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Funds ditch romance, confront reality on retirement

With the advent of the Retirement Income Covenant (RIC), super funds can finally move forward on the decumulation phase. But they shouldn’t try to “boil the sea.”

Despite the fact that a generation of superannuants are about to enter the decumulation phase, funds are still grappling with the challenge of producing a compelling retirement solution. But the advent of the Retirement Income Covenant (RIC) – which will soon see funds publish their strategies – means regulatory guardrails are now firmly in place, and super can turn its attention to a problem that’s just as much about legitimacy as retirement.

“Where the penny has dropped recently is that (retirement) is not a policy matter anymore,” says Simon Brinsmead, general manager for institutional partnerships at Challenger. “It is genuinely a proposition matter and a member retention matter. You’ve got a lot of members coming into the retirement phase now; over the next ten years, that’s about 3.6 million members moving from accumulation into decumulation. Within that, you’ve got about $750 billion aggregate FUM.”

The average balance for an industry fund member at retirement is about $400,000, and those members will be the ”lifeblood of super funds.” But Brinsmead believes that a large chunk of that base will be members who don’t want or need advice, or can’t afford it – and unless the proposition is simple, they’re going to be left in the dark.

“It’s not going to be a matter of members playing around with all these calculators and pick and choose all these building blocks, which is what it is today if you’re unadvised,” Brinsmead says. “It’ll be more along the lines of “here is the retirement product, and it does the best thing it can do with the member’s account balance at that point”.”

Brinsmead believes that the most compelling offerings will consist of a bundle of an account-based pension and a “retirement income building block”, which will provide longevity protection and certainty where the more flexible, liquid pension doesn’t. But building that product is where the greater difficulty lies – it necessitates stronger actuarial relations and higher regulatory costs – and where Challenger is getting the most commercial engagement from funds.

“We’ve all got these grand ideas of what we’d do when we’re looking at something from 30,000 feet.,” Brinsmead says. “But when you look closer at it, which is what’s happening now – funds looking down the barrel of actually having to build something – that romance is fading and the reality is kicking in; specifically the reality that, to build a grand longevity product, literally from the ground-up where it’s pooling the members, is really complex and quite costly.”

Members just want a pleasant experience, Brinsmead says, and integral to any compelling retirement solution will be making those two components – a pension and longevity protection – fit various cohorts or “personas” in order to provide some degree of customisability, similar to existing member-facing investment options. Funds might create a handful of personas sourced from data gathered on their typical member; as digital advice is integrated into the process – something Brinsmead believes is “inevitable” – it could add greater scale.

But for funds, it’s not going to be as easy as set and forget. Making it simple for members and tying the product into the broader retirement strategy is one concern among many, and funds will want their new solutions to be flexible enough to avoid legacy product risk.

“When products come to market, I can guarantee you that funds aren’t going to get it right first go,” Brinsmead says. “That’s purely because this is new and member preferences are going to evolve. And as member preferences evolve, super funds are going to want to capture that knowledge and iteratively instil that new information into their product.”

“(Funds shouldn’t) try to do everything at once. Think of this as a journey. Because the really interesting things are going to happen when members start to give feedback, and funds start to get a really good sense of what members want and they don’t want to lock themselves in too early on what they think their proposition should be.”

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