One size will not fit all in post-retirement

Super Review conducted its annual roundtable at the Conference of Major Superannuation Funds in March and found that superannuation funds continued to face a range of challenging issues in 2018, from insurance inside superannuation to the evolution of post-retirement products.

Roundtable participants:

• Mike Taylor, Managing Editor, Super Review
• Eva Scheerlinck, CEO, Australian Institute of Superannuation Trustees
• Raewyn Williams, Managing Director, Research, Parametric
• Andrew Proebstl, CEO, legalsuper
• Brian Zanker, Business Development Leader, Mercer
• Nick Callil, Head of Retirement Incomes, Willis Towers Watson
• Frank Crapis, Head of Life Product, Comminsure
• Geoff Brooks, Head of Marketing, Equipsuper

One size will not fit all when it comes to comprehensive income products in retirement, with the key being greater knowledge of members’ wants and needs.

MT:        Let’s move on to post retirement, and I think the thing that’s marked the industry in my mind over the last 10 years is the degree to which superannuation funds are now embracing the idea of having a member all the way through and then helping them through their retirement, and there’s been a number of sessions about it here. But it seems to me that it’s that post retirement phase which is the most problematic because not every fund is set up to handle it, not every fund has got the right product in place, the whole question of CIPRs is kind of a moveable feast. Nick, I’ll throw to you because I know you guys have done a lot of work on it.

NC:         Yeah, I think the conversation is changing. I was saying to someone here recently that when you talk about what the concept of the CIPR is that funds have to move towards and it’s clearly not one thing, it’s a component here, it’s an investment component, a longevity component, and the art in it is assembling that.

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I think five years ago if we had that sort of conversation at a fund level they’d say, “Hang on, we’re not product advisers, that’s not what we do. Whether we should be or not, that’s just not something that we’re equipped to think about.” I think now they’re sort of getting it, I think they’re realising this isn't something where they’re going to go and buy it off the shelf and plug it in and off they go, it’s something they’ve got to hone, they’ve got to tailor to their members, but that involves complexity, that involves understanding your members a bit better and also understanding what the product landscape looks like. 

I think funds are getting there, I think some of them are still struggling with that because it invites a whole new area that they have to spend time on and put people and resources to. But I think as members and assets are flowing towards that and funds don't want to lose that money or see it flow out, that’s creating the need. But we’ve still got a long way to go.

To your point on the government’s role, I think some funds are moving ahead regardless but there are a number who are saying, “We’re waiting for direction from the government.” So, the sooner that comes the better, not because the leading funds need that, but I think that middle bulk of funds probably needs a bit more certainty than they have at the moment. 

RW:        Can I say perhaps controversially that I think it’s somewhat disappointing that we are here years and years after we started looking at demography, demographic shifts, this is one area in the future we actually could see, after watching it for a long time.

We’ve talked about the gig economy and a whole lot of stuff that’s unknown, but we actually have known that members have been getting older for a long time, we’ve been talking about being mission-focused and member-centric, and now we find ourselves at a point where members right now still by and large don't have good retirement solutions, and some funds are still saying, “We’re waiting for direction from the government.” 

I would’ve thought that the better outcome is that we as an industry, I did say I was being controversial, but I would’ve thought that we as an industry could’ve got onto this sooner and actually self-determined outcomes for our members rather than waiting for the government to intervene because I always think that if you’re waiting for government direction on something like this then that’s the second best outcome at best. 

GB:         I think we’re working in a system that was built essentially in 1993 and most of them were in accumulation phase. I don't even know whether funds are fit for purpose actually to run retirement services. It’s not just about product solutions, it’s about how do you almost package advice and all those sorts of things into the product solution so the retirement service, the product is just part of it, it’s actually the services that are built around it to actually nurture people through.

Retirement is not just a chunk of 20 years, there’s various stages of retirement. There’s early retirement when you’re active and so on, late retirement and so on. And guiding people. It doesn't end on the day you retire and you just hand them an account-based pension and away you go, it’s all about how do you keep engaging those people through that and keep an eye on them and help them to say, “You need to make some adjustments along the way.” 

When we set up the financial planning business 10 years’ ago we started heading that way and we were driven by a big defined benefit cohort with high balances and so on, so we had a stake in it if you like, but the thing is there are many funds that have actually built that out for the post retirement phase.

