Retirement incomes – a critical solution

Retirement incomes – a critical solution

As the Australian population ages, superannuation funds are not only helping people to build their retirement savings, but are also looking at the potential, and challenges, of managing those savings well into retirement. KPMG Partner Paul Howes explores the next steps.

Partner, Head of Wealth Management Advisory

KPMG Australia


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Superannuation funds recognise the ageing population and the longevity risk faced by retiring members. As a result, the need to create retirement income products and solutions has been on most funds’ strategic plans for a number of years.

However, the development of detailed strategies, or the further step of introducing new products and services for members, is only now beginning to pick up pace. There have been, and continue to be, a number of hurdles to overcome.

Funds have focused on pre-retirement

Funds have spent over 20 years refining their product offering for pre-retirement members, which have represented the bulk of their membership. Member investment choice, fund choice, MySuper, and the rise of the self-managed super fund (SMSF) market have given funds reasons to refine their pre-retirement offering.

They have increased the range of investment choices, allowed transfers of insurance, and introduced member direct investments. Tax changes, most notably the introduction of contribution caps, have also impacted pre-retirement members.

As a result, the way funds operate – their structures, objectives and planning – have focused on meeting the needs of a fairly generic pre-retirement membership.

Funds have also been distracted

There have been plenty of other things demanding a fund’s attention and absorbing resources. These include the implementation of Stronger Super, administrator consolidation and system upgrades, as well as considerations of, or executing fund mergers.

Introducing a retirement solution is complex

To succeed in the retirement space, funds need to rethink their whole operation. But to do this, they need to determine their retirement offering. And this is not easy, as designing and implementing a retirement solution is inherently complex.

The first difficulty is to meet the needs of a range of members. Pre-retirement, all members have the one key goal to maximise their savings on retirement. In retirement, it’s a different story. For example:

  • for members with lower balances, superannuation retirement savings supplement a full age pension entitlement – they may even require their whole balance to retire debt
  • at the other extreme, members may have sufficient savings such that investment and longevity risk are not concerns
  • in the middle are members for whom investment and longevity risk are real issues and getting their retirement decisions right is crucial, and individual.

As true ‘industry’ funds have morphed into public offer funds, open to all, most funds will have members in all these categories.

The second difficulty is the fact that funds don’t know the whole story. Even if a fund were able to provide retirement solutions to meet the differing needs of their members, it is unlikely to have the whole picture to be able to offer the appropriate solution and support for each member. Again, for some members, their superannuation fund balance may be their only retirement savings. At the other extreme it may only be a small component, with other savings held in other superannuation funds or outside the superannuation environment.

Thirdly, members find it difficult to engage with and understand superannuation. A product which is modified or improved to better meet retirement needs is even less likely to be taken up. The obvious answer of providing members with advice has its own challenges, such as the ability to provide access across the membership population, cost, and engaging and informing advisers in relation to a new product, etc.

So how should funds react?

Industry legacy positions differ, so whilst the issues facing the industry as a whole can be broadly characterised as above, the optimal response for a particular fund is highly dependent on the unique experience and situation of the fund and its members.

Significant focus is called for within a fund to develop an understanding of these challenges and apply it meaningfully to the business. That focus, whilst needing to be aware of other industry responses, will be, if not unique, individual to the fund.

The focus must also draw broad attention from within the business in order to have traction and to ensure the subsequent re-orientation of a significant set of objectives. That is a challenge, in addition to the challenge of identifying and formulating the response.

Doing all that in a dynamic and competitive environment is both a pressing need, and an opportunity.

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