Our complex system makes independent advice critical

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Superannuation is designed to ensure people can financially support themselves in retirement. However, media coverage and public debate tends to overwhelmingly focus on the savings phase (accumulation) rather than the spending phase (decumulation). With so much of the conversation dominated by how to grow your retirement nest egg, it’s easy to feel unprepared when it’s time to decide how to actually access the money you’ve saved.

The system is too complex
One of the reasons this is daunting is that Australia is the only OECD country that has a mandated, pre-funded accumulation structure without a mandated decumulation structure.

Unlike in other countries, where a defined benefit pension is more common, Australians have to make an active decision about when and how they’ll access their super in retirement – whether as a transition to retirement pension initially, a lump sum, an account-based pension, an annuity or as a mix of these.[1]

In making this decision, people need to consider a range of factors and projections, most of which they are not well equipped to deal with on their own. People want simplicity in their finances. Instead, they are left to navigate decisions on tax, access to the Age Pension and other government benefits. When coupled with the uncertainty of life expectancy and future expenditure needs, the system is setting people up to fail. This is compounded by very human responses to complexity, known as behavioural biases. For example, people tend to place more focus on the immediate concerns before them, making long-term planning harder. It’s no wonder that pre-retirement can be a stressful stage of life.

Earlier this year, Super Consumers Australia conducted a Retirement in Australia survey, which found that a sizable majority of the more than 10,000 respondents struggled to navigate the retirement income system.[2] They perceived planning for retirement as more complicated than almost every other consumer decision they need to make.

Good advice is hard to find
We asked respondents to tell us what (if any) resources they used to help them with retirement planning. Many people nominated super funds (41.6 per cent) and financial advisers (40 per cent) – two sectors that the financial services royal commission identified as struggling to overcome conflicts of interest in their business models.

Super funds can and should provide targeted and strategically timed information to people about the decisions they will need to make in the lead up and during the decumulation phase, and when they will need to make them. Their educative role can also extend to encouraging people to think about their super not as just a current lump-sum balance, but as a potential future income stream – for example, by projecting potential ranges of retirement incomes in member statements.[3]

Beyond this, it is problematic for super funds to have a role in providing personal retirement planning advice to members given the potential for such advice to be conflicted. A recent review by the Australian Securities and Investments Commission (ASIC) found that superannuation fund advice failed the best interests duty in 51 per cent of cases.[4] The superannuation fund business model is built on growing the size of the fund and, for some, extracting profit from charging percentage-based fees on invested capital. Therefore, there is a strong disincentive to give advice that sees this capital move elsewhere, for example to a better-performing fund or what might be a more suitable investment option outside of superannuation (e.g. paying down a mortgage).

The picture gets worse when we look at financial advice provided by vertically integrated providers such as banks, with ASIC finding 75 per cent of the advice files they reviewed were in breach of the law.[5] Meanwhile, financial advice in the self-managed super space fared even worse, with ASIC finding that 91 per cent of the advice files they reviewed did not demonstrate compliance with the legal requirement to provide appropriate advice.[6]

Government resources such as Moneysmart and the Financial Information Service (FIS) can be helpful, but also have drawbacks. For example, Moneysmart is a free, valuable service run by the regulator, but doesn’t give personal advice, while the FIS does not offer online access to its service or tools and has been criticised for not being appropriately targeted at those who actually need it.[7]

Australians aren’t alone in facing this problem; retirees in the UK have faced similar struggles. In 2015, UK retirees were given new ways to access their retirement savings, such as lump sum payments. However, they weren’t given much advice on how best to maximise those savings. This saw people making poor decisions and, in some cases, being scammed out of their retirement savings.

The UK government’s attempt to fix this problem is still in its early days, but it is promising. The Money and Pensions Service was announced by the Queen in 2017 and launched a couple of years later. It is funded out of a small levy on everyone’s pension savings, but then costs nothing extra to access.

