Geoff Warren (left) and David Bell

The retirement industry is currently operating in a kind of purgatory where business, policy and regulatory challenges are holding back the provision of good retirement outcomes for all retirees. We are concerned that many retirees will be left behind unless the right settings are put in place, ideally sooner rather than later.

It is time to think big – something that the Treasury’s ‘Superannuation in retirement’ consultation encouraged. Our submission took up the challenge by penning 13 essays on a range of topics that informed a variety of policy recommendations. Our central theme is that current settings are working for neither super funds nor retirees. Some bold measures are required to create an effective retirement super industry that works for all retirees.

Three overlapping pieces of work are central to our key policy suggestions:

  1. Market mechanisms cannot be relied on to deliver good outcomes for retirees.
  2. Business incentives to deliver high-quality retirement income strategies (RIS) are lacking for some super funds, creating tension with the obligations under the Retirement Income Covenant (RIC).
  3. We build on our work on choice architecture (see Pathways for directing members into retirement solutions) in expressing high concern that certain retirees will be left behind without the ability to ask their fund to provide them with a clear recommendation.

These themes together suggest that improvement is necessary in three areas for the super system to work well for all retirees. First, super funds need to step up and do more for their retired members. Second, the super sector needs clarity and appropriate incentives to commit strongly to retirement. Third, funds need to be enabled to assist their retiring and retired members in an effective manner.

We now explore these areas in further detail.

Retirement market is prone to failure

In 2018 the Productivity Commission stated that “there is no prospect that Australia’s basic financial markets will be fully competitive”. When it comes to retirement, we believe the market is more prone to failure for two reasons. First, effective competition seems unlikely between providers (i.e. super funds). Competition is inhibited by the combination of difficulty in comparing products, services and solutions and strong incumbency effects. Most members tend not to look beyond their current fund as they find it very difficult to choose and switching costs are high.

Second is limits to effective choice. Many retirees have low capacity – and willingness – to make financial decisions for themselves. This reflects a range of influences, most notably the intersection between cognitive limits and complexity – both of retirement itself and the solutions and products on offer.

Business incentives are weak for some super funds

The RIC places an obligation on the trustees of all super funds to develop an RIS. However, the business case for investing considerable resources and effort into retirement is not clear for every fund. There is a stark variation amongst funds relating to the percentage of assets (1 per cent to 69 per cent) in the retirement phase.

Thus many funds are facing into their RIC obligation to develop an RIS for a small portion of their existing member base. These funds are confronted with a tenuous financial case (high cost, long-dated benefits, little competitive upside) and issues including how retirement fits into the overall business strategy, cross-subsidisation, first-mover risk, and legacy product threats.

The incentive for some funds will be to drag their feet or deliver the minimum required rather than make a big commitment of management time and resources to developing a high-quality RIS. Further, undershooting is somewhat accommodated by a principles-based framework. The members of these funds are at risk of poorer outcomes.