Our complex system makes independent advice critical The retirement income system is setting people up to fail because of its complexity, writes Super Consumers director Xavier O’Halloran.
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uperannuation is designed to ensure people can financially support themselves in retirement. However, media coverage and public debate tends to overwhelmingly focus on the savings phase (accumulation) rather than the spending phase (decumulation). With so much of the conversation dominated by how to grow your retirement nest egg, it’s easy to feel unprepared when it’s time to decide how to actually access the money you’ve saved.
The system is too complex One of the reasons this is daunting is that Australia is the only OECD country that has a mandated, prefunded accumulation structure without a mandated decumulation structure. Unlike in other countries, where a defined benefit pension is more common, Australians have to make an active decision about when and how they’ll access their super in retirement – whether as a transition to retirement pension initially, a lump sum, an accountbased pension, an annuity or as a mix of these.1 In making this decision, people need to consider a range of factors and projections, most of which they are not well equipped to deal with on their own. People want simplicity in their finances. Instead, they are left to navigate decisions on tax, access to the Age Pension and other government benefits. When coupled with the uncertainty of life expectancy and future expenditure needs, the system is setting people up to fail. This is compounded by very human responses to complexity, known as behavioural biases. For example, people tend to place more focus on the immediate concerns before them, making long-term planning harder. It’s no wonder that pre-retirement can be a stressful stage of life. Earlier this year, Super Consumers Australia conducted a Retirement in Australia survey, which found that a sizable majority of the more than 10,000 respondents struggled to navigate the retirement income system.2 They perceived planning for retirement as more complicated than almost every other consumer decision they need to make. 16
Good advice is hard to find We asked respondents to tell us what (if any) resources they used to help them with retirement planning. Many people nominated super funds (41.6 per cent) and financial advisers (40 per cent) – two sectors that the financial services royal commission identified as struggling to overcome conflicts of interest in their business models. Super funds can and should provide targeted and strategically timed information to people about the decisions they will need to make in the lead up and during the decumulation phase, and when they will need to make them. Their educative role can also extend to encouraging people to think about their super not as just a current lump-sum balance, but as a potential future income stream – for example, by projecting potential ranges of retirement incomes in member statements.3 Beyond this, it is problematic for super funds to have a role in providing personal retirement planning advice to members given the potential for such advice to be conflicted. A recent review by the Australian Securities and Investments Commission (ASIC) found that superannuation fund advice failed the best interests duty in 51 per cent of cases.4 The superannuation fund business model is built on growing the size of the fund and, for some, extracting profit from charging percentage-based fees on invested capital. Therefore, there is a strong disincentive to give advice that sees this capital move elsewhere, for example to a betterperforming fund or what might be a more suitable investment option outside of superannuation (e.g. paying down a mortgage). 1 Australian Research Centre for Excellence in Population Ageing Research, Retirement income in Australia, ‘Part 1: Overview, CEPAR research brief’, November 2018. https://cepar.edu.au/sites/ default/files/retirement-income-in-australia-part1.pdf 2 While not nationally representative, the survey provides useful insights into consumer sentiment about retirement planning. 3 Australian Research Centre for Excellence in Population Ageing Research, Retirement income in Australia, ‘Part 3: Private resources’, November 2018, p31. https://cepar.edu.au/sites/default/ files/retirement-income-in-australia-part3.pdf 4 ASIC, Report 639: Financial advice by superannuation funds, December 2019, p30. https:// download.asic.gov.au/media/5395538/rep639-published-3-december-2019.pdf
YourLifeChoices Retirement Affordability Index™ November 2020