The service provides answers to common financial questions people have throughout their lives, from saving for a first home to planning for retirement. Its Pension Wise service gives people access to free, impartial, specialised guidance – delivered face to face or over the phone – about their pension options. It also provides a free, online tool to help people choose how to access their pension money.

The tool provides users with a brief summary of the different options for taking a defined contribution pension. Users can select those they are more interested in for more detailed information, and can then choose extra information, e.g. how their pension is taxed.[8]

Back in Australia, we still lack access to a one-stop shop for independent, affordable and trustworthy retirement advice. It was something we  urged the government’s Retirement Income Review to consider.

Access to advice provided by an independent, trustworthy organisation (such as the UK Money and Pensions Service) would remove many of the inherent conflicts created by conflicted remuneration and vertical integration.[9] The Retirement in Australia survey found that older pre-retirees, particularly, wanted access to a helpline and a trusted person to help them navigate retirement decisions. Given that the complexity of decision making increases as people near retirement, this added level of assistance is understandable.

Advice has its limits
It is fair to say a lot more thought has gone into the accumulation phase of retirement saving compared to when people come to spend it in retirement.

As people save, they are supported with generally higher quality default options, so if they aren’t making active choices the system still offers some protection.

The retirement system does much less to guide people through the complexity.

It is open for debate whether the degree of flexibility (and the associated decision making that’s required of consumers) in the current decumulation system is the optimal approach. For example, the Centre for Excellence in Population Ageing Research (CEPAR) has suggested that mandated annuities, which are a feature of the retirement system in the Netherlands and convert an investment into an income for a period of time, may be more cost effective in providing for people in retirement and may even simplify decision making.[10] They have also proposed a ‘MyPension default’ option that could meet the needs of the majority, while allowing for people to ‘opt out’ into a choice product.[11]

Super Consumers is a strong advocate of extending the benefits of default product design from the accumulation to the decumulation phase. As we noted earlier, a large majority of people find retirement planning decisions complex and, therefore, lack confidence in navigating the system. The quality of financial advice is still being held back by conflicts, and many people can’t or won’t seek advice because it is expensive and can’t always be trusted. Also, decision making becomes more difficult and rates of cognition impairment increase as people age.

For some time now, the government has been considering a policy measure that would require funds to offer Comprehensive Income Products for Retirement (CIPRs) to members as part of a covenant introduced in legislation governing super. CIPRs would include risk-pooling, with simplified and standardised information disclosures. Progressing this framework has been paused pending the Retirement Income Review.

As Australia’s population continues to age, the weaknesses in the decumulation system discussed above will be magnified. Like others, we  eagerly await further developments after the recent release of the Retirement Income Review.

Have you found good financial advice hard to find? What are your tips to find an adviser?

Xavier O’Halloran is the director of Super Consumers Australia, an organisation committed to ensuring everyone gets a fair outcome from Australia’s $3 trillion superannuation industry.

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[1] Australian Research Centre for Excellence in Population Ageing Research, Retirement income in Australia, ‘Part 1: Overview, CEPAR research brief’, November 2018.  https://cepar.edu.au/sites/default/files/retirement-income-in-australia-part1.pdf

[2] While not nationally representative, the survey provides useful insights into consumer sentiment about retirement planning.

[3] Australian Research Centre for Excellence in Population Ageing Research, Retirement income in Australia, ‘Part 3: Private resources’, November 2018, p31. https://cepar.edu.au/sites/default/files/retirement-income-in-australia-part3.pdf

[4] ASIC, Report 639: Financial advice by superannuation funds, December 2019, p30. https://download.asic.gov.au/media/5395538/rep639-published-3-december-2019.pdf

[5] ASIC, Report 562: Financial advice: Vertically integrated institutions and conflicts of interest, January 2018, p35. https://download.asic.gov.au/media/4807789/rep-562-published-04-july-2018.pdf

[6] ASIC, Report 575: SMSFs: Improving the quality of advice and member experiences, June 2018, p63. https://download.asic.gov.au/media/4779820/rep-575-published-28-june-2018.pdf

[7] See Super Consumers Australia, ‘Submission to the Retirement Income Review’, February 2020, pp26-27. https://static1.squarespace.com/static/5d2828f4ce1ef00001f592bb/t/5e40e104120d25193d95e0a9/1581310217333/Super+Consumers+Australia+Retirement+Income+Review+Submission+%281%29+%281%29.pdf

[8] https://www.pensionwise.gov.uk/en

[9] See Super Consumers Australia, ‘Submission to the Retirement Income Review’, February 2020, pp29-30.

