The Australian retirement savings market has developed in 2022 in a positive way, a way I hope that the UK can follow. My friend Jim Hennington, signs off 2022 with this message about funding income from workplace retirement saving. Risks can be shared.
The accumulation phase is pretty simple – the focus is primarily on one product in isolation. You take your … contributions and aim for maximum returns (after fees) allowing for risk preferences.
But the retirement phase is much more important and more involved – the focus is on the member’s household (including their non-super, their spouse and their government pension). A mix of products and income sources come together to produce their overall retirement income.
In the past, all the risk, complexity and most decisions used to land on the shoulders of the member. But now they land on the shoulders of superannuation trustees – who are required to design high quality retirement income strategies for each group of members. This involves amazing modelling skills, practical financial planning experience and much more efficient retirement products than were offered in the past. Exciting times.
Signing off for 2022 from down-under
And this is the sign-off from Stephen Huppert, who works with Jim’s at Australian pension consultancy – “Optimum Pensions” . Optimum Pensions was founded by David Orford to achieve his life-long mission of a sustainable retirement income for all Australians and has been influential in my thinking on the direction I hope we will take in the UK.
Do you agree with Australia’s way of addressing the systemic weaknesses of funding a nation’s retirement income through a DC savings system?
“Superannuation funds are getting larger, the operating environment is more complex, and there is heightened scrutiny from government, regulators, competitors and customers on fund performance and member outcomes.” APRA Deputy Chair Margaret Cole – Opening remarks to the AIST Chairs Forum
This year we celebrated 30 years of the Super Guarantee (SG) regime that introduced compulsory superannuation contributions in Australia. Over this time, Australia’s retirement savings have increased from around $146 billion in 1992, to $3.3 trillion by the end of September 2022 (APRA Quarterly superannuation performance statistics, September 2022).
From saving for retirement to funding retirement
When Optimum Pensions asked industry experts, “What is the biggest challenge that still lies ahead for superannuation“. There was a common theme stressing the need to help Australians with their retirement funding.
This theme has finally been recognised on all levels of the industry this year. Acknowledging that the superannuation system has not adequately addressed the needs of retired members and members approaching retirement, the Government introduced the Retirement Income Covenant that commenced on 1 July 2022. The central requirement is for trustees to develop a retirement income strategy for this segment of members.
The importance of developing strategies to help this segment is evident when you consider that on 30 June 2022, over a quarter of all accounts belong to members 55 years and over. Further, these accounts make up 54% of all assets. (from the APRA Annual fund-level superannuation statistics for 2022 that cover APRA-regulated superannuation funds with more than four members released in mid-December.) See the chart below.
New retirement income products
The choice of a retirement income product is no longer a binary choice between an account-based drawdown product and a guaranteed lifetime annuity. In 2022, Generation Life and AMP launched investment-linked annuities: Generation Life Lifeincome and MyNorth Lifetime, respectively. These products allow the retiree to purchase a lifetime income with the amount each year based on the financial performance of the underlying assets.
Generation Life’s product was developed in partnership with Optimum Pensions based on our Real Lifetime Pension blueprint.
Both these products are available through financial advisors. We regularly hear that a barrier to superannuation funds offering a broader range of retirement income products is the challenge of guiding members to an appropriate product mix.
The number of financial advisors is still falling dramatically. It is now below 16,000, down from around 25,000 only a few years ago (Source: Adviser Ratings). The industry is waiting for the report from the Quality of Advice review that the previous Government established to consider how to improve access to high-quality, affordable and accessible financial advice. It is due to be provided to the Government by 16 December 2022.
These products join QSuper’s Lifetime Pension and Challenger’s Liquid Lifetime as products that allow the retiree to purchase a lifetime income with the amount each year based on exposure to investment markets.
Looking ahead to 2023
There are a few items on the legislative agenda, including the Government’s response to the Quality of Advice review, the outcome of the Treasury’s review of the operation of the Your Future, Your Super laws and the renewed attempt to legislate an objective of superannuation – over six years since a bill was first, unsuccessfully introduced into Federal parliament.
On the retirement front, we look forward to funds continuing to implement their retirement income strategies and meeting the expectation of APRA and ASIC of embedding these strategies within existing business practices and frameworks.
On the product front, we continually hear that life insurance companies and superannuation funds are working on new lifetime income products. Given that only Generation Life and AMP have successfully done so, we assume organisations are finding product development and implementation somewhat challenging. We welcome calls from superannuation funds to discuss to share our experience and expertise. We have several options for superannuation funds looking to accelerate their product development.
And for us, the Optimum Pensions team will continue to work towards redesigning retirement and fulfilling David Orford’s goal of lifetime income streams available to all Australians. We are closer than ever before.
Happy Christmas Australia
To all my Australian friends including Jim Hennington , Stephen Huppert, David Harris, Senator Nick Sherry , Jo Cumbo and John Tsalos, we wish you well.
You challenge our orthodoxies, offer a different perspective and give us courage to create pensions from our savings.
A happy Christmas and a happy new year to you.