Frontier's Carruthers on what comes next for retirement incomes

The retirement income covenant required all superannuation funds to formulate and make public a retirement income strategy for members by 1 July 2022. With the one-year anniversary of the covenant drawing closer, funds should expect APRA to hold them accountable to their strategy and plans, according to Frontier Advisors principal consultant and head of member solutions, David Carruthers.

"What APRA was looking for was funds to do a retirement income strategy, but also to integrate that with their business plan for the year and their business strategy. So, APRA is going to then look at the business plan and say, 'This is what you said you're going to do over the year. Did you actually achieve that?'," Carruthers says.

Funds that may have stated they considered their existing allocated pension appropriate may not be scrutinised, rather it is those that outlined ambitious plans that they were unable to meet that may come under the regulator's radar.

But the retirement income covenant isn't the only thing that has been occupying funds over the past 12 months. Many have been discussing and working on mergers, which is a very time and resource-consuming thing activity for superannuation funds.

"It would be disingenuous of APRA to come out and say, 'Hey, you've done nothing on retirement income, because you've been merging, and you should have done it'. And it's kind of like, 'Well, we're merging because you were encouraging funds to merge'," Carruthers says.

"APRA has told everybody to put their foot to the floor on one thing, but [funds] need to be doing other things as well. They need to be ultimately doing what's best for the member. And that might not always be merging with another fund."

He also hopes that APRA's thematic review on some of the retirement income strategies will be made public soon and before the end of this financial year.

The product piece

Part of many funds' retirement income strategy were commitments to consider, or add to, their products for retirement members.

HostPlus and AwareSuper have already outlined new product plans around deferred annuities https://www.industrymoves.com/products-services/hostplus-considers-adding-deferred-annuities, https://www.industrymoves.com/insights/aware-super-s-retirement-solution

AMP has the MyNorth Lifetime Income account https://www.industrymoves.com/products-services/amp-throws-its-retirement-income-product-into-the-mix and the Australian Retirement Trust (ART) has the Lifetime Pension which it inherited from QSuper,

But Carruthers says before funds even think of new retirement income products, there are lots of other things they can do.

"If you just go back to what are the objectives of this retirement income strategy, the first one is maximizing income. And we know across the industry that about half of members are drawing down the minimum government rates. We know that half of the members are not maximizing the income, they're actually minimizing the income. If we can make some small progress on that and move some of those members away from minimizing income, not even towards maximizing income, but at least taking some more income," he says.

Ultimately, it's about providing members with a bit more confidence around their ability to draw down larger percentages. Carruthers cites Australian Super's Smart Default option on their Choice Income account-based pension which automates a 6 per cent draw down rate for members.

"We did some research a few years ago just looking at this and we got the PDSs from the top 40 or 50 funds. And there was a couple of funds that didn't list the minimum drawdown as the first checkbox on the application form," Carruthers says.

So, something as simple as changing the order of the checkboxes for the pension PDS and adding more options that are greater than the minimum drawdown, could be an appropriate nudge to encourage a member to move away from minimising their retirement income.

Look to the future

Carruthers's message to funds is that they may not have to consider a total revamp of their retirement income product range in the first instance. Better communication and engagement around pension drawdown rates is just as vital a piece in the puzzle as a longevity product like a deferred annuity.

"Certainly, our advice to funds is that the solution you're putting in today is probably not going to be the same as the solution you'll have in five or 10 years time. The market will progress, innovate and expect that, and you don't have to have perfect from day one. You want to build that into your design, how can we change it, what flexibility can we give," he says.