A Your Future Your Super-style test for retirement income products would be “an utter disaster”, a leading superannuation fund researcher has warned.
Chant West general manager Ian Fryer told the Professional Planner Researcher Forum in Sydney on Tuesday that retirement income solutions need to deliver confidence to members that they will have enough money to last their expected lifetimes, but there are many ways longevity protection can be delivered.
Fryer said it would be difficult to create a YFYS-style benchmark for allocated pension products and virtually impossible for products with longevity protection.
“If we use the same thing in retirement, it would be an utter disaster. A majority of products, account-based pension products, would fail and I’ve got no idea what you do with longevity products,” Fryer said.
“Our recommendation… for the performance test is moving towards some sort of risk-adjusted return basis. And [even] if there’s something like that [which] could work for account-based pensions, it still wouldn’t work for longevity products. They need to be kept out.”
A discussion paper released by Treasury on Monday outlined potential new policies aimed at helping fund members navigate retirement income options, supporting super funds to deliver better retirement income strategies, and improving access to lifetime income (longevity) products.
The paper listed the YourSuper comparison tool and the performance test as two effective ways in the accumulation phase to rule out underperforming products and funds, which could help members make more informed choices.
Fryer told the forum that comparing super funds in accumulation is much simpler than comparing retirement products, especially those that incorporate longevity protection.
Accumulation funds can be compared on costs, returns, insurance offers and the like; but comparing retirement income options with longevity protection built-in is like comparing “apples with pears with hamburgers”.
“Which is better? Well, it depends what you want,” Fryer said.
“Do you want an apple? Or do you want a hamburger? It actually makes comparison tricky. And the reason why it’s tricky is there’s all these variations.”
Fryer said some products will be advised while others won’t. Additionally, some might be based on a single or a couple of investment strategies.
“Some will be a whole menu, and there’s longevity over the top of that; some will be guaranteed [and] some will be market-linked, so they’re all trying to do different things,” West said.
“I don’t think ever at Chant West we’ll be able to come out and say, necessarily, this product is better than all the other longevity products, because they’re trying to do different things.”
No simple solution
Aware Super senior product manager for retirement product Jayson Dominelli said that despite the range of approaches and product structures and features, super funds are fundamentally trying to help members overcome the fear they may run out of money in retirement.
“I’m sure we all know, when we interview our members, only about 7 per cent of them say they want to take down the minimum drawdown amount, but in practice, we see about 55 per cent of them take it,” he said.
Dominelli said Aware is developing its own solution but is “still deep in the member research and design phase of what we’re doing”.
He added any longevity solution will be designed to interact with an account-based pension and the age pension.
“We’ve identified all of the needs in retirement, whether they be emotional [or] the functional needs of the members [and] you can see that a longevity product will never solve for all of those needs,” he said.
“It’s not a silver bullet, but there is definitely a place there for it to solve for a subset of those needs. [There’s] also a place for the government age pension, but also a place for an account-based pension to give that flexibility to help with unexpected things that come up in retirement.”
Advice too essential to be sidelined
Financial advice is likely to play a significant role in delivering the optimal retirement income solutions to members. Evalesco financial adviser Melody Edwards said discussions with clients commonly reveal concerns about having enough to live on for the rest of their lives, prompting a new wave of retirement income products incorporating longevity protection.
But Edwards said retirement products are complex and advisers need greater confidence in how they work before fully supporting them.
“Having these types of products come up is filling a need in that in that space,” Edwards said.
“There is such a variation among products and around features and how they’re invested and the outcomes that you can get, so that does prevent advisers from putting their full confidence behind them – that lack of understanding, lack of training around it, and really seeing how it fits in from a holistic view as well.
“The anecdotal chatter I get from other advisers is that they liked the idea of it, but really having not a clear understanding and not clear transparency around how it all operates, really does provide an obstacle to using it more.”
Allianze Retire+ head of technical services Justine Marquet said product providers are willing and ready to deliver the education and training that advisers need to understand the products and to give them confidence to recommend them to clients.
“All of these products are really innovative and offer quite different things,” Marquet said.
“A big part of the job and the journey is education, initially, and just explaining what the key characteristics are, but in relation to what they might already understand, because that’s how we learn: we relate things to what we already understand.
Marquet said this means taking what was once known as a potentially a lifetime guaranteed annuity, and then explaining all the different ways that it is different to that.
“There’s flexibility, there’s access to capital, there’s integration into the allocated pension on platform or within the funds. You can have it as an investment option, for example,” she said.
Marquet said communication and education is “just a given for all of us in this innovative space, we have to do it”.
“We are all really invested in making sure that everyone in the market – from the super funds to their members to the advisers as well as the researchers, everyone really understands what’s on offer, and, and what’s out there and how our products operate. But then it’s really more just really addressing those member needs and client needs.”
While advice will play a role in ensuring fund members get the best retirement income solution, including accessing new-look retirement income products, Aware’s Dominelli said that as things stand most members go into retirement products without receiving advice.
“We can’t think that this needs to be only an advised channel,” he said.
“It needs to be both. It needs to be a direct-to-member and an advised channel.”
As part of the research the firm is doing, they’re talking to members and advisers to understand the barriers they might have when they try to recommend or add complex retirement products into conversation.
“That’s a key part of our research,” he said. And clearly some of the things that we’re seeing early are things like the fine line between complexity and features on a product versus simplicity, but also bringing transparency at the same time.”
I agree that mandating funds to have retirement income products with prescribed features on their shelves is the wrong way to go. Retirement income needs are so nuanced and need to be advised. It is a massive leap up from advising on the accumulation phase.
Back when annuities were concessionally assessed in the aged pension means test, they were popular. Advisers and distributors needed to understand the intersection in order to sell these products. It seems the government is keen for the revitalisation of private annuities to take the pressure off public provision of retirement income and that is probably appropriate given that super has been building for 30 years. So agree, education is the key here as the products are complicated but harder than that is trying to change the mindset of aged pension entitlement and the home is sacrosanct. To really solve for this, some big picture thinking is required. The 3 pillars of retirement income are part of the same bundle, not mutually exclusive and independently available.