If it ain't broke

With the growing number of retirees in the Australian population, the role of superannuation in retirement is under question and, as selfmanagedsuper senior journalist Jason Spits writes, the proposed answers seem very familiar to many.

For many in the SMSF sector, government plans to address an issue can often feel like a solution looking for a problem, with the lengthy discussions around non-arm’s-length income and expenditure, and the more recent dialogue regarding the Division 296 tax, adding some credence to the perception.

Having spent much of 2023 working through those two issues by way of a series of short-run consultations (see Issue 44: “People hearing without listening”), the superannuation sector went into Christmas last year considering another Treasury discussion paper, titled “Retirement phase of superannuation”.

It considered the take-up of retirement income products under the Retirement Income Covenant (RIC) and how it could be accelerated by supporting super fund members to navigate the retirement income system, supporting super funds to deliver better retirement income products and services, and making lifetime income products more accessible. (See “Another consultation paper” below.)

While these aims are laudable, there were a few key issues that may raise some red flags for the SMSF space, including a call to look beyond account-based pensions (ABP), heavily used by the sector, to annuities to address longevity needs, and to include SMSFs under the obligations of the RIC.

Why fix it?

This latter suggestion came out the blue with the paper noting SMSF trustees faced the same complex decisions as members of Australian Prudential Regulation Authority (APRA)regulated funds when deciding on how to structure their retirement income, but without “the same entitlement to support that members of APRA-regulated funds receive under the RIC”.

As such, it questioned the approaches SMSF trustees take to manage risk and maximise income, what barriers there are to achieving these outcomes and how the government can assist in improving them.

Unsurprisingly, there is little support for the suggestion SMSFs should be covered by the RIC. This is not new and harks back to the arguments made in 2021, when SMSFs were originally excluded from the RIC, that APRAregulated funds and SMSFs operate in very different ways.

SMSF Association head of policy and advocacy Tracey Scotchbrook says it was natural to ask the question given the wider discussion on retirement income that is taking place, but there is no expectation potential changes are in the pipeline.

“We looked hard at this question again and the RIC policy drivers do not fit the SMSF environment. APRA-regulated funds tend to be more disconnected from their members in comparison to SMSFs where the trustees are the members of the fund as well,” Scotchbrook notes.

“Some SMSFs will need some support and the sector can work with government and regulators to promote education and advice, but SMSF trustees are required to make declarations when setting up their fund about their obligations to the fund and its members.

“The annual compliance checks that have come to the sector via the ATO means every fund has ongoing engagement with its trustees.”

Financial Advice Association Australia general manager of policy and advocacy Phil Anderson also sees the differences between APRA-regulated funds and SMSFs making the latter unsuitable to sit under a regime designed predominantly for the former.

Anderson points out APRA-regulated funds have limited knowledge of their members’ needs and that segments of the superannuation system treat people as part of an aged-based cohort.

“This is very different from the SMSF members, who often have an adviser and their own obligations and there is no reason why the government should apply a default model from one part of the system to another part which acts very specifically,” he explains.

“If people are not ideally suited to being in an SMSF, that is a different issue, but what can be done with an SMSF can’t be done at the APRA-regulated fund level.”

Actuaries Institute superannuation and investments practice committee chair Tim Jenkins also sees little will be gained by extending the RIC to cover SMSFs, but feels there is value in considering some of the guidance measures that are being discussed. These include regular contact with fund members, providing guidance and education that could be timed as ‘nudges’ to action when a member approaches or reaches a key date or event in their life.

“We see a role for government and SMSF service providers to give guidance along the way and to promote the idea that superannuation is a pot of money for retirement living and not a nest-egg to be maintained well into the future,” Jenkins adds.

“The superannuation guarantee model over the past 30 years has encouraged saving and building member balances, but people in any type of fund need reminding superannuation was designed for spending in retirement.”

Where’s the problem?

Jenkins’ comments touch upon an issue raised in the paper, being to encouraging more people to take up retirement income stream products and shift their thinking away from the view superannuation should be held for as long as possible, often with the intention of passing it on to the next generation.

The paper notes while 84 per cent of retirement savings are in ABPs, these products do not manage the risk of outliving those savings and research has found many people are drawing down only the minimum required, depriving themselves of a better standard of living and subsequently dying with large balances still in hand.

Conversely, only 3.5 per cent of retirement income streams are held in annuities, raising the question of whether this binary, one-sided split in product selection is a problem.

Jenkins says the research cited in the paper about people sitting on pension income is not universally accepted and some run them down before death, adding the uptake of pensions is a good outcome for many and people treating their superannuation as a nest-egg is a separate issue.

