great retirement income outcomes for fund members.




Empowering Consumers to Achieve Income Security in Retirement

By Patricia Pascuzzo (Founder and Executive Director, CSRI), presented 31 May 2018, CSRI Leadership Forum 2018

Today we have heard much about the problems people face in retirement. And we have heard deep insights from industry leaders about the challenges they face in helping retirees manage their financial risks.

As a non profit, non partisan, independent organisation, the CSRI provides a unique and authentic setting for progressing these issues.

Today’s Leadership Forum builds on a four-year journey starting with the first Leadership Forum in 2015.  This was a time when very few acknowledged the importance of developing the post retirement system, yet CSRI was there carving out this critically important strategic space. This was followed by a holistic review of the retirement income system in 2016 involving a broad range of stakeholder and expert perspectives. This led in 2017 to an intensified focus on improving member outcomes in retirement that contributed the government’s recent announcements.

Retirement Income Framework

The Government’s proposed retirement income frameworkrepresents an historical development. Some 25 years after the introduction of compulsory superannuation, trustees will finally be required to consider the retirement income needs of their members.

While this announcement has been a long time coming, I am sure I am not telling you anything new by saying that the task of reform and continuous improvement is only just beginning and we all have a role to play.

We need to do our best to get the policy settings right and avoid the destabilising changes that have characterised the super system. The Productivity Commission report released this week provides a timely reminder of the need to learn from the experience of superannuation in designing the post retirement system.

One of the lessons is the importance of regular monitoring and recalibration to make sure the system remains true to its objective.  Timely change may avoid the cost and instability of a major overhaul of the system down the track.

The focus should not just be on directing consumers. It must also be on empowering consumers to help themselves. This is a worthy vision, which I hope we all share in this Leadership Forum.

Implications for Policy Makers

History has shown that policy changes that go barely noticed in the public domain can ultimately have profound impacts once you fast forward 10 or 20 years. The growth of super from basically a niche market in the early 1990s to an over 2 trillion-dollar industry today is a case in point.

The retirement income framework could potentially have a dramatic effect on income distribution and intergenerational wealth not to mention on market structure and the flow of funds in the pension market.

It is critical that these measures receive the public scrutiny they deserve to ensure they meet their objectives and ward off possible unintended consequences. History also shows that it becomes more difficult to unwind measures once they have been introduced.

The announced new means test rules for income streams would seem innocuous to many given that such products do not exist currently. However, they suddenly take on a whole new meaning if trustees are obliged to offer comprehensive income products in retirement (CIPRs) and nudge members to take them up.  The distributional impacts of these measures need to be carefully weighed up to ensure they improve incomes and reduce reliance on the age pension.

Given normal human inertia, we also need to be mindful of the license given to trustees to guide consumer choices.  Nudging is not new.  Making it cumbersome for customers to exit or to take advantage of an improved rate or lower fees, are forms of reverse nudges that are not in the interests of consumers.

In the same way that an object in outer space given a slight nudge will travel a long distance, consumers have also been shown to be highly responsive to a nudge. If we are going to institutionalise nudging at retirement, where the consequences can be significant and potentially irreversible, we have to have the checks and balances in place to protect the consumer interest.  And that includes protections against mis-selling as we have seen in other areas, including SMSFs, with dire consequences.

These are not measures that can be implemented with a ‘set and forget’ mindset. Their impact on consumers needs to be closely monitored to ensure they are meeting their policy objectives without negative consequences.

There is no one body in Australia charged with responsibility for monitoring the effectiveness of retirement income policies as there are in other jurisdictions such as New Zealand.  That monitoring role is conducted on an ad hoc basis which seems inadequate and in need of strengthening.

For all these reasons, CSRI will push the boundaries for a world class reform and collaboration agenda. It will provide a much-needed ‘safe zone’ for bringing together a broad range of stakeholder perspectives, to ensure that post retirement policy and its implementation are in the community interest and remain true to their policy objectives. That’s my commitment to the industry and those it serves.

Empowering Consumers

Today’s forum is being held at an important juncture. Trust in institutions is at an all-time low.  We have the opportunity today to take stock of the situation and assess what needs to be done.

