Many financial advisers may not have heard of Comprehensive Income Products for Retirement (CIPRs) But the proposed legislation of a MySuper-style default superannuation income retirement product has the potential to disrupt the growing demand for advice around retirement.
Australia faces a number of challenges as a wave of Baby Boomers hit retirement age. One of the biggest is just how retirees, who are set to live longer (increasing longevity risk), will earn an adequate income.
“The Commonwealth is bearing the brunt of longevity risk,” says Patricia Pascuzzo, executive director of the Committee for Sustainable Retirement Incomes (CSRI).
Retirees are also struggling to manage the various financial risks.
“That’s not surprising given the complexities involved,” she says. “At the same time only 20 per cent seek the help of a financial planner to help them manage these risks.”
Pascuzzo says Australia’s retirement income system needs to be improved.
The David Murray-led Financial Services Inquiry (FSI) suggested one way to improve the system was to introduce the CIPR for super members’ retirement.
A CIPR would be similar to MySuper products in a member’s accumulation phase; it would be a default retirement income product for retirees that are disengaged or unsophisticated.
A CIPR is a hybrid product. Murray recommended they would be low-cost and have minimum features, including a regular and stable income stream, longevity risk management and flexibility.
As the FSI said, to deliver those features that would require a combination of underlying products.
“For example, an account-based pension paired with a pooled product that provides longevity risk protection,” it said.
The drive has stalled
But the drive to introduce CIPRs seems to have stalled. The government has said it would consult on CIPR legislation by the end of 2016.
Andrew Baume, director of structured investor solutions at Deutsche Bank, says he understands the government has been in the process of consulting on a formal and less formal basis.
“But we haven’t seen any indication yet of the next step,” he says.
Baume describes CIPRs as a “utopian idea,” and he believes the government may be struggling to create appropriate CIPR legislation.
Baume says the goal of CIPRs, unlike annuities, is to not only to provide more certainty around income and managing downside risk, but also creating an asset allocation that allows retirees to participate in the upside of equity markets.
“Like many utopian ideas, it’s not easy to design,” he says. “It’s a difficult nut to crack.”
Wade Matterson, principal and senior consultant at Milliman, says he believes CIPRs are a way off. “It’s challenging to get basic policy through, particularly when it comes to super.”
He believes the legislation is largely going to be principles based. “It’s not going to be mandated that a CIPR require any one particular product over another,” he says.
Matterson says it will mostly deal with factors including market risk, longevity risk and the ability to keep up with inflation.
CIPRs a ‘threat’ to advisers?
Super funds are already moving to created CIPRs. UniSuper has announced it is planning to introduce FlexiChoice, a lifetime retirement income product that addresses longevity and sequencing risk, in 2017/18.
But will the emergence of CIPRs be a threat to financial advisers?
Unless super funds develop greater sophistication in creating a tailored default retirement product, the introduction of CIPRs should not be a threat to planners, experts say.
Matterson says CIPRs, like MySuper, are targeting the default market. He says there will be a “middle ground” of people who should seek advice but will simply accept the default recommendation of their super fund. They could be lost to financial advisers.
The biggest threat is if funds become more sophisticated in delivering individualised CIPRs.
“By definition that’s challenging,” Matterson says, though he adds: “It can be done.”
But at the moment funds struggle to get a complete picture of an individual’s financial position.
“Until they build up a really complete picture of what an individual looks like it doesn’t pose a massive threat to advisers,” he says.
“It’s why a whole lot of super funds are looking to build out partnerships with financial advisers as well as adopt more technology-led advice solutions.”
Baume agrees the impact on planners is uncertain.
“I’m not sure that it impacts awfully heavily on financial advisers’ business,” he says.
“It’s not a 2016 problem.”
Will ‘necessitate innovation’
Pascuzzo also says she doesn’t believe CIPRs will be a threat to advisers. She notes the size of the market is growing significantly with the Baby Boomer generation just starting to hit retirement, with the peak of Baby Boomer retirees coming through from 2025 onward.
“They will be retiring with growing superannuation balances,” she says. “They have much higher expectations than their parents and will need help in managing the various risks they face and navigate the choices on offer.
“I see enormous opportunities for enterprising financial planners who embrace the changes brought about by demographic, regulatory and social changes,” Pascuzzo adds.
“The key to encouraging a greater proportion to seek out financial advice will be to provide an integrated offering that includes financing of aged care. It will also necessitate innovation in more cost effective ways of delivering advice.”
Pascuzzo says there is “now a lot of engagement needed to design the regulatory framework to support the provision of CIPRs and a retirement income focus.”
“The key success factor will be making the public conversation as wide as possible,” she says.
“The CSRI has been doing a lot of work on this score working with industry, consumer groups and academic experts.”
Pascuzzo says the CSRI is convening a forum in Canberra on October 12-13 that will reveal the outcome of its consultation processes and seek to build support for a regulatory framework to allow the industry to cater to an income goal.
