Australia: Advice – better than any product
The Australian superannuation system is on the verge of creating cutting-edge income drawdown products. But many leading funds contend that advances in online advice will have a greater impact on outcomes. David Rowley reports
At a glance
• Despite the widespread admiration for Australia’s superannuation scheme its post-retirement time has, so far, been an afterthought.
• New tax rules could pave the way for new soft-compulsion retirement products from the summer.
• Members will be able to switch schemes at the point of retirement.
• Regular annuities have few fans.
Australia is widely admired for a compulsory superannuation system that has helped create the fourth-largest pool of retirement assets in the world. But admiration is almost entirely focused on its accumulation system; its post-retirement system has, so far, been an afterthought.
This could change from July when tax rules will make it attractive for insurers and super funds to offer deferred annuities and group self-annuity products. The intention is to pave the way for soft-compulsion retirement products that combine an insured income with an income drawdown from on-going investment.
The government contends that Australians do not optimise their retirement savings. It calculates that these products, which it proposes branding as ‘myretirement’, will offer a flexible mix of insured income and income drawdown that would offer from 15% to 30% more. This will be achieved by avoiding the poor decision-making by individuals who either spend too much too soon, or are overly cautious in how much they drawdown.
The government is proposing to give superannuation trustees a safe harbour whereby, as long as most members get the best outcome, no individual member can sue them for a sub-optimal outcome. Schemes are also not forced to offer such products and members are not forced to take them, but most are expected to be offered on a soft-compulsion basis.
One of the ingenious parts of the idea, is that the open-offer nature of superannuation will mean members can switch schemes at the point of retirement. It is hoped that the relative success of each product will be publicly tracked, so that individuals can choose the most successful one. The government expects the first products to launch in early 2018.
Jeremy Cooper, chairman of retirement income at annuity provider Challenger, sums up the views of many in Australia when he says: “If we get these reforms right, we really will be leading the world in transitioning a defined contribution retirement saving framework into a retirement income-centric one.”
The story might well end there, if not for the fact that the largest schemes recognise that there is a higher level of optimisation that can be achieved in providing advice.
This is the view of State Plus, the advice arm of First State Super, a superannuation fund for public sector employees of New South Wales. It has spent the past three years investing in a move to a paperless multi-channel system with the largest number of fully qualified advisers of any fund in Australia.
“The risk of outliving one’s retirement assets is based on a number of key variables that include life expectancy, the level of drawdown, asset allocation and the magnitude of returns,” says Graeme Arnott, chief executive officer at StatePlus. “Retirees need to consider their household resources, including the spouse’s money and employment status, their housing situation, and the need for access to capital, health and longevity.”
State Plus also plans to overcome the oft-mentioned obstacle to advice – that it is too expensive and that there are not enough advisers to meet all retirees. “Research tells us that clients want to first meet with a financial planner face-to-face to establish trust, but afterwards they’re happy to be serviced in other ways, including digital channels,” says Arnott.
State Plus is built around the idea that the bigger it is, the better the economies of scale it will have and the more attractive it will be to other schemes. It is so confident of this model that it has spoken of its interest in expanding outside the Australian market.
Another super fund which is also aiming to be best in class at advice for its retirees is UniSuper. It has yet to launch its own myretirement product, but it already knows that it will be called FlexiChoice and that it will give members the opportunity to dial up or down the income they receive. The design reflects the work done by the fund’s former head of research, David Schneider, who together with two actuaries from Towers Watson (Jeffrey Chee and Paul Newfield) built a computer program capable of optimising an individual’s retirement income.
The program, which is capable of carrying out billions of calculations, works out the optimal investment strategies on a range of income scenarios together with details of a member’s health, risk appetite, gender and age of retirement.
If a super fund creates a good retirement product, one might assume that running an advice operation as well is superfluous. However, for many funds it could be a life or death proposition on whether they retain members or not.
Kirby Rappell, research manager at SuperRatings, a firm that measures the performance of individual super funds notes that where advice is most widely offered, members are more likely to take a pension product than take their savings as a cash lump sum.
“The approach we are seeing progressing best is where a fund is uplifting its advice capabilities to offer tailored advice to clients around strategy. This then makes the product solution a secondary consideration.”
That not all funds will be able to offer competitive advice propositions is confirmed by David Carruthers, head of member solutions group at Frontier Advisors, one of the leading consultants in Australia: “Many funds are yet to solve the puzzle of how to provide advice cost-effectively. Some sort of robo solution will be part of the answer, especially for the funds with larger, often geographically spread memberships,” he says. “However, a number of other funds are doing a good job meeting the majority of their retiring members face-to-face. Perhaps it is in this area where a benefit of having more compact memberships actually presents opportunity for the smaller funds over their larger rivals.”
So what of the products? While there is not a single person in the superannuation system with a bad word to say about deferred annuities which might be triggered at age 80 once one’s super has run out, there are few fans of regular annuities.
Michael Rice, managing director at Rice Warner, and one of the most prominent actuaries in Australia, has not endeared himself to annuity providers by pointing out that a well-designed ‘bucket’ system offers much of the security of an annuity and should provide a greater income too.
Under such a system (designed, of course, by actuaries such as RiceWarner), the member’s account holds a cash account to pay a pension, which is topped up by dividends and interest payments on assets held in a regular investment growth account. He sees the higher income offered by such products as offering far greater appeal than one that contains a measure of insurance.
“The majority of members still buy account-based pensions and we expect that to continue,” he says.