As a starting point, there needs to be a shared vision between all sectors of the industry and government as to the role of the consumer.

I intentionally refer to the consumer to signify that, unlike the member, she is not captive. Unlike the investor she is not a voluntary participant.  And unlike the customer, she is often not the decision maker.

The Royal Commission has dealt a fatal blow to libertarians who would argue that consumer choice is an end in itself.  Fair Work Commissioner Donna McKenna was quoted as saying that “if someone of my education and experience hits a brick wall, what hope does the average person have?”.  This I’m sure resonated with many.

On the other hand, paternalism only works where the interests of the agent, whether they be employers, trustees, or financial planners, are aligned with those of the consumer. The ability of agents to resolve conflicts in favour of the consumer has also been cast into doubt by the Royal Commission.

For all of these reasons, neither caveat emptor nor paternalism can be relied upon – we need to find a middle ground anchored in delivering quality long-term outcomes for consumers.

There is a role for government, industry and community groups to work together to help to empower consumers to look after their interests, while at the same time supporting them to make smart choices.

That doesn’t mean turning consumers into financial experts. It means giving them the practical tools, meaningful choices and appropriate nudges to make the right decisions.  Empowering the consumer is an important theme for this Forum.

With the bulge of the baby boomers about to reach retirement, they will need help to manage the range of risks they face and many would find CIPRs difficult tounderstand. This poses communication challenges for funds, product providers and government.So how do we empower consumers to be better placed to meet those challenges?

First, we must declutter the system and standardise options. We know from the accumulation phase that giving people a laundry list of options only confuses them and results in disengagement.  A low-cost universal advice toolwould help consumers make choices among retirement products by visualising the trade-offs and allowing comparability across funds.

Second,the traditional ways of marketing and engaging with consumers needs a new standard, governed by a voluntary code, and reviewed by a consumer panel. Industry participants would be regularly reviewed based on principles of transparency and clear communication focused on practical retirement outcomes without use of technical jargon.

Third, information alone is not enough –manyconsumers want to be shown what to do.Lifelong engagement, smart defaults and digital decision support tools can guide people towards better long-term outcomes. We will hear today a number of approaches being used already. Industry needs to continue with the diversity of approaches for the foreseeable future, and also report back their effectiveness to better inform industry practice.

Finally, and importantly over the longer term, we need an integrated policy approach to superannuation. While it was pleasing to see the Productivity Commission is looking at shifting the focus from employers to members, the Commission remains silent on what will happen to members when they reach retirement.  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. It will be important that the “best in show” default funds have both the capability and motivation to help transition members into retirement.

Implications for Industry

While more work is needed to finalise the retirement income framework, that doesn’t mean that industry can be complacent.  It’s time for funds to start taking action.

In addition to all their current activities focussed on the accumulation phase, funds will have to give more attention to meeting the needs of consumers in retirement.  On top of their current activities of acquiring contributions, administering accounts and investing funds, they must also develop retail capabilities to engage consumers and provide retirement incomes.

This diversification will impact on funds’ resourcing, incentive structures, organisational capabilities and board and executive structures. Governance and planning will have to be reviewed to accommodate these new requirements. If nothing changes in the governance and strategy, then the possibility for positive change is all the more remote.

Adopting a compliance mentality to developing a retirement benefit strategy would severely limit the ability of funds to make the most of opportunities to create value for members and ensure future sustainability.

Improved benchmarks

Bearing in mind the industry transformation that needs to take place, improved industry benchmarking is also needed.

In this regard, let me now turn to a new CSRI initiative to support funds in implementing a retirement income focus and shine light on consumer outcomes. This initiative will examine what constitutes good practice, what innovative approaches are being developed, and will identify organisations that are at the forefront of those developments.

As a first stage we have identified good practice principles around five core consumer focus capabilities (as shown in the slide). They relate to governance; understanding consumer needs; financial advice; investments and products; and consumer outcomes.

Our plan is to develop these principles into a balanced scorecard assessment tool that will assist funds to benchmark their own performance.  I have circulated a paper in the delegate pack that discusses the proposed CSRI Scorecard.

