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.