The ASIC report into death benefit claims revealing the devastating impact of poor industry practices on grieving Australians has again highlighted the pressing need for change. While some funds have taken up the cudgels, others are still playing hardball on improving their service offering.
While private credit funds have attracted much-merited attention, conducting a thorough due diligence is challenged by how portfolios are managed and constructed, let alone the risk of potential defaults. The deflective reply to investor queries about this is often akin to, “look at our past returns, we clearly know what we’re doing”.
Funds struggling to build lifetime income products: Chant West
Superannuation funds need to do some serious work and create more retirement income options for members, according to Ian Fryer (pictured), general manager of the research house Chant West.
Chant West has been observing lifetime income products for more than a decade and has recently begun rating them in anticipation of more super funds adding these products to meet their Retirement Income Covenant (RIC) obligations.
Recent proposed changes to what advice superannuation funds can give members should also make it easier for funds to assist members with these products.
“It would have been 12 or 13 years ago [when] we introduced what we then called the longevity product award. And I said then, there’s not too many products in this category, but we expect there’ll be more in a few years,” Fryer says.
“Unfortunately, it has taken a lot longer for more funds to bring these products to market. But with the RIC, funds have now got to do something in this space. It’s time for us to do the work and indeed, for funds to do the work, to have these products out there.”
Chant West has given three products a recommended rating so far. They are AMP MyNorth Lifetime, Australian Retirement Trust – Lifetime Pension and Generation Life LifeIncome.
Fryer notes the complexity involved in developing a product that can provide a member an income for life.
“They’re very complex products to build. There’s lots of moving parts. You generally must have an insurer to ensure the longevity risk. There’s also lots of actuarial work that you need to do.”
There’s also the guidance and advice piece. It’s all well and good to build products but if there is no clear distribution strategy, funds could be wasting money for little member benefit.
Fryer is hopeful recently announced Advice Through Superannuation draft legislation will make it easier for funds to offer members advice on these types of products.
This draft legislation amends the Superannuation Industry (Supervision) Act 1993 (SIS Act) to clarify the scope of the prohibition on trustees collectively charging their members for personal advice. The proposals include an allowed topics list, an allowed circumstances list and a disallowed topics list.
“The lists have been designed to provide greater clarity and surety to trustees regarding the types of personal advice for which they can collectively charge,” information released by Treasury with the exposure draft said.
The allowed topics list includes retirement income and covers: Advice about planning for retirement through superannuation; transition to retirement products; retirement income solutions including products, draw-down strategies, lump sum withdrawals and longevity protection.
“If you had a service in funds that can help people understand when it makes sense to go into these products and when not, then that would be a big help,” Fryer says.
Also on the allowed circumstances list is eligibility for government services that includes the age pension and carers allowance. This is important because one of the little understood benefits of a lifetime income strategy is how it can improve eligibility for the age pension as only 60 per cent of an investment-linked annuity counts towards the means test for the pension.
“The age pension thing is critical because some funds haven’t been sure whether they could provide advice on that because it’s outside super but now that it’s clear it’s included, I think that’s probably a bigger help,” Fryer says.
As the RIC identified, super funds are good at accepting money and investing wisely. The RIC was introduced to force funds into making sure they give members’ retirement outcomes just as much consideration.
“Once you move into the retirement space, it’s much more personalised. It’s actually a very different space. And I think funds are still trying to get their heads around how they move from most members getting some sort of default and that being fine, to pretty much every member needing to have some sort of personalisation or tailoring,” Fryer says.
With some funds having millions of members, it requires a total mind shift to create an appropriate experience for members in retirement. Even the largest super fund, AustralianSuper, while announcing it had signed up life insurer TAL to develop an ‘income for life’ retirement option more than a year ago, it is still to announce a product.
“They’re not simple products, but they’re actually quite powerful; you can get a much better sort of income profile for the rest of your life by using these products,” Fryer says.