We don’t expect that any super fund will have a comprehensive retirement income strategy in place.  Each fund will develop its own approach depending on the needs of its members and its competitive advantages. The Scorecard will look at the whole strategy not each component.  And it will not disadvantage funds for being different if their approach suits their members and capabilities.

The process will involve “judgement with independence and objectivity”.  While this won’t satisfy those who seek an objective measure, we are mindful that the use of metrics in the absence of judgement may result in unintended consequences.

“Teaching to the test” issues already exist in the super industry.  Headline investment returns already receive an excessive amount of attention, relative to other important indicators of consumer outcomes, and investment returns are rarely compared on a like for like basis.  By drawing attention to a broader set of qualitative indicators, we will seek to lessen the risks of a singular focus on one financial measure. The Royal Commission has reinforced the importance of taking into account non-financial indicators of performance with a view to furthering the bests interests of consumers.

The Way Forward

This CSRI initiative is timely given the government’s commitment to a retirement benefit framework and the Productivity Commission’s urging funds to focus on members.

Further work is needed to develop and socialise the scorecard capabilities and principles which we plan to do on a collaborative basis.

In the initial beta testing stages, the Scorecard will be developed as a tool for super funds to benchmark themselves against peers. In the longer term, the intention is to create a tool that is available for consumers.

We recognise that it is still early days but that’s not to say there are not important developments worth showcasing. We plan to investigate the exemplary performers and unveil the results at the next Leadership Forum. If you are interested in more information on this initiative, or being part of the collaboration, please contact me.

The CSRI has achieved much in championing a sustainable retirement income system for all Australians. Our contribution will continue with vigor.  We see these changes as a substantial, long-term investment in making the market work more effectively, making our retirement income system more sustainable and improving the lives of millions of Australians.

Thank you.


Don’t Forget the Fourth Pillar

By Christine Brownfield
With the 2018-19 Federal Budget announcement of an expansion of the little-known Pension Loans Scheme, it is timely to revisit the hurdles to be overcome before housing can play a meaningful role in meeting Australia’s future retirement income challenge.

The family home as an asset class
Housing wealth is increasingly being recognised as the fourth pillar of our retirement incomes system (alongside the age pension, compulsory superannuation and voluntary savings), despite being relatively untapped. For current and soon-to-be retirees, rates of home ownership are high and their home is often their largest asset.

Residential property is the largest asset class in Australia, with an estimated value of over $7 trillion. This compares to ASX listed equities at $1.9 trillion or, for a different comparison, and perhaps one more relevant to retirement funding, aggregate superannuation assets of around $2.6 trillion.

How can housing wealth be released?
The family home is not just a place to live but also a store of wealth. The wealth can be released by simply selling the home, but this creates the problem of where to live, and there are clear benefits to home ownership in retirement.

Downsizing is another way to release housing wealth and was the focus of an initiative announced in the 2017-18 budget. Downsizing can work well financially and emotionally for retirees in large/ valuable homes, who are happy to move to a different area where housing is cheaper, or who can find suitable housing stock to downsize to in their local area. Other retirees might investigate downsizing but find that it isn’t a good way forward for them for reasons including lifestyle, community, costs such as stamp duty and sales/marketing/relocation expenses and public policy settings. Many are simply not interested in downsizing – they wish to see out their retirement in their home. Downsizing is often triggered by non-financial factors.

There are also products which facilitate the separation of the ‘place to live’ and ‘store of wealth’ attributes of the family home. Debt home equity release products are known in Australia as “reverse mortgages” or there are mechanisms which facilitate a senior homeowner selling a share of the future sale proceeds of the home whilst continuing to live in it.

How do retirees use housing wealth?
Increasingly, senior Australians release housing wealth to extinguish housing debt remaining at retirement. For some, the alternative would be having to sell the home. Housing wealth might also be used to buy a new car or white goods, to finance home modifications, to pay medical expenses or to fund in-home care. Wealth might be accessed to help family members enter the housing market. Some seniors seek to access funds to enjoy travel that would otherwise be unaffordable or simply to live a more comfortable retirement.

