The superannuation sector has yet to receive clear directions about building a framework for retirement income but Australian Prudential Regulation Authority (APRA)-regulated funds could learn lessons from the SMSF sector about creating better options for retirees, according to an industry consultancy group.
In a column posted on its website, Rice Warner stated the slow pace of retirement income reform has resulted in half of the baby-boomer generation entering retirement without formal advice or products that suited their needs in retirement, but which can be found within the SMSF sector.
“As APRA funds contemplate the changes needed for the forthcoming Retirement Framework, they should think further about building a viable retirement service for their members,” Rice Warner said.
“After all, if a highly fragmented segment can deliver something efficient, it should not be beyond the ability of those managing hundreds of thousands of members and tens of billions of assets.
The consultancy group noted SMSFs held more than half of the nation’s retirement assets as they were structured to allow retirees to manage their own finances and had key advantages in how funds were structured as well as how they handle tax, access advice and make investments.
“The key advantage of SMSFs is that they pool family superannuation – more than 85 per cent of these funds have been set up for couples,” Rice Warner stated.
The firm pointed out that at retirement a couple with an SMSF would need four linked accounts consisting of an accumulation and a pension account for each partner, with the former receiving contributions from any part-time work or to hold assets exceeding the transfer balance cap.
“This contrasts to APRA funds where the partners are usually not in the same fund, and where their accounts cannot be linked due to outdated administration platforms. Further, shifting from MySuper into a retirement product is tedious with cumbersome paperwork,” RiceWarner said.
This inability to have a total view of an individual’s, or couple’s, superannuation was also cited as a barrier to the provision of advice within an APRA-regulated fund.
Rice Warner pointed out that APRA-regulated funds can only hold a part of a member’s financial assets and, due to insufficient information, intra-fund advice is limited to recommendations about moving out of accumulation into pension phase.
It added where intra-fund advice is offered and “where a full pre-retirement plan is prepared for a couple, the member is simply moved into an account-based pension, but the partner is often left in their current fund’s retirement product.”
“One of the reasons for this is the compliance cost of comparing the partner’s fund with the member’s fund – and the embarrassment if it is rated better. However, leaving the members in separate funds does makes it more complex to review strategies in future years.
Further the column noted APRA-regulated funds usually offer a single diversified or balanced fund shaped around MySuper but these were best suited for building wealth and not maintaining it through post-retirement stages.
“A balanced fund is ideal for those saving for retirement, but it is not optimum for retirement where people need several accounts for different purposes,” Rice Warner said.
“For example, this could include one account for making regular pension payments, a diversified fund to cater for the longer-term spending needs, and a separate allocation for longevity protection.
“Once again, this is easier to structure for a couple with all their pension assets held in one place. It is also easier to manage the tax situation,” it concluded
