Australia’s define contribution superannuation system asks individuals to manage financial risks beyond their capability. Australians have shown a great reluctance to pay for financial advice and the revelations at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry would appear to make that prospect even less likely in the near term.
Regardless of the government’s eventual response to the royal commission, the case for a consumer-centric approach to meeting Australia’s retirement income challenge is strengthened. Individuals who have been in default funds all their working lives cannot be expected to navigate the complex choices they suddenly face in the next stage of their lives.
We need our fully funded contributions based superannuation system to deliver outcomes akin to defined benefits. That is the purpose of the government’s new retirement income framework, as announced in the 2018 Federal Budget.
Whether default super has served consumers well to this point is an interesting debate, but the real question is whether it will serve them well in the future. Given the rising numbers entering retirement and the diversity of their needs relative to the accumulation phase, a one-size-fits-all default will not work.
Giving people a laundry list of options only confuses them. But taking these decisions completely out of their hands risks further stifling engagement and leaves them open to being exploited. A balance is required.
In this context, fund performance is not just about delivering high investment returns, it is also about how well funds guide people to make smart decisions, particularly as they approach retirement. Empowering consumers does not require turning them into financial experts. It means giving them practical tools, meaningful choices and appropriate nudges.
While there are complex issues to resolve, they are not insurmountable if we tackle the following areas:
- Reducing complexity: We must de-clutter the system, standardise options and simplify the interaction between super and the age pension. Offering individuals meaningful choices encourages them to consider options actively and makes them more receptive to being engaged.
- Clearer communication: Focus on practical retirement outcomes, instead of on the technicalities of getting there. Better quality, independent, targeted communication can help individuals take charge of their retirement planning. Showing individuals their projected retirement income changes the framing and helps them focus on the result.
- Understanding the consumer: Generate a richer understanding of individual and household circumstances and preferences by leveraging consumer transaction data and sophisticated data science.
- Product innovation: Introduce pooled lifetime income streams to help retirees manage the risk of outliving their savings. The Federal Budget announcement of means testing rules represents a critical first step. Working with behavioural biases: Research commissioned by Choice and Financial Literacy Australia shows that consumers do not want more information, they want to be shown what to do. Smart defaults in retirement that work with human inertia and artificial intelligence decision support tools offer scope to guide individuals towards better outcomes. Already, new players like Grow Super are employing digital design and the positive reinforcement used in the nudge concept to help people make betterinformed decisions.
- Effective safeguards: Given the stickiness of defaults and the diversity of consumer needs and preferences, safeguards are needed to ensure that nudges are designed in the best interests of consumers and mitigate the risk of mis-selling.
- Improved benchmarks: Recognise the limitations of investment returns and track performance across wider criteria. A new Committee for Sustainable Retirement Incomes Sustainable Retirement Income Index will help shift attention to broader consumer needs and outcomes.
- Integrated view of retirement: The separation of policy for the accumulation and retirement phases stifles the industry’s ability to ensure individuals a smooth transition to retirement. The Productivity Commission should shift the focus from employers to members and include post-retirement planning within the scope of any alternative default model.
For the nation, these changes would represent a substantial, long-term investment in making our market work more effectively, making our retirement income system more sustainable and making the lives of millions of Australians better.
Patricia Pascuzzo is the founder and executive director of the Committee for Sustainable Retirement Incomes.