Hurdles to overcome
Given the size of the “fourth pillar” and the number of “asset rich, cash poor” senior Australians with few assets other than the family home, it is interesting to consider why the release of housing wealth during retirement is not more prevalent. The possible explanations are wide-ranging.

Public policy settings encourage retirees to store wealth in the family home as it is an asset which is free from capital gains tax and exempt from age pension means testing. This creates a financial incentive not to release housing wealth.

There is no overarching federal legislation applying to providers of home equity release products. Reverse mortgages are heavily regulated but not home equity release arrangements in general. Sensible principles-based legislation could provide comfort to retirees that products/schemes are regulated and must provide, for example, security of tenure. It would also be advantageous to potential providers to have a clear regulatory framework.

Supply of home equity release products is not growing: there are only a handful of products available in Australia, and those on offer have strict eligibility criteria. SEQUAL, the association established in 2004 for providers of home equity release products, closed its operations in January 2017. Two home equity release product providers withdrew from the market in 2017 – Macquarie Bank and Westpac-owned St George Bank both ceased offering their reverse mortgage products.

A significant hurdle to increasing the market for home equity release products is a lack of capital. The flip side of security of tenure for a senior homeowner is that the capital provider will not have their capital returned until the homeowner, or their estate, sells the home. A long-term investment with a lack of liquidity is not attractive. For equity products, the provider of capital would effectively be invested in a diversified pool of interests in residential property. This is a new asset class with no secondary market, which is somewhat at odds with the fact that it would be a subset of a $7+ trillion asset class.

Finally, releasing home equity to fund retirement is not currently “mainstream” in Australia. Aside from the issues already outlined, financial advice may not consider the family home: total asset planning is needed. Many people, understandably, have an emotional attachment to their home, and this makes it difficult to view the home as a financial asset. Downsizing or utilising a home equity release product may be rational courses of action but they are often needed at a time of life when people feel vulnerable and apprehensive about making difficult decisions.

Budget 2018-19: expansion of the Pension Loans Scheme
The Pension Loans Scheme is a reverse mortgage scheme offered by the government. It allows some senior Australians to borrow against their home to top-up their part pension or, if not eligible for the pension due to only one of the assets and income tests, to provide an income stream up to an amount equal to the full pension. The take-up rate has been low historically, attributable to the restrictive eligibility criteria and low awareness of the scheme.

Eligibility for the Pension Loans Scheme is to be expanded from 1 July 2019 to include all Australians of Age Pension Age who own homes. The maximum allowable combined Age Pension and Pension Loans Scheme income stream will be 150 per cent of the Age Pension rate.

Concluding Remarks
In terms of recognising housing wealth as the fourth pillar of our retirement incomes system, this expansion of the Pension Loans Scheme is significant. It is a partial solution to the problem of a lack of capital as the government is effectively stepping in as a loan provider, facilitating an income stream with the borrowing secured against the property. The Pension Loans Scheme will be available to all home-owning senior Australians including those who do not meet the eligibility criteria for home equity release solutions currently on offer. Most importantly, awareness of this scheme will increase and it is a step towards the use of housing wealth to supplement retirement funding becoming “mainstream.”

Christine Brownfield is Company Actuary at Homesafe Solutions Pty Ltd


Battle of the Bulge: Retirement’s Next Challenge

By Patricia Pascuzzo

Changes announced in the federal budget take us a step forward in ensuring 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.

The budget this week promised a new retirement income framework which aims to boost living standards for retirees and expand the options available to them by requiring super fund trustees to offer new comprehensive income products.

A framework is needed because our defined contribution system asks individuals to manage financial risks beyond their capability. Despite the complexity involved, Australians have proved reluctant to pay for advice, a prospect that only looks unlikely to diminish in the near future given revelations at the Haynes Royal Commission.

The irony is retirees have never needed more help managing the heightened risks they face without the security of employment income.  These include unfavourable investment returns close to or in retirement (sequencing risk), outliving their savings (longevity risk), loss of purchasing power (inflation risk) and unexpected health and aged care needs (event risk).

