Why we need a retirement income revolution

Superannuation fund members have been well served by low-cost default products, thanks to legislative oversight and competitive returns.

But once members switch to retirement phase, they find they are on their own and face the daunting task of choosing a suitable product.

Many retirees enter the drawdown phase with a sense of trepidation. They don't know how long their super will last or how they will cope with unexpected emergencies.

Nor do they know how to navigate the financial landscape ahead of them, riddled as it is with complexities.

From July 1, the federal government's Retirement Income Covenant (RIC) requires super funds to publish their retirement income strategies on their websites and outline how members can maximise their income, manage risks and have flexible access to their money.

Since the inception of compulsory super three decades ago, funds have focused primarily on the accumulation phase but now, as many of their members move into retirement, trustees will be required to pay more attention to this growing demographic.

The RIC provides funds with a checklist of what they should consider in product design, namely new pension and income stream products that address longevity risk (the risk of outliving your savings).

Alex Dunnin, executive director of research and compliance at research firm Rainmaker, which publishes Money, says 25% of assets held in super in 2021 were owned by retirees or those over 65.

"The amount has grown from just 20% six years ago to 25%. It's growing fast. It's only about 10% of accounts, but retirees have bigger balances, so they dominate funds under management.

"Some funds already have 40% of the money they run owned by retirees and should be massively into retirement right now and everything that the RIC is talking to them about," says Dunnin.

Over the next 20 years, about 40% of all super money will be owned by retirees, he says. "It means they've got to start running investments that deliver an income, not just grow their capital value.

"Currently, a lot of funds have had a heavy focus on accumulation members - on the younger, pre-retiring members."

Now there's a mix of young members, pre-retirees and those already in retirement.

"You then have to break down how you run your money. It's not just a single pool anymore. It means funds need to think about whether they invest differently, buy different assets, and whether they structure things differently."

Account-based pensions have served members well. They offer retirees the control, flexibility and transparency they need to manage life's unexpected twists and turns. And while they may worry that they might outlast their super, the age pension is there as a safety net.

Some argue, however, that a mix of products, including annuities, could maximise retirement incomes, particularly for those retirees referred to as middle Australia - those who don't qualify for the age pension but don't have a high super balance.

Super funds need to innovate

"If you look at annuities being sold through super funds, it's basically failed and there are fewer annuity providers. There's a proportion of retirement assets in those products, but it's small," says Dunnin. "People just don't like them."

According to the Australian Prudential Regulatory Authority 2021 super figures, annuity products accounted for just 3% of retiree assets.

"These products have been around for ages, but the fact is they haven't resonated, they've had very low cut-through," says Dunnin. "It should be a wake-up call. If we roll these things out again with a new brochure, are we expecting anything different?

"People don't like being locked in; that's why we have allocated pensions and account-based pensions. Maybe blending the two would be a better idea."

Funds will need to be more adaptive and innovative to create products to suit retirees and consider a role for annuities or similar products akin to a "retirement wage".

"The covenant might trigger smarter thinking on how we can enhance income products," says Dunnin.

When rolling over from MySuper into pension phase, members are often advised to use the fund's capital stable option.

But some funds are innovating on that front, says Dunnin. Equipsuper, for example, has a MyPension option.

He says not-for-profit funds think in terms of MySuper - simple, default diversified products.

"We're going to go down this road of default retirement products, but it's going to supercharged."

The RIC is likely to herald a wave of new, lower-cost, easier-to-understand, more useful products, he says.

"The thing now is when you retire, it's such a complicated decision. If we can come up with a simple, all-purpose arrangement - a MySuper retirement equivalent - that's the key to this whole thing.

"The revolution in super we've seen for accumulation members - low fees, high performance, simple products, directly accessible products - is now coming to the retirement space."

Transitioning to retirement

UniSuper's Danielle Murrie, chief marketing and growth officer, says her fund is a longstanding industry leader in providing retirement income solutions.

"Our genesis as a defined benefit fund means we have a deeper understanding of the use and construction of different income streams to support members' spending in retirement.

"We already offer a market-leading account-based pension, alongside lifetime income products. We guide members through a comprehensive and ongoing program of engagement and education in the lead-up to retirement."

UniSuper is one of Australia's largest funds and often appears in top-performing league tables. It offers its members webinars, events, roadshows and three levels of financial advice programs: comprehensive, limited and general advice.

Murrie says these services play an important role in helping to support their members' journey into the retirement phase of life.

"Any life-stage transition is an uncertain time. We make sure that we support our members in that retirement transition to feel confident that their plans are in place to enjoy this next stage of life.

"It's true that members engage more with their super as they move closer to retirement, particularly at that key point when they switch from saving for their retirement to spending their life savings.

"We progressively increase connection with members as they approach this point.

"As a large fund, UniSuper can increase resourcing as required to meet peaks in demands from members. We also have a physical presence at universities around Australia to support our members from higher education and research in their workplace along with member centres in major cities."

Murrie says UniSuper is well placed to meet the RIC requirements using existing products and services. It will continue to monitor the products and services it has. "We expect this analysis to increase the degree of guided support we provide to be customised to what we know about the individual and the support they seek."

Super funds are also increasingly looking at exploring robo advice as a way of increasing member engagement and offering simple guidance for common questions, such as a member's appetite for risk. This would not be a replacement for the face-to-face advice they provide.

