Treasury has received a swift rebuke to applying a Your Future Your Super style performance test to retirement products.
As part of the superannuation in retirement consultation launched last December, Treasury floated the idea of expanding the test, among other potential solutions to improving retirement outcomes.
Among 91 submissions published by Treasury, The Conexus Institute* argued that extending the test will be very difficult and could lead to “significant unintended consequences”.
“At best, the YFYS performance test might be applied to return-generating components of retirement solutions, such as account-based pensions,” the submission, authored by executive director David Bell and research fellow Geoff Warren, said.
“These assessment tools are quite unsuitable for other retirement products or retirement solutions.”
The Financial Advice Association, in a submission attributed to chief executive Sarah Abood, said the “apparent thinking” that having a retirement product performance test is “not correct”.
“The level of complexity and decision making required is substantially different,” the submission said.
“What has worked in the accumulation phase will not necessarily work in the retirement phase. Neither do we believe that this issue will be solved by an ability to readily compare products and switch consumers from one provider to another on the assumption that the new product will better meet their needs.”
The Financial Services Council, the Association of Superannuation Funds of Australia, Vanguard, HESTA and Aware Super were among others that cited opposition towards expanding the performance test.
The FSC said retirement products are inherently non-comparable because they offer such a wide variety of benefits.
ASFA argued performance testing is “problematic enough” for accumulation products.
“For retirement income products involving a range of elements and with differing characteristics and varying target markets the pursuit of a simple, comprehensive metric is likely to involve an illusory goal,” ASFA said.
HESTA argued against the test on the grounds that funds have only recently had the chance to implement the Retirement Income Covenant – which requires funds to offer a retirement solutions to members – and that a review of the YFYS performance test is yet to be undertaken.
“Given these issues, HESTA believes that a performance test for retirement products is not appropriate at this time.”
However, support for the test came from super funds AustralianSuper and Cbus, the latter of which has been under fire this year for a myriad of regulatory intervention issues over board governance, insurance claims handling and union ties.
Cbus argued the same level of protections that applied to accumulation products should also apply to retirement ones.
“It is however noted that measures of success in retirement will likely differ from accumulation phase, with consideration needed in managing longevity and flexible access to savings and ultimately the purpose of extending the investment performance test to retirement phase would not be to apply a quality filter or a sole measure of success but a much narrower assessment to identify significant investment underperformance that could be leading to poor member outcomes,” Cbus said.
AustralianSuper said a performance testing framework should be applied to retirement products, but noted there will be additional aspects to performance that are particularly relevant to retirement, like the objectives of the RIC and other regulatory obligations.
“A filter, or test, should consider investment performance and fees over a period as indicators of better outcomes,” the fund said, noting any filters should capture retirement products and recognise different aspects of retirement income like flexibility, investment returns and volatility.
Value of advice
The FAAA reiterated its recommendation of a limited, means tested, special payment of $2000 to support those seeking financial advice in the lead up to retirement.
But while the original Treasury paper hyped up the impact financial advice reforms – via the Delivering Better Financial Outcomes – could have on expanding accessibility and affordability to retirement income advice, the FAAA offered a critique of the consultation paper’s statement that “advice has its limits if retirement income products are not available to meet members’ needs”.
“It is our view that this is incorrect,” the FAAA said.
“Lack of product options is not the biggest problem in retirement income. While there is room for improvement, products should be viewed as a means of implementing a strategy and therefore a suitable retirement strategy is required that suits the individual consumer’s needs before a product is suggested.”
Instead, the association said the “much bigger problem” is that few Australians understand what is involved in retirement, nor do they have access to retirement advice.
“In the absence of financial knowledge, they are particularly unprepared for the complex and challenging decisions that are involved in retirement.”
Vanguard, which launched its own super fund in late 2022, also recommended the government continue to progress on the DBFO reforms which will help expand the access to advice via the removal of the safe harbour steps, Statements of Advice, and changes to intrafund advice rules.
At the Conexus Retirement Conference in August, Minister for Financial Services Stephen Jones said solving the retirement issue would be “70 per cent advice” and only 30 per cent product.
No standard
The Treasury paper also recommended developing a framework outlining attributes and features of a standardised retirement product, to balance the objectives of the RIC.
Funds would be required to develop at least one product which meets the framework attributes and provide it as a ‘first offer’ to members.
The Conexus Institute said while there are potential advantages in establishing a standardised retirement product, it is outweighed by the disadvantages.
“Our main issues with the proposal are that a clear case for direct government involvement in product design is not apparent, and there is a risk that a standardised product could be a vehicle for some members taking up unsuitable retirement solutions that do not cater for their specific needs,” the submission said.
“We suggest that policymakers may be better pursuing policy measures that place an onus on fund trustees to deliver suitable retirement solutions.”
The FAAA said decumulation is far more complex and nuanced than accumulation, and an incorrect decision can have lifetime negative consequences for a member.
“We believe that this would distract funds and other product providers from addressing the core problems, which are lack of financial knowledge and lack of access to financial advice,” the FAAA said.
The FSC doesn’t believe take up of a standardised product would be high due to a perceived lack of trust by consumers towards government designed products.
“As such, superannuation funds could spend significant resources creating products that meet the Government standard but that consumers do not ultimately want,” the FSC said.
“The FSC is concerned that any move to create a standardised product may result in poor consumer outcomes, particularly when combined with a default retirement scheme. Further, it may stifle innovation and competition by encouraging funds to create cookie cutter products.”
*The Conexus Institute is a not-for-profit think-tank funded by Conexus Financial, the publisher of Professional Planner.
