Treasury consults on the retirement phase of superannuation

Challenges identified

The Paper discusses the complex decisions that retirees currently face when planning their retirement income. These include decisions about how best to draw down their savings over time to manage costs such as health, aged care and leisure, while at the same time being prepared for unknown expenses they might incur. The Paper also points to the complexity of the retirement income products and annuities that are currently available as a further complicating factor in this decision making process. 

The Paper goes on to recognise issues in how Australian retirees perceive their superannuation income. While the recently proposed objective of superannuation⁵ will make it clear that the Government's objective for super is to deliver income for retirement, many retirees see their superannuation balance as a 'nest egg' to be held as capital, from which only the minimum amounts should be withdrawn. The reasons for this, the Paper says, are varied but can include members not having the right access to advice, 'choice overload' when considering the amount to be withdrawn or concerns about running out of savings. It could also have mentioned the desire of many retirees to leave part of their superannuation savings to their dependants.

Potential policy responses

The Paper seeks feedback on the following proposals in this context:

• Further guidance, education and communication with retirees: the Paper proposes a broad range of ideas for further guidance to retirees, such as basic factual information, education, or materials being produced and distributed by government, the government providing free and impartial guidance for retirees in or approaching retirement, and requiring funds to provide general information about both phases of superannuation and the objective of superannuation when onboarding members. Given it is well known that more disclosure (which is what much of this material will be) is of limited use in informing consumer decision making, it may be right to be sceptical about the effectiveness of these measures.
• Requiring funds to assist and default members to 'better settings': Armed with the necessary analysis of their members (to assess member outcomes under the retirement income covenant), the Paper proposes that trustees could be required to 'nudge' members towards retirement income settings that better suit their circumstances. These settings could include a range of features or products, such as ‘default’ drawdown rates, investment strategies and/or longevity products. However, trustees have found it hard to convince themselves that they will be able to comply with their duties in putting members into retirement products by default. The Paper also puts forward the idea of a rework of the minimum drawdown framework for retirement income streams (eg to revise minimum drawdown rates or to clarify that the minimum rates do not amount to a recommendation). While increasing the minimum drawdown rate will naturally increase pension payments, it is doubtful that merely stating that the drawdown rate is not a recommendation would do anything to change behaviour.
• Navigating the retirement income system: the Paper suggests that more could be done to bring together the three pillars of the retirement income system – the Age Pension, superannuation, and savings and investments outside of superannuation. Ideas in this respect include (with appropriate changes to policy settings to facilitate them) the provision of information by trustees on how these streams might interact and change across the period of a member's retirement, funds prompting or assisting members to apply for the Age Pension and improved data sharing between government and superannuation funds to enable both parties to have a better understanding of members' holistic circumstances. Again, to the extent this involves merely more disclosure to members, it is doubtful that it will have any effect, and requiring trustees to assist members to apply for the Age Pension goes beyond the usual role of a trustee and the purpose of superannuation.

Challenges identified

The Paper points to longstanding evidence that products and services in the retirement phase could be more accessible and better suited to retirees’ needs but notes that, despite this, there have been minimal successful policy reforms relating to the retirement phase.

Of the proposals since the Murray Inquiry in 2014, only the innovative income stream and retirement income covenant reforms went ahead (in 2017 and 2022 respectively), with proposals for comprehensive income products in retirement ('CIPRs') and standardised metrics for retirement income product disclosure failing to make the grade. Of the successful reforms, Treasury notes that there have been only a 'small number' of innovative income stream products developed and again highlights that the recent APRA and ASIC thematic review identified a number of shortcomings in how trustees are approaching their retirement income covenant obligations.

Potential policy responses

Treasury thinks it is clear that there is work to be done for funds to assist members in making the most of their superannuation in retirement. While advice reforms will go some way to assisting with members' retirement objectives, that advice has its limits if retirement income products are not available to meet members’ needs.

Noting this, the Paper includes the following potential policy responses:

• Standardised product disclosure framework: building on previous calls for a standardised framework for retirement phase products, Treasury suggests trustees could be required to publish simple consumer-focussed disclosure documentation on the retirement income products offered within the fund. Although Treasury acknowledges the challenges this would pose compared to disclosure in the accumulation phase, the Paper discusses requiring trustees to provide information about the characteristics of retirement products (such as expected income, fees and death benefits attached to the product), performance characteristics (such as investment performance and pricing), and a regular assessment of how trustees fulfil their covenant obligations (to enable consumers to be better informed as to the quality of the products and services offered within the relevant fund). Other ideas in this context also include the introduction of a standard risk measure that could assess the relative risk of retirement income products to a fall in income from year to year or the development of scorecard approaches that demonstrate how products balance the three retirement income covenant objectives (or other metrics).
• Tools for comparison and performance: pointing to the YourSuper comparison tool and the performance test, Treasury suggests that similar tools for the retirement phase could be developed. In putting forward this idea, Treasury is alive to the fact that proposals of this kind would rely on better disclosure practices being in place (see above) and that any performance test should not hamper product design.
• Regulatory barriers: without identifying any specific areas of concern, the Paper suggests that reforms could be made to the existing regulation of retirement income products to ensure regulatory settings are fit for purpose, do not impede innovation, and maintain equitable social security and taxation treatment. We expect that Treasury has in mind issues that were identified by the Productivity Commission in the Retirement Income Review, including the administrative processes involved in purchasing a retirement income product, the required commutation of the ‘retirement phase’ product back to the pre-retirement (or accumulation) phase before it can be switched to a new product and the complexity of different pre and post-retirement tax arrangements, but there are likely to be a number of other changes to the regulatory framework which would benefit trustees and members alike.

Challenges identified

The Paper highlights the small market for lifetime income products in Australia and the low uptake of annuities. Noting the risks to the stability and sustainability of retirement income which these kinds of products can address (including investment and sequencing risk, inflation risk and longevity risk), the Paper suggests that prohibitive development costs, limited incentives and the risk of expensive legacy products in future each present a barrier to the willingness of trustees and life insurers to do more to develop new products. Barriers to take-up by retirees include the risk of 'wasting' savings in the event of an early death, difficulties in comparing retirement income products, the lack of flexibility once the product is purchased and 'counterparty risk' on the part of the fund or insurer. 

Potential policy responses

These barriers, Treasury say, raise the question of whether funds will be able to act rapidly enough to provide the necessary services and products for members in retirement in light of Australia’s ageing population. Because of this, potential policy responses include:

• Support for better longevity pricing: the Paper suggests that the Government could potentially support the reinsurance of longevity risk to ensure insurance is available to Australians at a reasonable price. This could involve facilitating funds to pool risk within retirement products or by the Government directly intervening in the pricing of longevity risk through reinsurance or the selling of longevity bonds that allows providers to manage their financial risk in offering these products.
• Standardised products: similar to the MySuper product for the accumulation phase, Treasury suggests that trustees could be required to develop at least one standardised retirement product which meets framework attributes and must be provided as a 'first offer’ to members. Features of a standardised product might include a longevity protection component (for example a deferred guaranteed income stream that commences later in life), a forward-planned income stream that accounts for the member’s preferences (eg a stable income over retirement or a higher income initially) and an investment allocation that adjusts the investment risk for the member’s stage in retirement. Ultimately, the desired features of the standardised retirement income product would be to balance the flexibility of account-based pensions and the risk management features of annuities and to provide a high income. It is not the first time that the idea of changes to policy settings to support innovative retirement income products has been thrown into the ring. Most recently, in late 2021, APRA stated it was closely collaborating with ASIC, Treasury and the ATO on product innovation, but so far this has remained on the 'watch this space' list.