Superannuation funds need to lift their game when it comes to offering post-retirement products, according to the deputy chair of the Australian Prudential Regulation Authority (APRA) Helen Rowell.
In a speech to the AFR Super and Wealth Summit, Ms Rowell used the popular nest egg analogy to illustrate the problem with the way superannuation funds approached post-retirement plans.
“When you’ve spent as much time around superannuation as I have, you get to see a lot of images of eggs,” Ms Rowell said. “Usually in nests. Often painted gold. Frequently lying on a bed of $100 notes.
“Yet for all the ubiquity of the ‘nest egg’ as a symbol of planning for a comfortable retirement, I can’t recall ever seeing an image of the egg hatching.”
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Ms Rowell said that despite the superannuation industry growing into a financial behemoth over the past 30 years, the post-retirement phase of superannuation remained very much a fledgling.
“Australians might be transitioning into retirement in ever-growing numbers and with increasingly higher balances, but the availability of a wide range of quality products to help them manage and ultimately use their savings, potentially over decades, has failed to keep pace,” Ms Rowell said.
“The underdeveloped market for retirement income products is a missed opportunity for the wealth management industry; not because it poses particular risks – at least for now – but because the sector could be doing more to demonstrate its valuable contribution to solving the retirement puzzle by offering high quality financial products now and into the future.”
She said the government’s retirement income covenant highlighted the need for the industry to provide a wider range of high-quality options to help older Australians manage their life savings throughout the retirement phase.
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“Evidence shows that the majority of Australians do not adequately plan for their retirement or make the most of their assets in retirement,” Ms Rowell said. “As was noted in the Retirement Income Review (RIR), many people die with the bulk of their life savings intact.
“Rather than a sign of generosity to the next generation, this is widely accepted as evidence that retirees often lack the necessary guidance or options to help them effectively manage their nest egg, and so often are more frugal than needed in their retirement spending for fear of running out.
“This is not great for retirees, who may be unnecessarily compromising their quality of life. And it’s not great for the Australian community, because it means that our otherwise high-quality retirement system is not delivering to its full potential.”
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Ms Rowell said the situation could be fixed if superannuation entities, life insurers and investment managers worked together on finding solutions.
She said the post-retirement space was ripe for good innovation and had remarkable untapped potential.
The gap in the marketplace led to the majority of super members transitioning to the retirement phase choosing to take a lump sum, rather than investing their money in a retirement income product that would provide them with an ongoing income.
“The most popular option among retirees who invest their money in a retirement product is a simple account-based pension,” Ms Rowell said. “This option gives them maximum control of their money, but also total responsibility for ensuring it lasts the distance while also continuing to bear the investment risk.”
She said the market for annuities remained small and was overwhelmingly dominated by one company that had about 90 per cent of the market.
One of the biggest challenges the industry faces in developing new products is changing the mindset of the newly retired.
“One of the problems with the ‘nest egg’ motif is that it puts a focus in the consumer’s mind on accumulating the largest possible pot of money and then sitting on it,” Ms Rowell said. “Minimal emphasis is given to using the golden egg, and consequently retirees often struggle with the idea of using some or all of their accumulated wealth to fund their retirement.
“This mindset may in part explain why annuities continue to struggle to gain widespread acceptance as a retirement income solution, despite gaining popularity in overseas markets where retirement income products are more the norm.
“Having spent decades waiting to access their retirement lump sum, it’s perhaps understandable some retirees may feel resistant to immediately losing control of it again – even if in exchange for a safe, stable income for life.”
Ms Rowell said that better financial advice was part of the solution to changing attitudes towards retirement income products.
The RIR showed that of those who used a financial planner, 70 per cent invested their money into a retirement income product, while that figure dropped to just 47 per cent among those who didn’t use a financial planner.
Many of those who did not use a financial planner kept their money in cash.
What do you think of the post-retirement products on offer from financial institutions? Do you have an annuity? Have you consulted with a financial adviser about your retirement income options? Why not share your thoughts in the comments section below?
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