The superannuation industry continues to mature, and more assets are moving into the retirement phase. This presents the superannuation industry with new challenges – and new opportunities. In the accumulation phase, it is relatively simple to satisfy the needs of members; increase their superannuation balance until the point at which they retire. Of course, there is more to it than this. Consideration needs to be given to asset allocation and member risk appetite (among other things) but, for the most part, the problem is generally well understood by members and funds alike.
In retirement, members’ financial objectives are more complex. In addition, members in retirement are much more engaged than those still accumulating. They can no longer leave decisions about spending their assets to a dim distant future. They must make those more complex decisions now.
The framing of the Retirement Income Covenant recognises the complexity facing retirees by requiring superannuation trustees to provide a retirement strategy for their members that helps them to achieve and balance three interlocking and potentially competing objectives:
The Covenant acknowledges that there exist trade-offs between each of the objectives above, which presents superannuation funds and members with a retirement trilemma.
Due to the nature of this trilemma, the design and operation of retirement income solutions are more complex than accumulation products and will require funds to effectively and clearly articulate the trade-offs of each solution to an Australian population with relatively low financial literacy. This is exacerbated by the generally low appetite for members to pay for comprehensive personal advice to assist them. This seems like a gargantuan task and, in many ways, it is. A common solution proposed is scaled advice – that is, providing members with low-cost digital tools and calculators that aim to improve financial literacy around retirement. To date, take-up of such tools in retirement has been low which suggests that the industry’s approaches to framing the problem facing retirees and explaining the potential solutions in the context of this framing is not cutting through. Perhaps we can look to areas outside of financial services to help us solve this problem for the retirement trilemma.