Potential policy responses to assist retirees 15 min read
The Federal Government has released a discussion paper (the Paper) which seeks industry and community views on how the superannuation system can best provide the security and income Australians need in retirement.
The Paper invites feedback on the opportunities, barriers and challenges to improve the experience and outcomes of members in the retirement phase with a focus on:
- the support that members need to navigate the retirement income system;
- what funds need to deliver better retirement income products and services; and
- the accessibility of lifetime income products.
The Paper repeats findings from numerous reviews that have looked at retirement incomes in recent years, raises ideas that could be implemented by trustees and 'potential policy responses' which the Government may consider, but lacks concrete and detailed reform proposals. This is disappointing as the issues with the existing regulatory regime are well understood and it seems any meaningful reforms are uncertain and a long way off.
In this Insight, we provide a recap of recent moves towards improving retirement outcomes and an overview of the potential policy reforms addressed in the Paper on which Treasury seeks feedback.
- Treasury has released a discussion paper in which it seeks to gather views on potential policy reforms addressed at the retirement phase of superannuation.
- The Paper proposes and seeks feedback on a range of policy responses in three key areas: supporting members to navigate retirement income, supporting funds to deliver better retirement income strategies, and making lifetime income products more accessible.
- Several of the potential policy reforms will be familiar to trustees already, given they repeat findings from numerous reviews that have looked at retirement income solutions in recent years.
- We encourage trustees to consider Treasury's potential policy responses and to give feedback on how Treasury's proposals and other ideas trustees may want to put forward could help to solve issues with the retirement phase of superannuation.
- The closing date for submissions on the Paper is 9 February 2024.
Treasury says that the need to focus on retirement outcomes is becoming more urgent. While there are currently 1.6 million people aged 65 and over receiving retirement income from a superannuation product, that is estimated to increase to 2.5 million Australians over the next 10 years. Drawdowns from superannuation are projected to increase from 2.4 per cent of GDP in 2022–23 to 5.6 per cent of GDP in 2062–63. The Government predicts that, over time, superannuation will become the primary source of retirement income for many retirees who will rely less on the Age Pension and, because of that, retirees will need access to the right information, advice, strategies and products to help them make the most of retirement.
This of course is not a new problem. The 2014 Murray Inquiry proposed that superannuation policy should ensure retirement income is the ultimate goal and recommended government to require trustees to pre-select a comprehensive income product for retirement.1 Although finding that the retirement income system was working relatively well, the Productivity Commission's Retirement Income Review also pointed to a 'nest egg' mentality amongst retirees and suggested that more could be done to encourage consumption in retirement and to encourage trustees to develop innovative retirement products (see more in our Insight).2
In a step towards addressing these concerns, the long-promised retirement income covenant finally became law on 1 July 2022 (see more in our Insight). It is aimed at improving retirement outcomes, by putting the onus on super trustees to formulate a strategy to 'assist' those members of their fund who are at or approaching retirement with the following objectives:
- maximising expected retirement income over the period of retirement;
- managing the expected risks to the sustainability and stability of retirement income over the period of retirement; and
- for beneficiaries to have flexible access to expected funds over the period of their retirement.3
It remains an open question as to whether it is right that trustees should be asked to help retirees make decisions about how to spend (or not spend) their superannuation in retirement. Nevertheless, one year on, the APRA and ASIC thematic review found that there has, so far, been a lack of progress from RSE licensees in embracing the covenant to improve members' retirement outcomes.4 The regulators expect trustees to address, with urgency, 'gaps' in their approach.
While the Government has separately committed to expanding the provision of retirement advice by trustees through its recently released 'Delivering Better Financial Outcomes' package (see more in our Insights here and here), Treasury concedes that there is still a long way to go.
The Paper involves a broad consultation with all stakeholders across the superannuation industry and community. It proposes and seeks feedback on a range of potential policy responses in three key areas. The potential policy responses are set out in the Paper at a very high level without much in the way of supporting analysis or indication as to whether the Government is seriously considering any of them. This is surprising given the number of enquiries and reviews that have considered the same issues and many of the same proposals in recent years. It seems Treasury is looking to gather information again about industry views on the main problems and proposed policy responses before the Government makes decisions about which ones to pursue.
We consider the main potential policy responses raised by Treasury in more detail below.
The Paper discusses the complex decisions that retirees currently face when planning their retirement income. These include decisions about how best to draw down their savings over time to manage costs such as health, aged care and leisure, while at the same time being prepared for unknown expenses they might incur. The Paper also points to the complexity of the retirement income products and annuities that are currently available as a further complicating factor in this decision making process.
