Income is key in scramble to fix retirement phase of super
As policymakers focus on optimising the retirement phase of superannuation, industry leaders say policies should prioritise lifetime income streams
Improving superannuation’s retirement phase is a growing policy concern with no “one-size-fits-all” solution, and Dr David Knox, Senior Partner at Mercer, says a crucial first step would be requiring members to take at least part of their retirement benefit as an income stream in the future.
His goal is a retirement system that enables “most retirees to maintain the standard of living in retirement that they have enjoyed during the past 10 or 15 years”, however, Dr Knox said achieving this is like “trying to complete a jigsaw puzzle when the pieces don’t fit together.”
That’s because superannuation policies have focused on the accumulation phase for decades, while the retirement phase has remained comparatively undeveloped. But given superannuation's pivotal role in the overall retirement income system, Dr Knox said it’s time for policymakers to figure out how to fit this piece of the puzzle together.
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Growing pains for superannuation
Nearly 32 years after the introduction of the Superannuation Guarantee, the government is seriously thinking about a growing problem that has long troubled researchers – how to optimise the retirement phase so that members have the confidence to spend their money in a fulfilling retirement.
At a recent Advancing the Retirement Phase of Superannuation event hosted by UNSW Sydney’s Innovations in Risk, Insurance and Superannuation (IRIS) Knowledge Hub, Business Insights Institute and the Centre of Excellence in Population and Aging Research (CEPAR), Dr Knox was among a panel of industry leaders discussing how to solve the “bigger picture” of promoting dignified retirement by addressing the shortcomings limiting Australia’s $3.7 trillion superannuation system.
“People need to think about a whole range of things in retirement, but in the accumulation phase, they haven’t needed to think very much at all,” noted Dr Hazel Bateman, Professor in the School of Risk & Actuarial Studies at UNSW Business School, who chaired the panel discussion also featuring Professor Olivia S. Mitchell of Wharton Business School at the University of Pennsylvania; Dr David Bell, Executive Director of The Conexus Institute; and Dani Murrie, Chief Marketing and Growth Officer at UniSuper.
“Over the last few years, we’ve seen some indicators from government about how it’s thinking about solving this issue,” Prof. Bateman said, pointing to Treasury’s December paper on the retirement phase of super and the government’s recent introduction of the Retirement Income Covenant.
She said these moves have seemingly expanded the possible universe of policy options on the table. One thing the panellists agreed was at the top of their wish lists as the focus turns to the retirement phase is the need for lifetime income products to play a more significant role.
‘Many components and many uncertainties’
When thinking about the challenges surrounding the retirement phase, it’s important to remember that “we’re talking about a retirement income system, not just superannuation,” Dr Knox stressed.
Moreover, the question of how to enable members to maintain a dignified lifestyle in retirement involves “many components and many uncertainties”, he said. For one thing, it requires recognising the many different sources of support for a retirement lifestyle, including superannuation, the means-tested age pension, homeownership and continued labour force participation. “So, we need to be flexible in this space; there’s not a one-size-fits-all solution,” Dr Knox said. “We’ve got to look at the broader picture.”
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And while every member is different and has different needs in retirement – as the Treasury paper reinforced – an overarching goal must be to give retirees the confidence to spend. “That comes back to the annuity concept and giving them the confidence that they will not run out of money,” Dr Knox said. “But we’ve also got to give them confidence that they have a choice.”
He said supporting member confidence is especially important given that people dealing with these issues are older and may face weakening cognitive ability. “So, we’ve got to give them control and some choice. And, above all, we’ve got to give them dignity.”
Getting the settings right
Dr Bell described the government’s current policy stance on addressing the retirement phase as “unresolved”, adding that “given the differences between accumulation and retirement phases, it looks a bit ‘policy-light’.”
He explained that accumulation-phase settings may not be appropriate for members in retirement, who generally benefit more from engagement and tailored products than younger members, for whom default settings are often sufficient. “I’m not sure matchup works,” he said.
Prof. Bateman explained that the “fairly vague” Retirement Income Covenant aimed to bolster the framework for retirement outcomes by obligating funds to implement a strategy to help members maximise income while managing risks and maintaining flexible access to capital.
According to Ms Murrie, UniSuper has approached that obligation through a “member lens, first and foremost”, in fulfilling the covenant. “By that, I mean helping a member all the way through to the end of life,” she said. “What are the pain points and the opportunities within that life journey, and how can we help members?
“From a product perspective, we know we have the building blocks in place to meet the Retirement Income Covenant,” Ms Murrie added. “We have an account-based pension that enables flexibility, we have a defined-benefit income plan, but we also have a lifetime income plan, which helps with the discussion points on the longevity side. So, we’ve got the pieces of the puzzle; now the question is, how do we engage members so that they can understand the puzzle pieces in a way that means something to them?”
