Post-retirement income policy ripe for change

The Australian financial services industry has spent the best part of a decade seeking to deal with post-retirement incomes and, by definition, post-retirement products but in 2019 it remains a work in progress with no definitive end in sight.

In the lead-up to the 18 May Federal Election there was a belief that the recommendations of the Productivity Commission (PC) would remain largely unimplemented by the expected future Labor Government, but the surprise re-election of the Coalition and the declaration by the Treasurer, Josh Frydenberg, that the Government will take another look at post-retirement means that the PC’s policy proposal remains on the table.

That being the case, the notion of a Retirement Income Covenant premised on a so-called “MyRetirement” approach may not survive on the policy agenda over the next three years. But in the meantime the superannuation industry is already witnessing the results of earlier policy changes, not least the means test changes which came into effect on 1 July.

Mercer senior consultant and superannuation specialist, David Knox, certainly sees the 1 July means test changes as significant, if only because it levels the playing field for the company’s recently developed Lifetime Plus product but he acknowledges that the path ahead remains complex and that the objective of developing “Comprehensive Income Products for Retirement” (CIPRs) may not ultimately be achieved.

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The chief executive of actuarial research house, Rice Warner, Andrew Boal, sees it somewhat differently arguing that the policy building blocks are largely in place for the development of a new breed of post-retirement product, but enough uncertainty exists to make key players reluctant to move.

The PC pointed to the dominance of account-based pensions (ABPs) and the use of annuities while also looking at the desirability of CIPRs and urged against the adoption of a one size fits all approach via a Retirement Income Covenant.

The PC’s final report stated that: “In the retirement phase, risk-pooled lifetime income products may meet some members’ preferences for a predictable income stream and for managing longevity risk”, while questioning the advisability of using a Retirement Income Covenant to push super fund members into particular products.

It said the proposed Retirement Income Covenant “may nudge many others into products ill-suited to their long-term needs, may not achieve its desired goal of increasing retirement consumption, and fails to take sufficient account of the diversity in household preferences, incomes and other assets.”

Further it said the requirement that all funds must offer a ‘flagship’ risk pooled product would oblige any fund without a capacity to create such a product to purchase it from a third party — where there are few choices currently on the market.

“The requirement for a standardised risk-pooled product may conflict with trustees’ obligations to act in members’ best interests, and many funds do not want to offer them,” the PC report said. “Their complexity, limited scope for reversibility and major deficiencies in the credibility, independence and affordability of financial advice for retirement products leaves significant scope for member detriment arising from the requirement to supply risk-pooled products.”

In short, while the superannuation industry has spent much of the past decade discussing CIPRs and the introduction of a “MyRetirement” product, the PC believes such a move would be ill-advised.

The PC’s view coincides in large part with that of the Association of Superannuation Funds of Australia (ASFA) which, while supporting the concept of a principles-based Retirement Income Convent, warned of the need to take into account members’ desire to retain access to capital.

For its part, and hardly surprisingly, the Financial Planning Association (FPA) warned against the proposition of a MyRetirement product, arguing it would be detrimental to consumers and would erode consumer protections, particularly in relation to the selling of financial products and the provision of financial advice.

The FPA said the Treasury’s proposed Retirement Income Framework “is forcing the creation of financial products, mandating they be offered to consumers, overriding existing consumer protection mechanisms, and overlooking the significant risk this poses for consumers and the trillions of dollars of Australians’ retirement savings.

“It is also ignoring the fact that if these products were viable, product providers would already be offering them to consumers. However, as detailed in our previous submission, product providers have not developed these type of products, or if they have they have failed and become legacy products to the detriment of providers and consumers,” the FPA said.

Deloitte Superannuation partner, Russell Mason, said that if one thing had been learned from the outcome of the 18 May Federal Election it was that retirees wanted certainty and it had become increasingly clear appetite for a MyRetirement product had waned.

Reflecting the analysis contained in the PC’s final report, Mason said the majority of retirees were still utilising a combination of drawdown products and annuities, with some of the best minds in the industry yet to come up with what looked like a better total package.

“You can look at the MySuper model, but one size certainly does not fit all in the post-retirement phase,” he said.

Mason said that circumstances became incredibly complex as superannuation fund members entered the post-retirement phase and it was entirely arguable that the provision of advice needed to be an integral part of how funds addressed the situation.

Mercer’s Knox advocates a ‘steady as she goes’ incremental approach to the development of retirement products and made clear he believed the 1 July changes to the means test rules on longevity products were a much more significant advance than many others believed.

“I think we have made progress and the first step of the progress occurred on 1 July when we had the new means test rules on longevity products,” he said. “I think that levels the field on longevity products and provides a nudge for retirees to at least think about retirement products. There’s not going to be a huge revolution but it provides traction and represents an important step.”

Knox said he believed the other important step was the Australian Prudential Regulation Authority’s (APRA’s) focus on member outcomes.

“What I mean by that is that trustees are going to have to look at various cohorts of members including retirees and ask whether they are doing their best for members who are retirees,” he said. “Traditionally, trustees have focused on active members but retirees are becoming more important and their assets are becoming more important and that member outcomes focus from APRA will be another reminder to trustees that they need to look at retirees differently to active members because they have different needs.”

“The third thing that we haven’t got to but what I would like us to get to is the Retirement Income Covenant because I think if we had a covenant within the Superannuation Industry (Supervision) Act (SIS Act) that would also be an important step forward,” he said. “So we’ve got two of three (policy measures) and if we get the covenant in place trustees will have to ask whether they have the best offerings for members.”

Knox said that irrespective of whether the industry got to implementing CIPRs, the three steps entailed in the APRA member outcomes test, the means test and a covenant would serve to “move the needle.”

Knox pointed to Mercer’s own efforts in the area and the manner in which the means test changes, which came into effect on 1 July, were going to help Mercer’s relatively newly-developed Lifetime Plus product compete against annuities such as those produced by Challenger.

“We were finding it hard to compete against annuities because we were not getting the means test treatment that they were getting,” he said. “That has changed and we’re now on a level playing field and I think products like the Mercer Lifetime Plus product are in a better position.”

However, he said that only time would tell how successful the Mercer product ultimately proved to be.

“… But I think the fact that the means test has changed and with the outcomes test put in place by APRA, trustees are going to have to ask themselves some questions,” Knox said.

Rice Warner’s Boal believes the reluctance of some product manufacturers needs to be understood.

“What I see happening at the moment is that we’ve now got the building blocks of the regulatory environment in place for things to happen, but people are being a bit circumspect and wary about launching anything,” he said citing past experience in uncertain times.

“Some of the things that the retail sector has faced over the years has involved dealing with legacy products and the last things people want to do is to launch a new product and then find out a little way down the track it is not what they wanted or should have,” Boal said. “You don’t want a product with 11 members and you can’t close it so I think there is an element of circumspection around that.”

Boal said there were two things that needed to be taken into account – understanding what people want and making sure your product has that (need) built into it in the right way.

“But it’s not just a case of getting to the end consumer but getting to a middle supplier such as a superannuation and then a life insurer who might be supplying protection with respect to the pooling type products,” he said.

“It is a case of understanding what the customer needs and then getting to a scalable number of them quickly so then you do not end up with a product with only a few members in it before it really takes off,” Boal said. “Timing is everything, and so what I think has been happening is that people have been waiting to ensure they have the timing right to launch something.”