[10] Australian Research Centre for Excellence in Population Ageing Research, Retirement income in Australia, ‘Part 1: Overview, CEPAR research brief’, November 2018, p11. https://cepar.edu.au/sites/default/files/retirement-income-in-australia-part1.pdf

[11] Australian Research Centre for Excellence in Population Ageing Research, Retirement income in Australia, ‘Part 3: Private resources’, November 2018, p31.

Disclaimer: All content in the Retirement Affordability Indexâ„¢ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

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Total Comments: 12
  1. 1

    Lots of info there, and lots of chances for unscrupulous operators to “capitalise” on our future…
    The British system proposed above has one big flaw: Us who have saved all our working lives to achieve independance in retirement will have paid for a system we wont use, nor need. And can you imagine the “jobs for our mates” politicians getting biased advice out there? A free for all! Oh? An independant system? From a Government riddled with pork barreling and corruption, that refuses to implement a Federal ICAC? Not likely!
    What is needed is good honest advice, from the day people start contributing to super. From day one. HR/Personel departments, even schools, should educate young people while their brains are able to assimilate the messages. Unfortunately, in this “put-it-off” world, that’s not done.
    Secondly, throughout a person’s working life, they should be educated as to the actvity and performance of THEIR superannuation. Payslips should contain that information. Monthly (or fortnightly) snapshot of how it’s going and if it will amount to enough to fund their anticipated lifestyle. And what they could do about it. Change funds? Investment strategy? Potential pitfalls/roadblocks?
    With all the negatives around at the moment regarding life on the pension, a lot of working people give up on retirement. Even at 40 years of age, I hear people saying “What’s the point? I probably wont live that long anyway. Might as well enjoy it now!” (Then “we” have to fund their retirment…)
    Me? We are comfortable. I invested in super since I started work – in 1969. I dont get, or need, nor deserve a pension, neither does my partner (I totally support her BTW, always have). I have some investments I made 30+ years ago which are returning some small $$ as well. And I did it on an average wage. Mostly under the average wage, but never above it. No one gave me anything, except a good education, especially in maths
    Most importantly? An Industry Super Fund!

    • 0

      The change in the UK in 2015 was that prior to that people were FORCED to invest half their super pot in a lifetime annuity. As a result of faling interest rates returns were so poor after the investment company had grabbed their fees that for most people just spending the money straight out was a better option.

      They’ll be pushing for that here before long.

      As long as “the industry” can grab some of your money they’ll be telling the government of the day how wonderful our “uniquely Australian” retirement system is.

      Well it is for many of us. Like many I spent 40+ years contributing to it and instead of being faced with a complex calculation as to whether I am getting a fair return I get a nice round figure: $0.

      Both major parties are in the same boat and the Greens supported the coalition to get the last changes (which took away a great many part pensions and reduced others) through the senate.

    • 1

      Well done ‘on the ball’. It sounds like you got yourself into financial gear early in life and planned for the long haul by investing early, living within your means and not relying on a future pension. It takes out the uncertainty which seems to plague retirees. Education of successive generations could do well with your advice, particularly in relation to their super.

      I applaud you.

    • 0

      Some of the writers here are out of date about what get taught in schools these days.
      My granddaughter had a splendid education and on leaving school she is informed about buying a home, mortgages etc, buying a car, insuring and maintaining it, and l aspects of investing.
      She would be able to teach some adults a thing or two.

  2. 0

    I was once a public servant (sic) – not something to proud of obviously but I had a family to support so sometimes needs must.