The RIC requires funds to build on their understanding of their members who are approaching or are in retirement. This is where data analysis is key.

AustralianSuper, the country's largest fund, which manages $261 billion in retirement savings, has undertaken a detailed member data analysis.

Its members have a broad range of needs, account balances and life stages spanning the age 50-plus membership base (accumulation and retirement).

"As such, differentiating the strategy for the variety of life stages and needs of members is key," says Shawn Blackmore, AustralianSuper's group executive, membership experience.

He says the fund is committed to the continued assessment, development and evolution of its retirement income strategy and associated action plan, to ensure members achieve their best financial position and outcome in retirement.

"The monitoring and implementation of the RIC is being embedded within our business planning, product and service development, and governance frameworks with the expectation that performance insights will assist in the continued refinement of the fund's retirement proposition and member offer."

Different circumstances

National Seniors Australia has found that older people value stable and secure income, and products like defined benefit schemes that reduce worry in retirement. However, it does not support legislation that compels or encourages retirees to adopt specific products if they are not in their best interests.

"Trustees need to be careful to ensure members' different circumstances are fully understood when formulating a retirement income strategy," says Brendon Radford, manager policy and advocacy.

He says trustees should be required to support members unable to pay for complex advice to help them make informed choices about their retirement income options.

"While retirees who can afford personal financial advice will be able to tailor their income strategies to their needs, there are many that cannot because they have limited super balances, particularly women. More attention must also be paid to simplifying the retirement income system and to improving the financial literacy of older Australians."

He says that the government should also ensure independent and trustworthy online tools are available to enable retirees to compare retirement income products and options.

'Three buckets' makes it last longer

Equipsuper has taken an innovative approach to its MyPension retirement product. It aims to take the guesswork out of retirement and allow members to plan ahead with confidence.

The fund helps members figure out how much income they'll have in retirement and how long it might last.

MyPension provides retirees with a regular income, while simultaneously looking after their investments and helping them make their savings last longer.

Based on a three-bucket strategy commonly used by financial planners, MyPension automatically rebalances these investments each year, allowing members to "set and forget" their retirement income.

Their super is separated into three investment buckets:

• Cash (21%) - for regular payments, usually comprising three years of income.
• Conservative (39.5%) - investments in low-risk categories, including cash and bonds.
• Growth (39.5%) - investments that are designed to grow your savings but are subject to short-term fluctuations.

When investment markets are good, any earnings in the conservative and growth buckets go into the cash bucket, to lock in your gains.

"We automatically do this for you every April, so you don't have to think about it," says Equipsuper.

"If markets experience a downturn, we'll leave any buckets that lose value untouched at the end of the year, to allow them to recoup losses in future years.

"Regardless of where markets are headed, you remain in control of your money, as you can make partial or full withdrawals at any time, and leave any remaining benefit to your dependent."

Equipsuper says you can choose your annual income (within legislated minimum limits) and how often you want to be paid.

"Our research shows that Equip MyPension works well when you take out 7% (or less) of the initial account balance as income per annum.

"You can draw down lump sum payments in addition to your regular income and, if you do, those drawdowns will be from your conservative and growth buckets, leaving your cash investments unchanged."

One-stop shop would reduce complexity

Xavier O'Halloran, director of Super Consumers, an advocacy organisation, says the industry has been focused on building up people's nest egg for retirement, but hasn't been doing enough to help them make the most of this money as an income for retirement.

"The Retirement Income Covenant is a good thing, as it will make super funds think about how best to serve their members in retirement. Funds will be required to collect data on their members' needs and draw on this information to design more appropriate products and develop strategies to help people maximise their retirement income."

However, super funds don't have a good track record in making simple, high-quality products that are easy for people to understand, he says.

"Currently, there are tens of thousands of products in the market, but many are high on marketing but low on value.

As things stand, people will need access to quality, affordable advice if they are going to navigate all of this complexity.

"We want to see people better supported through the retirement planning process so they can make the most of their retirement incomes.

"People are still struggling with the complexity of planning for retirement. They need greater assistance in the form of advice, basic product design and guidance if they are to meet this challenge.

"To address this unmet need, we're calling for the government to bring together and improve all of the guidance spread across many government service providers into a one-stop shop to make it easier to plan for retirement."

O'Halloran says other jurisdictions, such as the UK, have helped people by developing such a one-stop shop for retirement advice. "This innovation would bring together and build on the scattered resources Australian consumers must rely on to plan for retirement.

"As the quality of advice review continues, the new parliament has an opportunity to reflect on what people need to help plan for retirement. We need to be looking at solutions that make sure everyone can get a good outcome from the retirement system regardless of wealth or level of financial knowledge," he says.

He offers the following tips for those entering retirement:

• When thinking about how much you'll need in retirement, look at what you currently spend and remove major costs you may not have once you retire, like your mortgage.
• A rule-of-thumb for middle income earners is that they will require 70% of their working life income to maintain their standard of living in retirement.
• Use the federal government's MoneySmart retirement planner. "This tool calculates how much income you're likely to receive in retirement from both your super and the age pension. It is an easy way to see your sources of income in one place."

O'Halloran says comparing retirement products is much harder. "Look at the basics like fees, long-term performance and how the product will help you deal with risks, like running out of savings early.

"Some products, often referred to as annuities, will pay you a set income for life, so you can maintain your standard of living through retirement."

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