Few retirees fit the stereotypical image of the silver-haired, yet impossibly youthful, cashmere-clad couple strolling hand in hand along a windswept beach. Similarly, most older Australians approaching retirement might find it hard to relate to some of the thinking behind the government’s recently revealed retirement incomes framework.
As outlined in the May Federal Budget and confirmed a few days later in Treasury’s Retirement Income Position Paper, the government plans to introduce a new Superannuation Industry Supervision covenant that will require super fund trustees to offer members a flagship CIPR (Comprehensive Income Product for Retirement) with built-in longevity income protection.
While longevity protection is needed for retirees, we are very concerned about the government’s focus on a one size-fits-all retirement product offering, which largely ignores the role of the age pension.
The super balances of most older Australians approaching retirement are still low.
Most older workers did not receive super in their early working life and it was only in their last decade of employment that the super guarantee reached 9 per cent.
AIST estimates that median super balances of Australians aged between 60 and 64 – which give us a good picture of the distribution of super across older workers – could be as low as $37,000 for women and $114,000 for men.
The government itself has acknowledged that a CIPR would have limited benefit to someone with a very low superannuation balance and that the age pension would provide such individuals sufficient longevity protection.
Its position paper also notes that for low-balance members, “costs associated with the administration of the CIPR and the need for flexibility may outweigh the additional income benefits the CIPR could deliver.” Under the proposed retirement income framework, trustees would not have to offer CIPRs to members with balances of less than $50,000. AIST believes this threshold is far too low.
In 2015, AIST commissioned the Australian Centre of Financial Studies to model a range of retirement income scenarios for members with balances from $100,000 through $500,000.
The findings suggested that retirees with balances of $250,000 or less would be better off investing in an account-based pension, as opposed to either an annuity or a combination of both products.
In one scenario, the retiree was nearly $70,000 better off after 25 years in retirement when choosing an account-based pension. Account-based pensions provide the greatest flexibility for access to capital, which will be crucial for many seeking to meet health or aged-care costs. Retirement spending patterns are not smooth.
Add to this a probable hike in advertising spending by commercial providers of annuity products following the recent budget move to treat annuities more favorably under the age pension asset test, and we can expect more retirees to opt for retirement products with longevity protection, regardless of whether this is their best course of action.
Research Alliance Bernstein commissioned in 2010 on the product decisions of retirees found that most acted more by default than considered choice.
The researchers noted that, at retirement, individuals had “a propensity to accept whatever is put in front of them”. This is particularly worrying for low-balance members who can’t pay for comprehensive financial advice. Like insurance, products offering longevity protection tend to be complex, opaque and difficult to exit.
Forcing trustees to offer a flagship CIPR raises questions about their fiduciary responsibility to act in the best interests of all members.
At the very least, many trustees will be in the unacceptable position of having to promote a flagship retirement product that they don’t think is appropriate for a large swag of their membership.
The plan to require funds to have a flagship CIPR makes that product, in effect, the fund’s default retirement income product.
The biggest problem with the government’s retirement income product framework is in its timing. A decade or two from now, when our super system is more mature and super balances are significantly higher, there may be benefit in funds offering a flagship retirement product with longevity protection.
In the meantime, a great many retirees could end up in expensive products that are not in their best interests.
Eva Scheerlinck is the chief executive of the Australian Institute of Superannuation Trustees (AIST).