    When the opportunity arose (about 25 years ago) I took a separation package and cashed everything up. Or so I thought. It turned out that I retained a certain amount of super in the state government employees’ accumulation fund. As a result I get invited to various seminars etc. Eventually I went to one.

    The speaker was a qualified financial adviser – salaried by the super fund obviously – not out to make a quid for himself.

    One of his main points was: Most people don’t need a financial adviser.

    I would say that’s beyond: avoid retail funds like the plague – industry super funds may not have the most fragrant board members but they are the best of a bad lot by a long chalk.

    If you are a state or federal public servant yourself (salt of the earth – just joshing earlier) you are probably in something pretty good already so don’t get talked out of it by a slick salesperson.

  3. 0

    You make some good points there #On The Ball..especially early education starting at school.
    However as you alluded to….The “ I want it all and I want it now” attitude coupled with a no value no respect bias from our educators would need a dramatic overhaul to make this work as the IDGAF..approach has become endemic in our society.

    • 0

      Why should you GAF under present system. If it’s your thing then by al means go out and splurge. Once you reduce your assessable assets you will qualify for a very generous age pension -the one you previously paid for but did not get.

      OTOH too many people do that and they’ll change the rules yet again – so get in quick – they’re talking about it already – and what they think about is worse than what they talk about.

  4. 2

    “Have you found good financial advice hard to find? What are your tips to find an adviser?”

    We can only speak to our experiences which are all positive. Our thoughts about retirement when we were in our early 60’s prompted us to seek the help of a financial adviser. we were asked to complete a budget prior to the interview at which he took a lot of details, asked us what we wanted to do in retirement, gave us a list of things to do straight away, including salary sacrificing, and asked us to return in 12 months.

    The first thing that he did 12 months later was to zero in on the budget forecast to compare with actual spending as he claimed our anticipated budget spending was too low. Thankfully our frugality won out and the budget was within limits. We were then asked whether we had done all of the things he recommended, which we had, and he was surprised. He stated that most people who sought his advice ignored a lot of it and then complained that financial advisers were useless.

    Because of the financial advice we got all those years ago, we are happy with the position we are in today, not rich but we don’t go without the things we want, we have holidays and we are still able to donate to our favourite charities. I’m not trying to boast (although it may read that way) but we may have been fortunate to find a great financial adviser first time or maybe it’s because we took his advice, all of the advice, not just the bits we liked.

  5. 0

    Many of the people now in retirement and receiving zero government age pension were advised at the time to maximise their combined super and (supposedly inadequate) government age pension incomes to get a brilliant result which was supposed to warrant the fees which the financial adviser (sometimes secretly) clawed back.

    In the event of course a simple change to the assets test clawback rate meant that they in fact received zero government age pension and ended up living exclusively one their own super income at a lower rate than the government age pension.

    You may think that the financial advisers must have refunded their fees (since their advice was all wrong) and are now playing violin on street corners.

    In both case no – (they’re no good on violin either) – but it’s important not to dwell on past wrongs. Play the game that’s in front of you. Don’t assume someone’s a crook just because they were in the past. Sign on the dotted line. You’ve got much more money than you really need and by now you’ve probably forgetten how hard you worked and went without to save it.

    The government and their good friends in the financial advice industry need your money much more than you do. German cars are very expensive to run

    Don’t be mean. Be a good Australian. Sign on the dotted line. You’ll feel a lot better knowing that it’s going to a good cause.

  6. 1

    I do not have super only my husband. I dont believe I need a financial adviser to tell me simple maths. Live by your means. Check your super statements regularly as some employees forget to deposit your entitlements. When i changed my husbands super to another, the old super company robbed my husband of 10, 000 dollar’s. I questioned them and they returned the 10,000 dollar’s. I would never trust anyone with our money. I invested 50.00 a week in buying property and controlled the books myself. Found errors in the banks and loop holes in the taxation system. Sold up now and spend the money whilst I’m alive. Went around the world at 50yrs old.



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