Financial planning for individuals entering retirement is not adequately incentivised in Australia or internationally, according to John Piggott, professor of economics, University of New South Wales (UNSW). He is also director of the Australian Centre of Excellence in Population Ageing Research.
“No country requires or provides incentives for default advice. And yet surely as you approach retirement, the thing you really need is sensible advice,” Piggott told attendees at last week’s Australian Securities and Investments Commission (ASIC) Forum.
Retirement income products
To improve efficiencies in retirement planning, the FSI questions what a comprehensive income product for retirement (CIPR) might look like.
According to Piggot, this included a whole range of products and features, finding that those including phased withdrawal with no minimum or maximum drawdowns are favoured at the moment.
He sees the issue of ‘phasing’ as quite important, providing flexibility early in the retirement phase, but a more fixed structure later. “Because you’re not going to be as mentally alert at the age of 85 as you are at 65,” Piggott said.
“When asking people how they’re going to arrange their retirement income, reasonable response is, ‘how long am I going to live’? If you know that from some given late age, you’ve got a secure income stream, that’s a much simpler proposition.”
“I think they’re the two reasons you might think about phasing in some different kinds of pensions.
He believes the FSI struggled when addressing issues of age and whether income should be indexed to life expectancy.
“I think they’re the questions which the FSI was not really able to grapple with, and which need to be answered if you’re going to come up with a comprehensive income product for retirement (CIPR) or a set of them.
Catering for diversity
He referred to a series of studies undertaken by UNSW, which compared the retirement income systems across a range of countries. “Australia is on its own in consumption smoothing, in relying on a pre-funded plan and then providing no structure at all in this retirement phase, and that was reflected in the FSI report,” Piggott said.
One of the key challenges in creating an equitable system is the high heterogeneity among the population once people reach their 80s, with different family and wealth circumstances, varying levels of health and differing lifestyle expectations. “So if you mandate something, there are going to be outliers,” Piggott said.
“The power of a reform is you can provide for those who are disengaged, or confused, or ignorant…so that if, in their personal situation, something is ridiculous, they can opt out.”
He also referred to a UNSW study that compared reactions from a group of people given the option of an annuity or account-based pension defaulted into either a 50-50, 25-75 or 75-25 split.
This found that the 50-50 choice dominated the individuals’ selections. “Defaults work…Most people stayed with the default,” Piggett said.
“There’s also the very vexed question of the trigger. What is retirement after all, what should happen?” Piggott said.
At present, the FSI says the super fund or trustee should wait for an instruction, “but then what happens if you don’t? At the moment it just sits there.”
For example, a default age, after which time, if no further contributions are received for six months, money is transferred into a default income product, is one option,
“But you’d have to decide how you were going to do it…this is the second implementation problem you’re going to face,” Piggott said. He also refers to the question of coverage for groups such as part time workers or those who are self-employed.
“If you put people into products that don’t have commutation, or have very disadvantageous commutation, then you need an opt-out period. This would require clear stipulation – what should that be? How should they be notified?” Piggott said.
“You’ve got to come up with ways of specifying these thresholds that make sense through time…with some sort of indexation.”
He also raises the important question of which organisations would be responsible, whether super funds or insurance companies, or other options such as a licensee- or other market-driven system. “All those issues sit around the outside. Many venture beyond the question of financial regulation, a comprehensive intervention would have to take these into account,” Piggott said.
TOPICS: asic, Australian Securities and Investment Commission, superannuation, University of New South Wales