Soon every super fund will have to provide a retirement solution to their members which sits alongside their existing account-based pension offerings. The impact on the financial advice sector will be significant.
While the controversial Your Future, Your Super reforms may be grabbing most of the headlines, government retirement policy for super funds is taking shape. The key policy instrument will be the Retirement Income Covenant (RIC), which will formalise requirements for super funds to provide retirement solutions for their members which provide regular income payments for life. The RIC is scheduled to take effect on 1 July 2022.
The range of retirement solutions offered by super funds is likely to be large. Some funds may white-label external annuity products. Others may create pooled solutions which bring confronting terminology such as group-self annuitisation. All these solutions could be offered in either lifetime or deferred (whereby income payments begin at a deferred age) formats. Sounds complex! The design of any two pooled products will likely be unique and the size and characteristics of each fund’s pool will impact experienced outcomes.
It is unclear whether funds will be required to provide a default solution (previous policy work labelled these products as CIPRs – Comprehensive Income Products for Retirement). Additionally, funds are likely to allow members to choose the mix between traditional account-based pensions and the new retirement income stream products.
Further complexities will likely arise through the way each product is designed to deal with sequencing risk, access to capital and residual benefits.
Given all this complexity, even if a super fund provides reasonable guidance tools and intra-fund advice, it is likely consumers will seek professional financial advice.
There are at least two issues at play which make the provision of this advice difficult.
The first is a business model and provision of service challenge. Recent research from Melbourne Business School found that the largely set-and-forget nature of annuities can make them an awkward fit with advice business models based on ongoing advice relationships, in some cases to recover from loss-making initial advice.
The second challenge is how to deal with the complexity of retirement financial planning. First, quality retirement advice needs to account for the range of possible outcomes in a multi-dimensional environment. This is known as stochastic modelling. There are some, but not many financial planning software packages which have strong stochastic modelling capabilities.
Second, understanding the unique solutions offered by different funds will be difficult. In some cases you will pretty much need to be a qualified actuary just to understand what is going on! Unless you undertake your own modelling, you are left to rely on the fund’s own assumptions. This may not be acceptable as it creates further cost considerations which tie back to the business model challenges previously outlined: a one-off piece of advice on a product not previously considered could be a costly exercise.
There are some potential solutions to the challenge these reforms pose for advice practices.
From a business model perspective, financial planning groups may specialise in the retirement solutions provided by some funds accompanied by referral arrangements. Perhaps the intra-fund advice arrangements associated with retirement products need to be expanded to allow funds to provide further detail (given the present trend where super funds are downsizing their advice capabilities and focusing more on intra-fund advice). Maybe an ASIC MoneySmart v2 is required which provides much of the necessary modelling of products in a stochastic framework (unfortunately the present ASIC MoneySmart is only deterministic). While the policy pathway to retirement solutions is developing, an API-style framework could be created whereby funds could codify the workings of their retirement solutions. This could then lend itself to specialised retirement modelling software as part of an advice tech stack, rather than a single integrated system.
Likely, many solutions are required and there is no silver bullet.
What is almost certain is that super funds will be developing retirement solutions, and consumers in those funds may like more detailed advice than what the funds’ guidance tools and intra-fund advice can provide.
The one bright element here is that there is a small window for all involved (industry, policymakers, and regulators) to prepare ahead of time rather than react after the event and have to play-catch up.
To say I am underwhelmed is an understatement. Look what the actuaries have done to insurance companies for whom they are supposed to be their “guardians” . They have allowed marketing and sales to get in front of good practice and this was well before they started to trot out the excuses like the impacts of low bond rates and mental health claims. Look where they are now. Do we really want actuaries to control what is one of the most important issues we are going to face for someone time- the size of the baby boomer “bump” , their increasing longevity and the ability for this to be funded.
We must be able to do more with out having to resort to actuarial “mumbo jumbo” which no-one understands and no-one can therefore challenge ( and of course because if its done by an actuary , it must be right). Watch fees go up and benefits go down as we continue to get this wrong just like our insurance premiums.
BTW we move from Defined Benefit to Defined Contribution so that members could have more control/visibility whilst allowing people to disconnect super from their employer and we are now moving back to Defined Benefit in a quasi form for retirement which is highly likely to lock you in to a super fund in many cases for life. Interesting to watch both as a participant and a player!
I have been looking at lifetime annuities for a while as their premise is very attractive: They offer a serious Centrelink advantage, giving by an extra 3% a year (5.5% from age 84) in returns for those who get the full age pension advantage of lifetime annuities, and guaranteed payments even if you live to 110 (or 122 as Jeanne Calment did).
I then did some modelling, checking how much the client would get if they passed away early, around about their life expectancy or late. Lifetime annuities that are in the market are advantageous if you get a. the Centrelink advantage and b. pass away soon or live a long time.
If you don’t get the extra age pension (because you already get the full or nearly full age pension or because you have so many assets that even with the annuity you don’t receive the age pension), annuities are much less useful.
Also, if you pass away at around your life expectancy – by far the most common scenario – the returns are not good, even with the Centrelink age pension boost.
This modelling is not difficult. Simply get a life table that shows what percentage of people pass away at age 70, 71, 72, 73…. and calculate the total the client would receive if they passed away at each of these ages, which is quite easy to do.
David is right about the set-and-forget nature of annuities – redeemable annuities are more expensive and non-redeemable ones can quickly lead to deep regret. It very much depends on the client. Overall they are an interesting option but require a *lot* of work for each client to know what is the most useful option and for the client to understand enough to make a considered decision. Add to this the difficulty of getting paid as an adviser – it is very similar to advising on life insurance where no commission is paid – very few clients (and usually only wealthy clients) are prepared to cover these costs, especially as they can receive the advice and then simply get the annuity direct.