Advice is the missing link in super’s retirement debate

The discussion paper also does a good job of explaining why the retirement question has not been answered.

In part, it’s to do with maturity; the sector’s first four decades have been focused squarely, and reasonably, on growth. But the paper is also right to point out the incentives in the sector do not support a focus on retirement.

It’s been in the interests of super funds to get as large as possible, and there have been few incentives to help members draw down from these massive pools of savings. And while there’s been plenty of competition between funds for contributions, there’s yet to be any real competition on retirement product offerings.

Changing these incentives and introducing competition is a vexed issue, in part because what a “good” retirement looks like is going to be different for every saver. The need for advice and personalisation is an undercurrent throughout the discussion paper.

Aside from the obvious differences in the size of superannuation balances, different fund members (or at least cohorts or fund members) will have differences in their health status, their marital status, their goals, their family situation and the lifestyle they have, and the one they want.

An appendix in the discussion paper lays out a model for a so-called bundled retirement solution that includes an allocated pension for a retiree’s everyday expenses, a capital reserve that a retiree could draw on for exceptional expenses, and an annuity product that would kick in at 90 years of age to insure against longevity risk.

At first glance, it’s a reasonable model that clearly some super funds are working away at. But it will need a level of personalisation and advice for each retiree. Some of this will be about how these individual products and ideas interact and overlap, but a degree of tailoring will also be required.

This raises two issues. The first is that the provision of advice was decimated after the banking royal commission, where the conflicts of vertically integrated models – advisers pushing wealth products from their own shops – were rightly exposed. As a result of the regulatory changes, super funds are unable (or at least feel they are unable) to provide the level of advice they would like.

The federal government is working (arguably too slowly) to give super funds more ability to provide advice; the sector knows this can and should require appropriate guardrails. What emerges will probably involve different levels and types of advice, some of which may look more like education or coaching.

The question less discussed in the discussion paper is who pays for this. Is a pay-as-you-go model the best? Or should the costs be spread over the entire membership base – including younger fund members, who might not see the benefits for decades.

AustralianSuper has a view that a default system needs to be set up, where retirees are automatically put into some retirement products, including the aged pension, with the ability to opt out and tailor where appropriate.

Such a model should allow for mass personalisation under a number of retiree cohorts. But whether the entire membership base is prepared to pay for it, and the government is prepared to play ball by handing responsibility for public monies to the private sector, is a bigger question.