“Pensions are a great product because they work for many people, but it is still horses for courses and they may not be suited to every situation,” he suggests.

“The consultation paper said the lack of annuity products was due to a limited supply from product providers, but we would argue it is a lack of demand.”

Institute of Financial Professionals Australia head of superannuation and financial services Natasha Panagis says pensions have achieved widespread use due to their flexibility, while annuities are often complex to understand without advice or guidance.

“Capital is locked away in an annuity and super fund members have to weigh up the flexibility of a pension against the longevity risk offset that comes from an annuity, and this is where advice can consider the pros and cons of each type of product,” Panagis points out.

“This is particularly important when it may be hard to find product providers causing people to view annuities as an alternative option.”

Anderson notes the issue with choice between a pension and an annuity is “the decision people are invited to make is to lock their money away for a length of time for a lower return to address longevity risk and they probably won’t do that unless they understand the benefits”.

“This comes back to the low levels of financial literacy many people have, which is why we still see people withdraw their super at age 65 and bank it just for the certainty of knowing what it’s doing,” he says.

Avoiding the past

Given the lack of awareness around retirement income products existing among the millions of people heading into or already in retirement, the consultation paper put forward the idea of a ‘suggested product’ that could be offered to fund members, as well as industry standardisation around the development of any new products.

This also appears to have little support and Financial Services Council (FSC) chief executive Blake Briggs acknowledges the body’s consumer polling shows many people don’t want to be constrained either by government policy or products.

“FSC research shows that 73 per cent of people wanted to tailor their retirement arrangements to suit their needs and that high-quality affordable advice is central to supporting consumers as they prepare for their retirement,” Briggs says.

“A one-size-fits-all approach is not suitable for retirement and would be rejected by consumers, and the government and superannuation funds need to be careful not to be imposing solutions on their members.”

Scotchbrook and Panagis indicate the SMSF sector is also wary of a top-down imposition of retirement income products and is keen to avoid the formation of legacy products like market-linked pensions that have become very difficult to exit after superannuation rules changed.

“We should be cautious about repeating the mistakes of the past and provide exit strategies for fund members who take on any form of retirement income product and this applies to members of APRA-regulated funds as much as it does to SMSFs,” Panagis warns.

To this point Scotchbrook adds: “Product innovation is useful, but it is at low levels because there is no demand at present for more, but more advice can shift that dial.”

“There is already a shift underway with APRA-regulated funds under the RIC and the proposed changes from the Quality of Advice Review will continue to increase consumer knowledge and confidence.

“Keep in mind, the RIC has not been in operation for that long, but the timing of this paper and the discussions around expanding advice to super funds shows there is an alignment in discussions and the need for better outcomes for many people who cannot access advice.

Sizing up the future

These better outcomes are a central theme of the discussion paper and while it puts forward ways to hasten results, it also recognises the scale of the task at hand. It states at present there are 1.6 million people aged 65 and over receiving income from a superannuation product and in the next 10 years a further estimated 2.5 million Australians will move from the accumulation into the retirement phase of their super and information and education will be central to a smooth transition.

These figures underplay the significant change that will be taking place in the retirement income system, as well as in the lives of the individuals concerned.

“There was never going to be an easy process to move this many people from accumulation to pension phase,” Anderson says, adding many will need to have a greater level of financial literacy to make the move.

“They will also need access to advice at a critical time when they are changing financial structures and their life situation and to have confidence in their future plans before they decide on which product they will choose.”

For Jenkins, the discussion paper raises the prospect of dealing with the current wave of retirees, but also laying the framework for those still to move through the system.

“The real focus of this paper is providing help and guidance and starting it early and carrying that through to retirement. The current environment is not easy for super funds to provide that support and under the rules at present they can’t do so unless the members ask for it,” he says.

Whether this will change remains to be seen, with the period for comment on the paper having closed in early February and a government response still pending, however, Scotchbrook suggests the government can look to the SMSF sector as an example of the outcomes it is seeking.

“SMSFs are a case study of what happens when members are engaged, advised and calling the shots on what happens as they head into retirement, which APRA-regulated funds could adopt using the nudges suggested in the paper,” she says.

“These would work with their model and we would like to see them applied to SMSFs as well, but there is no single solution. Defaults and mandates are not the right outcomes, but the RIC and the provision of advice are the two levers in the wider system and many funds are still finding their feet on advice.

“Good outcomes will not happen overnight and organic results can’t be forced and we would be concerned if policy was the driver behind member outcomes.”