I think the service model, it’s highly different for someone aged 65 plus than someone 25. So, it’s just something to think about. I can see a time when, actually, the super funds may split and possibly have the retirement – because once people retire too you’ve got to question whether the sole purpose test is indeed relevant or that overlay of the sole purpose test. If people can cash their money in sole purpose goes out the window. So, really, why should that apply? Maybe you should have a business that sits outside of there, the accumulation phase subject to a sole purpose test type structure and then post retirement, it becomes a different business. 

RW:        One thing I like about the idea of funds genuinely taking up the post-retirement solution challenge is I think the fiduciary model fits very well. I know that members are more engaged, and this might sound strange, but we know through life that retirement decisions are really, really complex and that’s where members actually need a lot of the help and there’s real damage that can be done if they’re making the wrong decisions. So that heritage we have of being fiduciaries is really important.

We know that as people get into that more frail stage there’s issues of capacity and competence, elder abuse and all of those things, and I actually think that it is a natural extension philosophically for funds to go into the post retirement space leveraging our fiduciary heritage, but I just think we have a long way to go to translate that heritage and that model to really good outcomes in retirement. 

ES:          I agree with all of that. 

[Laughter]

ES:          I think the thing that’s disappointing for me in the way that the government is talking about this is they’re really talking around products rather than frameworks or pathways or – not every fund will be able to have a retirement product for their members either because their members are too diverse and there’s not one possible solution for everybody, or they’re potentially a closed fund.

We’ve got 225 APRA funds around still and they all look completely different, and the demographics of the members in them look completely different, and the tipping point for having lots of people in retirement for some funds can be different too. 

Talking to Treasury they’re going, “We’re really disappointed that the industry isn't doing more and isn't mobilising because there’s all these overseas service providers that are ready to get in the market” and it’s like well it’s not about just buying a product off the shelf, it’s much bigger, and it is the fiduciary nature of that decision about what is right for our members. But it is moving -

NC:         Couple of points there if I may, the latest announcement in the advisory group that I’m sitting on does put forward the idea of a retirement covenant that they’ve called it, use the word framework if you like. So, that is picking up that point, and the really tricky area is how prescription versus let the market forces work, and it’s got to be somewhere in the middle of that for this to move ahead. But they are talking in terms of framework rather than product, so I think that does address your point. But I think there is a bigger point here and it really goes to what might seem the separate issue of consolidation and how many funds should there be. In one sense we talk as an industry about, “What’s super for?” It’s not to accumulate a big pot of money, it’s to actually look after people in their retirement. 

So is it legitimate to be a participant in this industry and to vacate that space and say, “No we don't really do that in the way that is regarded as the best practice.” There’s a case for saying, “Well no you don't have that choice. You want to enjoy the tax concessions from being in this industry, paying through to retirement not just up to the point of is actually part of the table stakes. So, unless you do that then you don't get to be in this club.” Now that’s pretty radical because it’s clearly not what is now, but that may be what the future looks like is that it’s not optional. 

BZ:          If you look at it through the lens of the person who’s about to make the biggest decision that they’ve ever had to make going into retirement, and sometimes you are looking at a pretty sizeable, relatively speaking, amount of money for somebody, we as an industry do not make that process easy for them.

If you can imagine yourself going into that phase, trying to work out whether you’re going to take the whole lot and blow it on your house or take your regular income stream and what are the tax implications and how does that interface with other incomes from other sources, that’s a pretty big time in somebody’s life and as I was saying we as an industry don't make it simple for people at that time either. 

It’s expensive to get that sort of advice at retirement, and that’s why there’s a whole challenge in this industry. But I kind of tend to agree with Nick, I think as an industry we could look at it to say we are all funds and prepared to play in the space of accumulation, we should actually have the responsibility of playing in the de-accumulation phase as well. 

AP:         I certainly agree this whole discussion about retirement income has been the death by discussion about product, and there’s actually a lot of stuff like we’re saying about the services and member education and advice, and we tend to I think sometimes in our industry when we’ve got these big issues to solve we just over-complicate them and then no one really knows what to do and so we back away and keep thinking and talking about it, and then government eventually does something. So, I think there’s always scope to look for the low-hanging fruit around these sort of issues, and actually do some clever things that make a meaningful difference to members. 

We’ve been sampling some campaigns to try and better inform our members and they’ve been targeted, the particular members who are in the category being older, and very simple brochures that explain the pension product and the guaranteed income account that we have. It’s been really interesting, even though our members you may think are more financially literate or capable of understanding concepts generally, they really struggled with the complexity of the product. We’re trying to really present it in a very easy to read clear way, but it’s quite challenging.