The Paper goes on to recognise issues in how Australian retirees perceive their superannuation income. While the recently proposed objective of superannuation5 will make it clear that the Government's objective for super is to deliver income for retirement, many retirees see their superannuation balance as a 'nest egg' to be held as capital, from which only the minimum amounts should be withdrawn. The reasons for this, the Paper says, are varied but can include members not having the right access to advice, 'choice overload' when considering the amount to be withdrawn or concerns about running out of savings. It could also have mentioned the desire of many retirees to leave part of their superannuation savings to their dependants.
Potential policy responses
The Paper seeks feedback on the following proposals in this context:
- Further guidance, education and communication with retirees: the Paper proposes a broad range of ideas for further guidance to retirees, such as basic factual information, education, or materials being produced and distributed by government, the government providing free and impartial guidance for retirees in or approaching retirement, and requiring funds to provide general information about both phases of superannuation and the objective of superannuation when onboarding members. Given it is well known that more disclosure (which is what much of this material will be) is of limited use in informing consumer decision making, it may be right to be sceptical about the effectiveness of these measures.
- Requiring funds to assist and default members to 'better settings': Armed with the necessary analysis of their members (to assess member outcomes under the retirement income covenant), the Paper proposes that trustees could be required to 'nudge' members towards retirement income settings that better suit their circumstances. These settings could include a range of features or products, such as ‘default’ drawdown rates, investment strategies and/or longevity products. However, trustees have found it hard to convince themselves that they will be able to comply with their duties in putting members into retirement products by default. The Paper also puts forward the idea of a rework of the minimum drawdown framework for retirement income streams (eg to revise minimum drawdown rates or to clarify that the minimum rates do not amount to a recommendation). While increasing the minimum drawdown rate will naturally increase pension payments, it is doubtful that merely stating that the drawdown rate is not a recommendation would do anything to change behaviour.
- Navigating the retirement income system: the Paper suggests that more could be done to bring together the three pillars of the retirement income system – the Age Pension, superannuation, and savings and investments outside of superannuation. Ideas in this respect include (with appropriate changes to policy settings to facilitate them) the provision of information by trustees on how these streams might interact and change across the period of a member's retirement, funds prompting or assisting members to apply for the Age Pension and improved data sharing between government and superannuation funds to enable both parties to have a better understanding of members' holistic circumstances. Again, to the extent this involves merely more disclosure to members, it is doubtful that it will have any effect, and requiring trustees to assist members to apply for the Age Pension goes beyond the usual role of a trustee and the purpose of superannuation.
The Paper points to longstanding evidence that products and services in the retirement phase could be more accessible and better suited to retirees’ needs but notes that, despite this, there have been minimal successful policy reforms relating to the retirement phase.
Of the proposals since the Murray Inquiry in 2014, only the innovative income stream and retirement income covenant reforms went ahead (in 2017 and 2022 respectively), with proposals for comprehensive income products in retirement ('CIPRs') and standardised metrics for retirement income product disclosure failing to make the grade. Of the successful reforms, Treasury notes that there have been only a 'small number' of innovative income stream products developed and again highlights that the recent APRA and ASIC thematic review identified a number of shortcomings in how trustees are approaching their retirement income covenant obligations.
Potential policy responses
Treasury thinks it is clear that there is work to be done for funds to assist members in making the most of their superannuation in retirement. While advice reforms will go some way to assisting with members' retirement objectives, that advice has its limits if retirement income products are not available to meet members’ needs.
Noting this, the Paper includes the following potential policy responses:
- Standardised product disclosure framework: building on previous calls for a standardised framework for retirement phase products, Treasury suggests trustees could be required to publish simple consumer-focussed disclosure documentation on the retirement income products offered within the fund. Although Treasury acknowledges the challenges this would pose compared to disclosure in the accumulation phase, the Paper discusses requiring trustees to provide information about the characteristics of retirement products (such as expected income, fees and death benefits attached to the product), performance characteristics (such as investment performance and pricing), and a regular assessment of how trustees fulfil their covenant obligations (to enable consumers to be better informed as to the quality of the products and services offered within the relevant fund). Other ideas in this context also include the introduction of a standard risk measure that could assess the relative risk of retirement income products to a fall in income from year to year or the development of scorecard approaches that demonstrate how products balance the three retirement income covenant objectives (or other metrics).
- Tools for comparison and performance: pointing to the YourSuper comparison tool and the performance test, Treasury suggests that similar tools for the retirement phase could be developed. In putting forward this idea, Treasury is alive to the fact that proposals of this kind would rely on better disclosure practices being in place (see above) and that any performance test should not hamper product design.
