Big super split on plan for automatic super pension

It suggested funds could “nudge members towards settings that better suit their circumstances” in retirement, to stop them from staying in the accumulation phase or living more frugally than they have to.

This could include developing profiles to shift customers towards withdrawal amounts that better suit their circumstances, offering “default solutions” to different subclasses of members, and developing alternative investment allocations for older Australians.

It could also involve super funds assisting customers with more products than just their traditional account-based pensions, through which members work down their savings, to factor in the aged pension, personal savings and longevity offerings such as annuities.

The proposal to “default” customers into pension products represents the biggest change to the system, and it has the support of Australia’s two largest funds.

AustralianSuper has pushed a bold plan to seize control of retirement incomes by combining members’ super savings with government age pension payments to create an income stream applied by default at age 67.

The mega fund, which is influential with the Labor government, wants members to be automatically switched from savings mode to drawdown mode using the same account once they reach retirement age, to make the transition “seamless”.

The $260 billion Australian Retirement Trust is overhauling its internal operations to better focus on retirees. Its executive general manager of advice, Anne Fuchs, said she “certainly supports the idea of a default”.

“We’re working on that and thinking very deeply,” she said. “Anything we can do to resolve that people would rather go to a marriage counsellor and dentist back-to-back than deal with working out an income stream, we should be doing.”

Individualisation key

But Aware Super CEO Deanne Stewart said automatically shifting customers to retirement solutions carried “a real risk” that they would lose out.

“While automatically defaulting members may move more members into the tax-free retirement phase earlier, this would not guarantee better outcomes for those members,” she said.

The shift would save a member with a $300,000 balance around $1600 annually after the age of 67, she said, but the benefits of a tailored retirement income solution “far outweighed” this amount.

She warned that while products were part of the solution to improving retirement, they “can’t be designed in a vacuum” outside of customers’ individual needs.

“Each member has a different balance, different circumstances outside their super, and different retirement goals. Trustees have to take the time and work harder to understand member preferences and behaviours.”

Ms Fuchs said that product designs needed to factor in that customers had “different money profiles and attitudes to money”, but that the default option “needs to be there for when you’re not actively engaging”.

“Having a default is really about a simplification of an income stream … for when the member does nothing,” she said.

Noting that funds were so far failing to meet their obligations to prepare customers for retirement, Treasury also suggested a “framework could be developed which outlines attributes and features of a standardised retirement product”.

This could have a longevity protection component, forward-planned income stream, and investment allocation that adjusts for risk at the member’s specific retirement stage. One proposal in the consultation paper included factoring in personal savings to this.

The chief executive of the $124 billion UniSuper, Peter Chun, said any default system needed to put personalisation of customers’ individual circumstances at its core.

“Smart defaults can take many forms, from the way choices are presented to members, to nudging members towards suitable drawdown pathways, or even to help start the age pension,” he said.

Mr Chun previously said that while “in accumulation phase, you can probably have more of a mass model for people saving”, the needs of customers in or approaching retirement were “very different” and required more bespoke solutions.

Advice headaches

But industry leaders said super funds also needed to be able to offer more bespoke financial guidance to customers to enable them to retire with confidence, as Labor continues to drag its feet on changing stringent laws barring funds from providing personalised advice at scale.

The Treasury consultation acknowledged this, saying reform was on foot, but also suggesting funds could offer more guidance to customers within the existing laws.

Ms Stewart called for the broadening of who can have personalised conversations with customers and what topics they could canvass with members.

“The best thing the government can do to improve retirement outcomes is to allow funds to provide personalised help to members at scale,” Ms Stewart said.

Association of Superannuation Funds of Australia acting CEO Leeanne Turner added that super funds needed to be able to gather relevant information about the personal circumstances of those approaching retirement if they were to adequately assist them in that transition.

Currently, funds cannot factor in whether customers have a mortgage when giving advice, for example, or if they have a partner with their own retirement savings if that person is with a different super fund.

“Defaults, nudges and advice only work if the retirement products involved are suitable for their target market and the individuals taking them up, she said.

Financial Services Minister Stephen Jones is expected to put forward his proposals to reform financial advice in the superannuation sector this week, a year after an independent review first handed down its recommendations.