Superannuation sector set for a new focus

The big challenge for the superannuation sector is about to begin as more working people head into retirement.

While the superannuation sector is set to mark 30 years since the start of the compulsory superannuation regimen in 1992, the next big challenge for the industry is the shift to focusing on what it was actually meant to do – provide a platform to help people finance the retirement phase of their lives.

Until now, the system has done a great job in providing a compulsory savings scheme for ordinary Australians which has accumulated $3.4 trillion, with projections that the super system could have assets of more than $10 trillion by 2040.

The real challenge now is to help those people who have dutifully saved under the scheme for most of their working life to get the advice and the financial products that can help them through until the end of their physical life.

Super funds across the country are now gearing up to outline their retirement income strategy on July 1 as required under the Superannuation Industry Supervision Act – a strategy that is set to go on their websites for all their members to see.

They are meant to include the products they have available for retirees and their plans for any ­assistance or advice available for retiree members.

The shift will mean an increase in cost for the funds – as they evolve from merely being a collection of low-cost bank accounts with an automatic weekly inflow of cash to having to actually provide high levels of service to ageing members, particularly in their transition phase from work to ­retirement.

With rising life expectancy, skyrocketing healthcare costs and the increasing cost of living, ­financing retirement is becoming a serious challenge for many ­people.

As with the superannuation savings system itself, it is not aimed at the very poor, who will rely on the pension and other government assistance in their retirement; and it is not aimed at the very rich, for whom superannuation is not that critical.

But the question is how well can the superannuation sector, which has done a pretty good job of overseeing 30 years of accumulating assets – assisted by its compulsory nature and overseen by regulator the Australian Prudential Regulation Authority – step up to develop a workable retirement income system for the vast majority of “ordinary” Australians in the middle? With the APRA overseeing the legislation, there is hopefully some standardisation of the process.

Many funds have different member profiles – some a lot younger than others – while some such as UniSuper are already very experienced in paying out pensions and dealing with retirees.

From July 1, members and industry analysts will be able to compare funds, not only on their investment returns but on how they handle their retired members, particularly what products they have on offer.

In the early days of the compulsory super, people with modest super balances would get to the end of their working life, take out their super in a lump sum, use it to pay off debts, maybe spend up on a cruise or a holiday, buy a new car and keep the rest in a bank ­account or a few shares.

There was criticism in the early days that people would just spend all their super and then go on the pension.

Now the criticism has been the other way – that retirees are too nervous about funding themselves for the rest of their lives and hold on to their money in their low-tax super accounts for too long, and pass too much on to their children.

Hoarding for fear of spending one’s super retirement balance too early is not irrational, given the uncertainties around what could be a 30-year retirement lifetime.

It is a period of high uncertainty regarding costs at a period when most retirees have little potential for acquiring new sources of income if their money runs out.

As Warren Buffett’s colleague Charlie Munger often says: “Tell me where I’m going to die and I won’t go there.”

The stakes are also higher these days, with larger superannuation balances and a higher cost of living.

The average super fund balance for people between 60 and 64 is now $137,051 for women and $178,808 for men.

It is not money to be squandered.

The answer, from the super funds’ point of view, is to provide a combination of supportive advice and financial products for their members.

Products are expected to involve a blend of two different ­options – account-based pensions that could cover, say, the first decade or so of retirement, and annuities, which could effectively be an insurance policy if people live beyond a certain time, say 80.

Companies such as Challenger have been providing annuities for some years, but their popularity has not been widespread in Australia.

From July 1 there will be a new focus on which funds are providing which products.

Funds are going to have to work out how they provide advice – do they have staff of advisers who do face-to-face meetings backed up by a friendly call centre? How should they charge for their services?

How much basic advice can be handled digitally?

Digitising the process and putting as much online as possible will help streamline the system and again provide a point of difference from fund to fund.

Funds will also need to be ready to provide advice over time – not just at the point of retirement.

The process will be one that evolves over time and may be different from fund to fund, depending on the demographic and income levels of their members.

“Of particular importance is how (funds) will adjust their retirement income strategy over time as they gather new and more detailed information about their memberships and draw on the insights gained from their strategy,” APRA said in an advice statement put out this year to trustees.

“A (fund) might decide to provide some forms of assistance to its members in the initial phases of its retirement income strategy and change or expand these forms over time as it gathers evidence about how the assistance is being used by members.”

It is a challenge that the well-funded and highly experienced compulsory super system should be able to meet.

Particularly with a Labor government, which was a driving force behind the introduction of the compulsory super system, there will be much patting of backs on the success of the system.

But the challenge for the sector now is not to look back in self satisfaction, but to gear up for the next big challenge for the system that will be critical to the wellbeing of millions of people.