- Regulatory barriers: without identifying any specific areas of concern, the Paper suggests that reforms could be made to the existing regulation of retirement income products to ensure regulatory settings are fit for purpose, do not impede innovation, and maintain equitable social security and taxation treatment. We expect that Treasury has in mind issues that were identified by the Productivity Commission in the Retirement Income Review, including the administrative processes involved in purchasing a retirement income product, the required commutation of the ‘retirement phase’ product back to the pre-retirement (or accumulation) phase before it can be switched to a new product and the complexity of different pre and post-retirement tax arrangements, but there are likely to be a number of other changes to the regulatory framework which would benefit trustees and members alike.
The Paper highlights the small market for lifetime income products in Australia and the low uptake of annuities. Noting the risks to the stability and sustainability of retirement income which these kinds of products can address (including investment and sequencing risk, inflation risk and longevity risk), the Paper suggests that prohibitive development costs, limited incentives and the risk of expensive legacy products in future each present a barrier to the willingness of trustees and life insurers to do more to develop new products. Barriers to take-up by retirees include the risk of 'wasting' savings in the event of an early death, difficulties in comparing retirement income products, the lack of flexibility once the product is purchased and 'counterparty risk' on the part of the fund or insurer.
Potential policy responses
These barriers, Treasury say, raise the question of whether funds will be able to act rapidly enough to provide the necessary services and products for members in retirement in light of Australia’s ageing population. Because of this, potential policy responses include:
- Support for better longevity pricing: the Paper suggests that the Government could potentially support the reinsurance of longevity risk to ensure insurance is available to Australians at a reasonable price. This could involve facilitating funds to pool risk within retirement products or by the Government directly intervening in the pricing of longevity risk through reinsurance or the selling of longevity bonds that allows providers to manage their financial risk in offering these products.
- Standardised products: similar to the MySuper product for the accumulation phase, Treasury suggests that trustees could be required to develop at least one standardised retirement product which meets framework attributes and must be provided as a 'first offer’ to members. Features of a standardised product might include a longevity protection component (for example a deferred guaranteed income stream that commences later in life), a forward-planned income stream that accounts for the member’s preferences (eg a stable income over retirement or a higher income initially) and an investment allocation that adjusts the investment risk for the member’s stage in retirement. Ultimately, the desired features of the standardised retirement income product would be to balance the flexibility of account-based pensions and the risk management features of annuities and to provide a high income. It is not the first time that the idea of changes to policy settings to support innovative retirement income products has been thrown into the ring. Most recently, in late 2021, APRA stated it was closely collaborating with ASIC, Treasury and the ATO on product innovation, but so far this has remained on the 'watch this space' list.
In their recently released corporate plans6, both APRA and ASIC have flagged that improving retirement outcomes will remain a key part of their agenda as regulators over the coming years. In that context, and off the back of the results of the regulators' joint thematic review on the retirement income covenant (and the finding that trustees can and should do more to assist their members by providing guidance and advice and by providing suitable products), the ideas put forward in the Paper are likely to be a welcome addition to the conversation for trustees on how best they can (sustainably) support their members going forward.
That said, the potential policy responses really are in their initial stages and we encourage trustees to submit feedback to Treasury on how best to develop these. In doing so, we suggest that trustees seek to identify not only how Treasury's potential responses would allow them to meet their retirement income covenant, but where the proposals would also introduce further risk.
Issues trustees should consider include:
- How do trustees support members in understanding the entire retirement income system (including the Age Pension and other investments), their options and the best way to obtain an income in retirement consistently with the sole purpose test?
- In the context of parallel proposals which will encourage trustees to provide more financial advice, how should the legislated retirement objectives which have the aim of 'maximising' retirement income be balanced against the financial objectives of an individual member to whom the trustee provides financial advice and who wants or needs to spend their savings quickly or who wants to leave a bequest?
- Should trustees be asked to assume even more responsibilities in the context of retirement income objectives when ultimately it is the members of the fund who will often pay (via the capital reserves accrued by the trustee) when something goes wrong?
The closing date for submissions on the Paper is 9 February 2024.
Financial System Inquiry, November 2014.
Retirement Income Review, Final Report, July 2020.
Section 52AA(2), SIS Act.
Information Report, Implementation of the retirement income covenant: Findings from the APRA and ASIC thematic review, July 2023.
'[T]o preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way', as proposed in the Exposure Draft Superannuation (Objective) Bill 2023.