Retirement’s future: Choice and guidance

For much of the superannuation system's history, the focus has been on helping Australians accumulate sufficient savings for retirement. Increasingly, however, the challenge is no longer accumulation but decumulation: how retirees convert their savings into sustainable income that supports the lifestyle they want. This is a fundamentally different challenge. While much of the superannuation system was built around a relatively standard accumulation journey, retirement is inherently heterogeneous and there is no single solution that will suit everyone.

For several years, regulators, policymakers and industry participants have recognised two fundamental realities. First, retirement is more personal than the accumulation phase. Retirees have different balances, spending needs, health expectations, Age Pension entitlements, risk tolerances and bequest objectives.

Second, the objective is not to select the 'right’ product, but to construct an appropriate retirement income strategy. Most retirees will require a combination of solutions, potentially including an account-based pension with varying drawdown strategies, lifetime income products, Age Pension entitlements and income from other assets. The challenge is choosing the combination of products that best supports the retirement a member wants to achieve. 

Given the range of retirement income products already available, the industry's task is not to manufacture more products, but to ensure that retirees have access to a diverse range of solutions, the tools to understand them, and the guidance needed to make informed choices. 

Scale favours specialist lifetime income product manufacturers over super products

The Australian superannuation system has benefited enormously from scale. Larger funds have been able to lower costs, invest in technology, build internal investment capability and improve member outcomes. A similar dynamic is likely to emerge in retirement product manufacturing.

Lifetime income products are significantly more complex than traditional account-based pensions. Their economics depend not only on managing longevity and investment risks, but also on achieving sufficient scale across administration, technology, member servicing, compliance and product governance. Developing and maintaining these capabilities is expensive, particularly when many retirees will allocate only a portion of their retirement savings to longevity products and others may choose not to use them at all.

Given these realities, it may not be efficient or desirable for every superannuation fund to manufacture its own lifetime income products, even with the backing of a life insurer. Instead, the retirement market may increasingly resemble the life insurance market, where a relatively small number of specialist providers manufacture lifetime income products that are distributed through a range of channels.

This would allow lifetime income products to achieve the scale necessary to support innovation, improve efficiency and reduce costs, while providing members with access to a broader range of solutions. This would not be unusual. Few superannuation funds develop their own administration platforms, custody services or life insurance products. Instead, they leverage specialist providers that can spread fixed costs and expertise across a larger customer base. Lifetime income product manufacturing may follow a similar path.

The important question is therefore not whether every fund should manufacture its own lifetime income products, but whether every member should have access to the range of retirement products that best suit their needs. If retirement is ultimately about constructing an appropriate retirement income strategy, the industry should focus less on who manufactures the solution and more on ensuring members can access the combination of solutions that best meets their circumstances.

The retirement choice challenge

If retirement outcomes depend on selecting the right combination of solutions, a legitimate question arises: who should help members make those decisions?

For most Australians, remaining with their existing superannuation fund throughout retirement will be an entirely appropriate outcome. Funds have spent decades helping members accumulate savings and are increasingly focused on supporting them through retirement. However, retirement presents a fundamentally different challenge. Unlike accumulation, there is no single retirement solution that will suit everyone.

A member's optimal retirement strategy may not necessarily be confined to the products manufactured or distributed by their existing fund. While many members may benefit from retaining most of their assets in their fund's account-based pension, the same fund may not offer the lifetime income product that best suits their needs. There is no reason to assume that a single provider will always be able to offer the most appropriate retirement strategy and combination of retirement income solutions for every member.

The Royal Commission also reminded the industry that the outliers matter. Even if a fund's retirement proposition is suitable for the vast majority of its retiring members, trustees must still consider how they will support those members whose needs fall outside the norm. A retirement product suite that works for 95% of members may still leave a meaningful minority better served by an alternative solution.

This goes directly to the principle of acting in members' best financial interests. The goal should not be creating a retirement product that is suitable for most members. It should be ensuring each member has access to a retirement strategy that is appropriate for their individual circumstances, objectives and preferences.

This does not imply that funds should stop offering retirement products. Rather, it suggests that funds should place the same emphasis on helping members evaluate alternative solutions as they do on promoting their own. As retirement products become more specialised and retirement strategies more complex, member choice and informed decision-making become increasingly important.

An open architecture approach, where members have access to a broader range of retirement solutions regardless of who manufactures them, may ultimately be more consistent with the objectives of the Retirement Income Covenant than a system built primarily around proprietary retirement products. If retirement is inherently heterogeneous and personal, members should be free to construct retirement strategies using the products that best meet their needs, not simply the products that happen to be available within their fund.

Member choice is not about increasing complexity. It is about ensuring that retirees can access the solutions that best meet their needs, supported by high-quality guidance, education and decision-support tools. If that is the case, the greatest value that funds can provide may lie not in manufacturing lifetime income products, but in helping members construct retirement strategies that deliver the outcomes they are seeking.

This is part one of a two-part series on the future of retirement. Part two will
focus on the role super funds can play and how Australia can build better
retirement decision-making infrastructure.