Retirement won’t wait

The Federal Government has announced that it will delay the implementation of the Retirement Income Framework (RIF) and Comprehensive Income Products for Retirement (CIPR) legislation.

Practically speaking this means that superannuation funds will not be required to offer a CIPR product as of July 2020 but instead will be given time until July 2022.  However, by July 2020 funds will be required to create a framework for ensuring that the needs of their retiring membership are addressed both now, and into the future.

Despite the extension, retirement won’t wait.

Over the next decade those Baby Boomers still in the workforce will retire.  At this point members will either withdraw their superannuation assets or transfer into the retirement phase. This oncoming shift is depicted in Graph 1 which shows the number of superannuation accounts held by individuals above the age of 50 at 30 June 2017. Over the next decade 2.8 million accumulation accounts will potentially move to the retirement phase. Rice Warner projections indicate that, despite the expected drawdowns in retirement, this will drive growth of 35% in the asset base supporting retirement accounts in the next decade.

Graph 1.            Superannuation Accounts (‘000)

If funds do not orient their value proposition towards the needs of retiring members, they will look elsewhere.  Becoming a fund-for-life through providing a high-quality retirement product will be critical, particularly in the context of increasingly stringent scale and member outcomes requirements.

Modelling included in Rice Warner’s newly released Retirement solutions: Meeting the needs of Australian retirees report shows that there is room to improve member outcomes by supplementing Account Based Pension (ABP) products, especially for longer lived individuals.  Table 1, an extract from the report shows that while the incumbent ABP products perform well on overall payback they:

• Provide less expected income to the actual superannuant than other alternatives (due to their potential bequest focus).
• Provide poor outcomes for long lived individuals (such as those who live to age 100).

Table 1.              Lifetime benefits received by medium wealth individuals across combinations of products

Fortunately, it is the retiring members choosing from the potential array of retirement products members who are most engaged and most likely to be receptive to innovation. This is supported by Rice Warner’s Super Insights research which shows that members close to retirement (aged 60 or above) are:

• Approximately two to three times more likely to move fund than members 20 years their junior.
• Twice as likely as other members to elect a choice investment rather than the default option.
• Four times more likely to contribute to superannuation over and above the Superannuation Guarantee.

In leveraging this engagement, it is worth noting that product design can be highly successful in attracting fund flows. This is particularly evident in the $1 billion of fund inflows to HOSTPLUS’s Index Investment following an endorsement from Scott Pape that spoke directly to the product’s low  fees.

Many funds have already identified the importance of product design and have begun offering products which meet the needs of these retiring Australians. These products have typically expanded upon the leading incumbent design of the Account-Based Pension, with the aim to improve the outcomes or change the trade-offs, through alternative investment models such as:

• Retiree-specific investment options which aim to reduce volatility, ensure stability of returns and enhance the income that can be withdrawn without unnecessarily selling capital.
• Downside protection investments which provide an allocation to growth assets whilst guaranteeing a level of capital or guaranteed income stream to investors in return for a fee.
• Basic group self-annuitisation products which provide cash flows through drawing from a pooled fund contributed by investors with a mind to share longevity risk.

While these products have been well intentioned, in many cases they have failed to garner significant investment from retiring members.  More investment in product design is needed to find the winning formula that improves product balance between flexibility, investments, longevity protection and consumer behavioural factors.

Despite the respite from Government, the need to develop quality retirement products has never been greater. Forward thinking funds are already looking to push the boundaries of product development with a strategy to become a fund-for-life.  Funds who miss the first-mover or fast-follower advantage, will likely lag the rest of the industry and become tomorrow’s takeover targets.