The development of new and innovative retirement income products has been plodding along in the background over the past few years, getting little of the media attention given to other superannuation issues.
Because of people living longer – a girl born today is likely to live to 84.3 years compared with 74.5 in 1970 – it’s important for people to make their super last longer. Most retirees with some super are in account-based pensions. People using these pensions are required to withdraw specified minimum amounts from their account balance each year. If you’re aged 65 to 74, that minimum is 5%. Of course, if your funds’ earnings are greater than this, your balance is not going to reduce!
Currently, if you run out of super, the state age pension is your ‘longevity risk product’.
However, these issues play in a different way from a government perspective. More people living longer means more tax concessions on the tax-free superannuation pensions, a more expensive age pension system to support, and an increasingly expensive health and aged care system.
The government has already pledged (but not yet legislated) to increase the eligibility age for the pension from 67 to 70, and has greatly tightened up the assets test for the age pension. This possibly leaves a few things on their list:
- Reduce the time between getting access to your super and being able to get the age pension (so you stay in the workforce and you don’t spend it all too soon).
- Link the age pension age to expected life expectancy.
- Encourage people to sign up for products that provide built in longevity protection.
The government is working on the last of these by proposing the introduction of a MyRetirement product (to be otherwise known by the ungainly name of CIPR – Comprehensive Income Product in retirement). Trouble is, these involve the use of annuities – and annuities have tended to be expensive, irreversible and inflexible.
Companies like Mercer and Challenger are extolling the virtues of their annuity products, and some super funds are releasing different types of hybrid products, but overall there doesn’t seem to be a big unmet demand for annuities.
The Financial System Inquiry (the Murray Inquiry) suggested that some form of CIPR should be the default retirement product but not all studies have endorsed this approach.
The Productivity Commission, for example, has recently come out and said a ‘MyRetirement’ default is not warranted. They concluded that the complex nature of individual and household financial circumstances means there is no single retirement product that can meet members’ needs.
Changing needs, work patterns and advice requirements also add to the complexity of this issue, and this author at least believes it would be a big mistake for the government to rush things or put mandated structures in place.
Funds are increasingly focused on improving the member experience for their retired and retiring members but it would be a mistake to think that the MyRetirement/CIPR framework is going to be delivering for funds anytime soon. Funds need to grasp the current challenge to provide better services for these members rather than waiting on the government to solve the problem for them.
Written by David Haynes