As the superannuation industry continues to reach maturity, average retirement balances continue to grow. This, combined with an ageing population, in particular baby boomers entering retirement, is causing significant growth in the size of assets held within the retirement phase across the industry.

Figure 1: Projected cashflows into retirement

Source: Rice Warner Superannuation Market Projections 2020

It appears as though the Retirement Income Covenant will require superannuation funds to provide a retirement income strategy specifically for these members who are retired or approaching retirement helping them to both achieve and balance the following objectives:

• Maximise their retirement income, inclusive of Age Pension and any other relevant income support payments.
• Manage risks to the sustainability and stability of their income.
• Have some flexible access to savings during retirement.

The offer of innovative retirement income products is expected to form an integral part of an effective retirement income strategy for a number of member cohorts. This is good for members, but there are complexities associated with retirement income solutions that potentially present challenges for trustees seeking to fulfil their obligations under the covenant. In particular, the design and operation of retirement income products are sufficiently more complex than those of accumulation products to warrant a different approach. For many funds, this will require a transformation from their traditional retirement income product offerings because current offers typically do not implement structures to effectively mitigate sequencing and longevity risk for a number of member cohorts, and simply rely on an account-based pension for all members in generality.

Increased balances, more complex retirement income products, and the interaction between superannuation, the tax system and the Age Pension, suggest that members will require increased guidance from trustees to navigate their personal situation. The cost of obtaining full comprehensive advice is too high for most members under the current regime, not to mention the lack of trust currently plaguing the industry since the Hayne Royal Commission.  All these factors have prompted moves to reform the delivery of affordable and accessible financial advice. The Financial Services Council (FSC) and others have been undertaking further analysis and review of operating models, but future changes remain unknown at this stage.

It is clear from these developments, however, that because many retiring members require increased guidance whilst being unable to afford full comprehensive advice, scaled advice in some form will be needed. The retirement income system is complex, but much can be done to simplify the choices for the bulk of members. Where a certain level of complexity is inevitably involved, the intelligent use of technology can support many members to understand and navigate the system with the aid of data analytics and intuitive visualisations.  

Below $200k

These members are unlikely to benefit from annuitisation, instead relying on the Age Pension for longevity protection. They are defaulted to an allocation of 100% account-based pension (with an appropriate default asset allocation).

Between $200k and $1 million

These members would likely benefit from some form of annuity for longevity projection in retirement to supplement the Age Pension to insure against longevity risk and poor market returns on their account-based pension. They are defaulted to an allocation of 75% account-based pension and 25% immediate lifetime annuity.

Greater than $1 million

Members with balances this high are unlikely to benefit as much from annuitisation, as they can self-insure a significant part of the risk and will be considering bequests. They will also likely have access to full comprehensive advice. They are therefore defaulted to an allocation of 100% account-based pension.

Even though the retirement income strategies for each cohort are different, the products required to facilitate the implementation of the strategies are the same. Likewise, the scaled advice or digital guidance provides to all three cohorts can be the same, with the ability to vary the annuitisation amounts (ands types), but using the default allocation as an anchor.

Figure 2: Projected members retiring each year by retirement balance

Source: Rice Warner Superannuation Market Projections 2020

Of course, there are further factors that should be considered in the customisation of retirement income products. The Retirement Income Covenant position paper identifies the following as potential factors to consider when defining cohorts:

• superannuation balance
• home ownership status, including mortgage position
• whether the member is single or partnered
• retirement age
• Age Pension entitlements

If these factors were added to the previous example, the default annuity allocation for the middle cohort could be set algorithmically by the fund. The algorithm may be complex, but the product mix remains simple. Additionally, the increasing capability of modern technology readily supports the development of interactive tools that can provide these extra dimensions to online advice. The advice can also be easily delivered via all modern platforms to improve engagement with existing members and potentially win new ones.

In our example, we considered only two simple product “building blocks”, an account-based pension and an immediate lifetime annuity.  However, there are already a range of other features being developed including annuities and pooled longevity products that are investment linked and that incorporate payment deferral periods. These features can be readily incorporated into a digital advice solution.  

By offering digital advice solutions that incorporate simple product "building blocks", providers can efficiently cater to multiple niche cohorts of their membership. At an industry level, this approach can also bring down the marginal costs for funds associated with the development and maintenance of retirement income solutions and associated guidance. It will also help with the migration of retirement income products to acquiring funds in a merger transaction, and reduce the incidence of legacy products, which is a very real risk in such an innovation-charged environment.