The peak financial advice body has recommended that compliance with a set of best practice principles for superannuation retirement income solutions should be compulsory for all super funds, while key super industry bodies have pushed back against aspects of the principles that they perceive as being overly prescriptive.
In a submission to Treasury on draft guidance on the best practice principles, the Financial Advice Association Australia says compliance with the principles will be voluntary, and that there will be no penalty for funds not adhering to the principles.
“We question why this would be voluntary and suggest, for the benefit of members, it may be more appropriate for the principles to be implemented as a standard obligation,” the FAAA submission says.
“However, should the principles be implemented as a voluntary obligation, the FAAA recommends trustees be obliged to publish on their website (in a manner that is clearly accessible for consumers) the reasons they have chosen not to implement the principles, in part or in full.”
Meanwhile, the Super Members Council, the Association of Superannuation Funds of Australia and the Financial Services Council have identified aspects of the principles they believe limit the flexibility of funds to develop retirement income solutions that best fit their respective memberships.
These concerns focus primarily on the issue of developing member cohorts. Principle 4 in the Treasury draft guidance says funds should develop at least three member cohorts that reflect the composition of the membership at or approaching retirement; base those cohorts on information held and gathered by the trustee; and use characteristics relevant to the development of trustee-designed retirement income solutions to develop cohorts, such as account balance and age.
‘Best practice is different’
The FSC recommends that the wording of Principle 4 be made less prescriptive to reflect “the overarching principle that best practice is different depending on the size and scale of the fund and the demographics of its customer base”.
“Funds will have slightly different approaches to the principles meaning they are still providing best practice, but in a way that is relevant to its particular customer base. The FSC is supportive of the way in which the principles have been drafted to be less prescriptive and principles based.”
The FSC says it is not clear why Treasury has opted for a minimum of three cohorts and says that “while three cohorts may be very achievable for larger established funds, smaller and/or newer funds may struggle to find three distinct cohorts in its customer base”.
While effective cohorting is seen as essential to funds developing relevant guidance and nudges for members as they approach retirement, the FAAA has reiterated its opposition to allowing trustees to collectively charge members for the provision of comprehensive financial advice.
“The cost of collectively charged retirement advice is likely to be significantly greater than the cost of collectively charged intra-fund advice in the accumulation phase,” the FAAA submission says.
“This means members of these funds will be paying much higher amounts for advice they are not actually receiving – including members who have sought, and paid for, their own personal financial advice with their chosen adviser, but must still pay for the collectively charged advice provided to other members of the fund on top of that.”
The FAAA says retirement advice is “both complex and high stakes for the consumers involved – because if poor advice is given in this life-stage, it can be extremely difficult for a consumer to recover their financial position when no longer earning income from personal exertion”.
It says comprehensive retirement advice should only be offered by licensed professional financial advisers who “have the education, experience and ethical obligations that enable them to provide this advice in an appropriate manner”.
‘Flexible, scalable’
The SMC says in its submission to Treasury that the principles should “support a flexible, scalable approach” to segmentation and cohorting to allow “flexibility to properly account for differing characteristics within cohorts over a minimum number of static fixed groupings”.
“Key elements of such an approach could include enabling segmentation frameworks that are responsive to each fund’s unique membership profile rather than a prescriptive minimum number,” it says.
The SMC also says the principles should encourage data-driven strategies that “enable member characteristics to be properly accommodated in cohort groupings, with trustees using real-time granular data to respond to individual member needs and preferences using tailored solutions where appropriate”.
ASFA recommends that Treasury avoid using prescriptive language and that it “facilitate flexible application” of the principles by ensuring they “exhibit appropriate language, flexibility and adaptability, and avoid unnecessary prescription and rigidity which could present complexities in their application”.
“There are several principles which are not as clear, and which present as considerably more prescriptive,” it says, and singling out Principles 5 and 6 in the Treasury document.
Principle 5 in the Treasury draft guidance says best practice for designing the products and product settings to build quality retirement income solutions means a trustee will provide their members with access to a lifetime income product that is not the Age Pension; an account-based pension; and lump sums.
Principle 6 says trustees must design product settings that allow for the construction of retirement income solutions that meet members’ retirement income needs, including lifetime income product settings that have regard to member preferences around expected risk and return – for example managing longevity or investment risk; account-based pension product settings that help to manage expected risks, for example sequencing, market and inflation risks; and trustee-designed drawdown pathways for account-based pensions that more efficiently convert superannuation balances into income than the legislated minimum drawdown rates.
ASFA says “it is not entirely clear if the phrase ‘providing access to’ would permit funds, and particularly those which may not offer a lifetime income product (LIP) directly, to offer a pathway to this product which, under appropriate circumstances (for example, where the member is receiving financial advice), could see members provided with specific guidance and/or referred to an appropriate third-party provider”.
ASFA also recommends the principles allow funds to determine the appropriate number of member cohorts for themselves.
“ASFA recommends removing from the principles references to a specific number of member cohorts, and that the principles allow for the number of cohorts to be defined by individual funds, which are already well-positioned to make such a determination,” it says.
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