Education, options and advice
Ensuring members get the guidance they need as they approach retirement is a big part of getting the retirement phase of superannuation jigsaw pieces to fit together. “We truly believe there are critical moments in going from the accumulation phase to the retirement phase when seeking and getting advice matters,” Ms Murrie said. “For us, it’s all about engagement, education, guidance and advice.”
She said UniSuper is addressing the education piece by investing in its data capabilities to help its members through scaled marketing nudges, working with prioritised cohorts on the next step in their retirement journey.
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Prof. Mitchell noted another concern is whether the system overwhelms members with decision-making and engagement requirements. “If we previously thought it was easy to move into retirement, we now realise it’s not, particularly for couples where one spouse has a defined benefit plan and the other doesn’t,” she said. “It just goes on and on, given the challenges with financial literacy.”
She called for “more guided choice and much more transparency,” suggesting that funds should offer one or two “plain vanilla, very standardised” deferred-annuity products: one for singles and one for couples. “Ideally, insurance companies that wanted to play in that market and the financial advisers providing advice could compare those two plain-vanilla products across providers,” she said. “That would enhance competition, possibly bring down prices, and make things more standardised. And it would help people understand that they don’t have to put their whole nest eggs into an annuity.”
Getting members to embrace annuities and other income products would also bring them and their families peace of mind, Prof. Mitchell said, adding that optimising retirement settings will be crucial as the "great wealth transfer" raises the stakes around financial literacy even further. “This is something we need to appeal to with the next generation as well, not just retirees,” she said. “A standardised, plain vanilla, easy-to-understand lifetime income product would go a long way towards helping people understand what they can do.”
Shortcomings and solutions
According to Dr Bell, the government could address several policy shortcomings to improve the retirement phase. First, “the traditional underpinnings of the market – competition and informed consumer decision-making – are both failing or not working well in this phase,” he said.
“From a competition perspective, there are high incumbency rates and an incumbency effect at the point of retirement,” he said, adding: “It’s partly based on trust, which is a good thing. But it’s very hard to choose a provider at the point of retirement because the products are so complex, so you just have to take them at their word. That’s the folly of competition. But making good quality, self-determination can be very difficult with some of the behavioural and knowledge-based issues at play there.”
According to Dr Bell, there’s also a business case issue at the industry level. “For some funds, retirement assets make up 1.4 per cent of their total assets, so how much are they investing in developing quality retirement offerings?”
Dr Knox said he would like increased prescription requirements at the trustee level and called for adopting accumulation-centred preservation policies for the retirement phase. “We moved transformationally from a non-preserved system to a system where all contributions are preserved until at least age 60. We need to do something similar in retirement; that is, we need to change the mindset of members from just accumulation to retirement income and maintaining the standard of living.”
And, he stressed, this is a conversation for people still a few years away from retirement. “We need to think about giving signals that say, you’ve got to receive your benefit – as income, predominantly,” Dr Knox said. He pointed to the two extremes at play with no guidelines in place, with members free to leave all their money in the accumulation phase or take out 100 per cent and buy a Lamborghini with it. “We need to tighten that up a little bit.”
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A better system, according to Dr Knox, would require members to take 50 per cent of their benefit as an income stream – “not necessarily an annuity, but an account-based pension with a maximum cap of double the minimum cap; in other words, you can’t take it all out.”
He suggested the government implement the change by 2030, providing a six-year transition period after which members would have to take half their benefit in some form of income, defined more broadly than as just annuities, and then “do what they like with the other half.”
“I think more products will be developed, the Retirement Income Covenant will come into play, and funds will have to go down that route,” he said. “I think we’d then be generating an income-focused system.”
Improving the system at scale
But for a retirement system as big as Australia’s, the drive to have members make informed retirement decisions with advice from funds has come with challenges, particularly for a fund with a membership as extensive and diverse as UniSuper’s (with more than 647,000 members and $135 billion in funds under management, as at end March 2024). Figuring out how to implement changes at scale to benefit retirement will be central to the government’s task.
“That’s why I go back to investment in technology and things like modern data platforms to support it,” said Ms Murrie, citing UniSuper’s drive to make more resources available digitally, including a retirement hub and an education hub for younger age groups.
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The fund then retains that data for use on members’ portals, “so then, every time you visit us, you’ll be nudged and think, that’s right, I’ve got that gap,” she said. “Or we can use that information to serve up for the next step of the conversation around education or seeking advice. That’s painting a picture of how we do it at scale – where we would want to see change from a regulatory perspective.”
According to Dr Bell, other initiatives that would improve the retirement phase of superannuation include a “retirement licensing regime to clean up the provider side” and the implementation of trustee recommendations. “Ultimately, I always come down on the side of the consumer,” he said. “I think enabling trustee recommendations would be the best next step for the retirement sector.”
Ms Murrie urged the industry to “really lean in” to the Quality of Advice Review and “get solutions for advice at scale, whether human or digital”.
Asked for her final thoughts on improving retirement outcomes, Prof. Mitchell said members should update their retirement expectations and be prepared to “work longer, save more, annuitise more, and expect less”.