Managing these risks involves complicated trade-offs that are highly specific to each member’s circumstances and preferences. Yet most are ill-equipped to do this. And the system is focussed on the accumulation of assets with little support during the drawdown phase.

Compulsory super and default funds were designed to overcome behavioural and other barriers that prevented people from saving.  But those biases do not suddenly self-correct when people reach retirement age. Having been in default vehicles throughout their working lives, there is little reason to expect people suddenly be able to switch on and navigate even more complex variables.

The answer is to develop our contributions-based system so that it delivers outcomes akin to a defined benefits framework designed around individual needs.  At a minimum, a mass-customised solution will take account of each member’s age, gender, health status and debt, while providing couples the option of a reversionary benefit.  To ensure income stability over retirement, the solution also should take into account pension entitlements.

Given limited access to financial advice, trustees will need improved products and a scalable process to guide or nudge members towards better retirement outcomes.  And to ensure members’ interests are served, super funds will have to make major investments in governance, people, systems and technology, including decision support systems.

It’s arguable that our intensely regulated industry, conceived via government mandate, lacks the required level of innovation, entrepreneurialism and vision to meet the needs of the bulge of baby boomers now entering retirement. So, again, there is a role for the government to facilitate market development and set the rules of the game.

The budget is a step in this direction. It means superannuation fund trustees will be required to consider the retirement income needs of their members and develop a strategy to help members achieve their retirement income objectives. Alongside the requirement to offer comprehensive income products, the government also announced new means testing rules that removes an important impediment to development of new income stream products to better manage longevity and sequencing risk.

The changes will have major implications for people planning for retirement and the super funds who serve their needs. Not only are such solutions needed for disengaged super fund members, they may also provide an escape route for self-managed fund trustees looking for a set-and-forget secure income stream that kicks in during their advanced years.

The CSRI Leadership Forum on 30-31 May 2018 will bring together leaders in public policy, industry and academia for detailed discussions about what these changes mean and how to take them forward.

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, an independent, non-partisan and non-profit think tank.


Retirement: Start with the Consumer

Patricia Pascuzzo

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.[1]  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/

[1]Pollinate (2016) Project Superpower Commissioned by Choice and Financial Literacy Australia


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.



Taking the Long Term View

In 2016, CSRI carried out a comprehensive review of the retirement income system, building on the findings of the work of the Murray review, the Cooper Review and the Henry Review.  This was a collaborative effort Whiteboardinvolving industry, consumers, government and academia. The aim was to develop long term policies to create adequate and sustainable retirement incomes for all Australians.

The scope of the CSRI review included:

  • Determining the adequacy of retirement incomes, including the role of housing, when the system is mature.
  • Encouraging greater self-provision with a view to improving system sustainability. We looked at the interrelation of superannuation, tax and age pension means testing.
  • Developing the post-retirement system to ensure efficient use is made of superannuation balances to generate stable and secure incomes.

We found that while the retirement incomes system has considerable strengths, there is also significant room for further reform to improve the adequacy and sustainability of outcomes.

Our full report on the review outcomes and suggested policy directions is available for download here. It includes policy principles to guide reform alongside 47 specific proposals aimed at substantially improving the system’s effectiveness.

The CSRI integrated reform programme provides a range of policy proposals that have wide, though not universal, support that would improve the adequacy and sustainability of retirement incomes.  As such it serves as a sound basis for judging policy measures for consistency with community benefit and an integrated approach.

With eyes on the federal budget next week, the Government should resist pressure for changes to the superannuation tax regime other than those that would reduce system complexity.  Flagged proposals, such as providing an exemption to the $1.6m cap that can be transferred to the pension phase for people downsizing the family home, would only undermine the government’s significant progress on super tax reform.

Genuine reform would mean looking at the age pension means test treatment of housing – traditionally a no-go area, but one that is gaining community acceptance in improving retirement outcomes and perhaps offering some solace for younger people wishing to buy established homes.

The CSRI integrated package provides a useful benchmark against which policy measures can be evaluated for consistency with broader retirement income objectives.

Further engagement is needed now to agree priority areas and build support for the direction of change.  We will consult further over the coming weeks on the way forward.