The quality and comprehensiveness of super funds’ responses to the Retirement Income Covenant have been mixed to date.
Some are treating it as a matter of urgency, while others are taking a more leisurely approach to meeting their obligations.
The regulators, APRA and ASIC, clearly want funds to get on with it. Within just the past couple of weeks they have released the results of research into 48 funds’ responses, which prompted a call for funds to do better; and aspects of operationalising the RIC have been added to the latest update to APRA’s prudential guidance to funds.
But the simple fact is that the issues funds are being asked to solve for members in retirement are complex. The issue is not as pressing for some funds as it is for others, because their membership profiles differ, and there are other, possibly better things they can be spending members’ money on doing.
A green paper published by The Conexus Institute* proposes an idea that it says would be “a powerful mechanism to make the super system ‘match fit’ for meeting the retirement needs of Australians” and help to overcome several market failures.
The paper proposes a retirement licensing regime which, it says, “would benefit fund members, in particular as market mechanisms are struggling”.
In summary, licensing super funds to provide retirement income strategies (RIS) would remove the compulsion on every fund to offer a RIS, leaving the field open only to those that really want to do it properly, those that perceive a clear competitive advantage from doing so, and those for which the business case is compelling.
“It could buffer the super system by requiring super funds to focus on the diverse characteristics and needs of their retired members, provide clarity around minimum standards of RIS delivery, and prompt super fund trustees to address the business case for retirement and decide whether to fully commit to serve the retirement needs of their members by meeting the standards,” the paper says.
A retirement licensing regime could be just the kick in the pants the industry needs to get moving in the right direction on retirement solutions.
Good outcomes for all
The paper, authored by The Conexus Institute executive director David Bell, advisory board chair Jeremy Cooper, and research associate Geoff Warren, makes the inarguable point that “an effective super system should deliver good retirement outcomes for all Australians”, but points out that the system as it currently exists doesn’t do this reliably and consistently.
The retirement outcome for any given member appears to depend too heavily on which fund they happen to be in. The paper says that broadly accepted market mechanisms, such as informed choice and effective competition, cannot be relied upon in the retirement income space, and while there continues to be such a wide dispersion in the pace and quality of funds’ retirement income solutions, these mechanisms will continue to be ineffectual.
“Market mechanisms (informed choice and competition) cannot be relied upon to provide appropriate incentives and signals to funds in retirement,” the paper says. And the issues that funds face, including “a need to cater for members who differ significantly in their characteristics and needs; substantial policy and regulatory uncertainty; various frictions; and a range of business challenges” have hindered progress.
Overcoming inhibitions
The paper says a licensing regime could address some of the issues currently holding back funds’ responses to the RIC, which include:
- Market failure in retirement, due to cognitive limits of consumers; the complexity of retirement; difficulty in comparing and switching between funds; and less-than-competitive markets fostered by a strong incumbency effect.
- Diverse member needs, driven by individuals’ circumstances and preferences, and by factors such as access to financial advice and desire for self-direction.
- Policy and regulatory uncertainty dogging the sector in terms of what the regulators deem to be a satisfactory RIS; and around what guidance and advice members need as they move into retirement (and how that should be provided).
- A number of “retirement frictions”, which hinder a member’s ability to compare solutions and to move efficiently between them.
- A weak business case for committing time and resources to creating a RIS for some funds, such as those with relatively young members who are a long way off retiring.
However, the paper notes that a licensing regime can’t address all these issues. For instance, it will not resolve “how super funds can provide guidance and assistance to all of their members”, as that is subject to financial advice reform; or the retirement frictions, both of which require further policy work.
The regime would have a number of potential ramifications, the paper says. For a start, a fund that opted out of the regime might not support members with the information and guidance they need as they near retirement; and the fund would see members switching to alternative funds or income providers when they do retire – again, potentially, without support to make that choice. Opt-out funds might need to engage with members approaching retirement to advise them that they are not licensed retirement providers and suggest alternate retirement providers. The implications of declining assets and member numbers are something these funds would need to think through.
A licensing regime could also foster the development of specialist retirement funds, open only to members moving out of the accumulation phase and offering leading-edge, fully developed solutions.
A strong precedent
The authors argue in the paper that a retirement licensing regime would be “an impactful policy measure that warrants strong consideration”. The authors say that RSE and MySuper product licensing are examples of how well-thought-out licensing regimes establish “baseline standards that contribute to better outcomes across the broad population of super funds and their members”. Co-author Cooper can attest to the power of licensing regimes, having made the initial ‘Cooper Review’ recommendations on MySuper.
Such a regime would help by establishing clearer conditions and standards for the retirement phase.
Retirement is complex, and there are many issues that funds’ retirement income strategies need to solve for. Talk to anyone connected to a fund whose remit includes developing an RIS and you’ll hear a variation on a theme: accumulation is simple; retirement is hard. Plus, funds have had three decades to refine accumulation strategies and investment processes, whereas they’ve only relatively recently tuned-in to retirement.
A licensing regime would at least help ensure that the RIS that do come to market are up to standard and delivered by funds that are committed to serving their retired and retiring members in the best way possible.
*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, the publisher of Professional Planner.
