SEAN MCGING looks at how superannuation funds can best support and deliver for members journeying from the accumulation to retirement phase.
The introduction of the Retirement Income Covenant requiring trustees of super funds to develop a retirement income strategy for beneficiaries who are retired or are approaching retirement, has forced funds to comprehensively assess and take action to best support their members as they retire. In conjunction with the superannuation system continuing to mature, we are observing a shift in focus for super funds from the accumulation phase to the retirement phase.
Figures from the Federal Government’s 2021 Intergenerational Report project that larger proportions of Australians can expect to receive higher balances at retirement age in the future. But the ever present and increasingly critical question for members is ‘will it be enough?’
Derived from Treasury’s 2021 Intergenerational Report
The inexorable rise in importance of the retirement phase versus the accumulation phase is driven by these simple facts:
CommBank IQ’s recent report showed that people over 55 are continuing to increase their spend greater than the Consumer Price Index (CPI)—by 9 per cent to 13 per cent—while younger individuals are spending below CPI by 0 per cent to 6 per cent. This highlights that even in difficult times, retirees are willing to spend and broadly expect to earn significant income from their super to do that.
Many retirees, particularly the recent and soon-to-be retirees, have:
Super funds need to be able to maximise after-fees, after-tax (credits) investment returns to provide retirees with the best possible retirement withdrawal and income streams benefits. They also need to meet their retired members’ increasing retirement service expectations – across ease of access to information and funds, advice, and a range of benefit options to best fit their individual changing circumstances over time.
A key part of this is addressing the basic question many retirees ask themselves. How long will my super money last? This depends on:
Super funds need to be able to provide income streams that meet their retired members’ financial security and benefit their best financial interests. To do this, super funds need to find ways to reflect their members’ current and future financial circumstances reasonably accurately, which is difficult to near impossible in full, but needs to be attempted; acknowledging the limitations to help members to achieve their retirement needs.
The following tables present a SWOT analysis highlighting six critical areas and key considerations for a super fund to be successful in enhancing member outcomes in the retirement phase.
A retirement phase market that is growing at a rate greater than GDP and already pays $11bn in pensions every year.
Small funds have member loyalty and flexibility with outsourcing capability in a growing market.
Small funds – costs and regulatory pressures.
Scale for private unlisted assets and the capability to manage illiquidity.
Overseas mega fund managers or financial arms of tech players establishing or expanding in Australia.
Getting the right mix of longevity insurance and investment strategy.
Small funds will increasingly gain access to generic pension product designs from third parties.
Limited longevity expertise within funds.
Small funds – flexibility to innovate using third parties in fintech, regtech and funds management.
To improve embedding a true culture that prioritises members’ interests first in everything a super fund does.
To be strong in dealing with conflicts of interest for fund versus member.
Substantial industry good practice guidance.
The $3.5 trillion honey pot that is super naturally increases the risk of
(i) attracting fraudsters with sophisticated techniques to steal data and scam members, and
(ii) poor industry behaviour which conflicts with the best interests of members such as potentially misusing inside knowledge of impending unit price changes from revaluing unlisted assets.