Australia: Retirement income framework being developed
Source: Asia Insurance Review | Aug 2018
Further development of retirement income strategies will improve retirement income outcomes for superannuation fund members, said Rice Warner, an independent consultancy and research house in financial services, in a submission to the Department of Treasury regarding the Retirement Income Covenant Paper released by the government in May.
The government said that the retirement phase of the superannuation system is currently under-developed. The government is addressing this through the development of a retirement income framework.
The first stage is the introduction of a retirement income covenant which will codify the requirements and obligations for superannuation trustees to consider the retirement income needs of their members, expanding individuals’ choice of retirement income products and improving standards of living in retirement. In addition, last year, the government agreed to support the development of more efficient retirement income products which are called Comprehensive Income Products for Retirement (CIPRs).
However, Rice Warner said that it has identified several potential issues with the structure and implementation of the proposed CIPRs framework. These are:
- Given the complex nature of people’s personal financial circumstances, financial advice will need to be provided to offer a CIPR product under the proposed framework. This could make these products relatively more expensive which will reduce the take-up of these products.
- For CIPRs to succeed, they should be a component of a default retirement strategy.
- Trustees should not have to offer a CIPR product if there is no compulsion for the member to take it up.
- The proposed framework should not mandate the types of products required to provide longevity protection (for example, not every retiree will want constant income throughout retirement).
- The relatively short deadline for implementation could result in limited product innovation and limited opportunity for additional competition from new entrants.
Rice Warner also said that a feature of a CIPR is to pool the mortality of retirees to fund the benefits of those who live beyond life expectancy.
However, one reason why CIPRs have not been developed under normal market forces is the high long-term real rates of return earned under the Australian superannuation system, which has been a result of holding high levels of growth assets, including equities and unlisted assets which generate a further illiquidity risk premium.
Rice Warner added that modelling shows that emphasising the provision of income for life through longevity products sacrifices returns over a member’s retirement. It says that if the aim of the CIPRs framework is to increase income of retirees throughout their life and reduce the bequest they leave, there are ways to do this without necessarily precluding most (or even all) assets being invested in growth-orientated strategies via an account-based pension at various stages of retirement. A