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Retirement income strategies are missing a piece

Analysis

While the publishing of retirement income strategies is a big step forward into super’s new frontier, many of those strategies are based on a “very unsafe foundation.”

With the publishing of retirement income strategies on June 1, superannuation’s new frontier has officially been opened. But at this point, many strategies are just strategies to have a strategy – and they’re missing a key ingredient.

“There is one very big assumption in pretty much all the plans, and that’s the reliance on member’s getting financial advice to bring those plans into reality,” says Simon Brinsmead, head of institutional client solutions at Challenger. “I think that’s a very unsafe foundation to assume that will happen.”

“What we need to stare into is that most members just will not get advice. It’s not that they don’t want to. It’s probably, in a lot of cases, that they don’t think about it, or they can’t afford it, or they don’t necessarily need it the way we think about it.”

The median account balances for the 45-54 bracket have increased by around 85 per cent over the last eight years; a similar story plays out in the 55-64 bracket, where median account balances are up around 61 per cent over the same period. There’s a massive wall of money coming into retirement, but about 80 per cent of members in the 55-64 bracket while 86 per cent of members in the 65+ bracket are unadvised.

“Super funds have taken a look at what they want their proposition to be; what they want the experience to be for members,” Brinsmead says. “That’s the fundamentally right question – probably the biggest question.”

“But one of the obvious gaps is longevity risk management. Different funds have different views of what that means. But when I say that many or most of the plans do have some reliance on financial advice, it is that fund x is saying “We have all the tools, members just need to get advice now and figure out how to use them”. What I see commonly is that tools will be provided to members to assist them, but I suspect that will not move the dial.”

That’s because of a historical lack of engagement with superannuation and a lack of desire on the part of retirees to navigate those tools. Funds are solving for the wrong variable, Brinsmead says; they’re trying to create a solution that meets expenses when they should instead be focusing on the maximum income – or “salary” – they can give members.

“If you look at the equation that way, retirement doesn’t have to be that complex. People who have complex situations will get advice – but a lot of us don’t.”

Of course, this is just the start of super’s new focus on retirement, Brinsmead says, and there’s plenty of innovation and calibration to come. He expects that funds will integrate digital advice into their product design, based on information about member cohorts gleaned from the data already available.

“The (strategies) that are the most comprehensive are the ones that are thinking about the overall member experience, really looking through the members’ lens,” Brinsmead says. “It wasn’t treating it as a disclosure document for peers; it was truly member facing. Those funds that are really thinking about the RIC because it’s part of their proposition are the thorough ones, where others were ticking the box.”




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