If people don't have confidence or they don't think they understand what you’re putting before them, they’re just not going to take it up, so there ends up being no action rather than some action.  So, communication is really important. 

NC:         Could I counter that? One of the discussions in this idea and the whole framework is the idea of defaults, and I think we all should use evidence-based decision making. The comment from the three international women speaking guests today on this sort of topic, one of the comments stood out for me, in the US, with resources far in excess of what we have here, they have spent 20 years trying to improve member understanding via communication and guess what, it hasn't worked.

I know a lot of industry doesn't agree with this, but a strong, well thought out default rather than this idea that you keep shovelling information and you give them 100-page PDS, that doesn't work let’s give them a one-page PDS, no that doesn't work. 

Just accept that what people might be after is you do the thinking. A bit of paternalism to use an ugly word, but this is the nature of the industry we’re dealing with. Toyota doesn't ask you how you’d like them to manufacture their car, “Do you want better engine there or there?”, they give you the car. So maybe we have to actually embrace that a bit more, and that is behind the CIPR idea is a little bit more, “Here’s one we prepared earlier, we think it’s probably right for you, few flags around the edges. Look if you’ve got $1m outside let us know that but if you are the sort of person we think you are with $400,000 in your account then this is probably okay.”

GB:         There’s a massive psychology that happens as people move into retirement and it’s all about their perception of what the fund is supposed to be doing. Forty-six per cent of our members consistently say they want the default product selection, they just don't want to think about it. So, there’s half your members. But the other thing is that we push them into – according to the young it’s almost a grudge purchase but at best it’s a passive purchase for most people and all of a sudden they hit retirement and all of a sudden it’s got to come active. You’re switching them from a thing that is set and forget into something where, “Gee, what do I do next?” It’s a massive psychological leap. It’s not just about retirement and that but the first thing they’ll say is, “You guys were supposed to look after that. The government put me in here so –

ES:          But isn't that nice in a way because that means they trust you.

GB:         That’s right.

RW:        And I want to raise the point we’re talking a lot about this era where there’s a decline of trust and suspicion about experts, and as an industry have a real stake in that discourse and how do we get the masses, the consumers, how do we get them to make sure they trust our industry and they trust our expertise, and that’s a broad societal problem at the moment this loss of trust and suspicion of expertise. 

GB:         And yet they’re taking their default product because they trust your expertise. 

NC:         At the other end of the lifecycle too, the reason that I’m passionate about the idea of a well thought out default is I think you mentioned earlier cognitive decline in your 80s. So, the idea that people are still capable of making - these decisions are complex anyhow and then you add on cognitive decline in the late 70s and 80s, you don't want them making decisions then, even those perhaps who could’ve a few years earlier or decades earlier.

So right along the spectrum I see the scope for really well thought out, you’ve got the trust, now what you need is the thinking through of what type of members do we have, what best fits them.  There’ll always be the outliers who are capable and need to have bespoke solutions, but the response really for the fund is to design something that really just works. 

GB:         I think the communication – when we did MyPension as a sort of a default product that was an interesting experience because we haven’t sold a lot of MyPension accounts but what it did do was build a narrative and people actually contacted us and said, “I want to do transition to retirement”; “I’m sorry, that’s not what this is for” but it ended up in the advice channel.

What you ended up with is people said, “I want to manage the investments a bit more myself”; “Well you need to look at something different.” So, a narrative around this stuff is really important because it’s creating that hook for people to get engaged. 

They may not end up buying the product that initially aroused their interest, but just to get the connect, call someone and suck them into that support channel, if that’s all a default product does then it’s achieved its objective. The measure is not how many accounts you open in that product, but it’s a measure of how many members you engage, retain and put onto the right solution for them.

BZ           We’ve done a lot of work on that well thought out default as well, and we’ve actually engaged the University of Melbourne in a research study to understand the psychology or thinking process that people go through when they’re actually making this decision.

My view is we don't understand really enough about how people actually engage to do that, because if you look at most funds, one of the biggest challenges they have is retaining those members at that critical point. So, they go to an account, they go to a financial advisor and they put them in some other product somewhere, and not that it’s necessarily right or wrong for somebody to stay in the fund they’ve been in in their accumulation phase, but what we’re trying to do is get the understanding of what’s driving the decisions at that point in time because I think we overcomplicate things. 

A well thought out default just means that that passive person can actually stay passive, and if the well thought out default is actually a reasonable solution then it’s actually not a bad outcome.