The superannuation system should adopt the use of preset account-based pensions (ABP) for all members aged 65 or over to counteract the slow movement of retirees when they exit accumulation phase, according to a new paper from the Actuaries Institute.
The paper, “It’s time: here’s how to turn superannuation into a retirement income system”, co-authored by actuaries Nick Callil and David Knox, said there is an estimated $326 billion of retiree wealth still in the accumulation phase costing the 1.5 million members who hold it a total of more than $2 billion in tax each year.
The pair have recommended super funds adopt a new income product, MyIncome, which is a preset ABP offered to all members of Australian Prudential Regulation Authority (APRA)-regulated funds from age 65, with the income stream features, including the drawdown and investment strategies, to be set by each fund.
Callil and Knox proposed these new income streams would be the first component of a three-part package in which the preset ABPs would be offered to APRA-regulated fund members using a frictionless acceptance process that requires no forms.
The second part of the scheme would require any superannuation balances still in accumulation phase at age 75, up to the transfer balance cap, to be transferred to pension phase and an income stream commenced. This shift would apply to all members of APRA-regulated funds or SMSFs.
“The slightly different treatment of APRA-regulated funds and SMSFs recognises that all SMSF members are trustees and are therefore directly involved in the management of the superannuation fund. On the other hand, the age 75 requirement should apply to all superannuation funds consistent with the objective of superannuation,” the paper stated.
The third part of the package would require APRA-regulated funds to begin collecting members’ bank account details from the time a member turns 60 to facilitate future pension payments.
“We need to normalise drawing an income from super so more people can live with dignity in retirement. The process for accessing a retirement income is too complex so many people simply build up assets in super rather than using them in retirement as intended,” Callil said.
“There is clear inertia when it comes to drawing down income, driven by the complexity of the decisions retirees are being asked to make.”
Knox added that applying for an income stream requires retirees to make decisions around asset allocation and drawdown amounts, complete additional forms and verify their identity and this highlights a structural gap in the system.
“We do not have a retirement income system. Australia’s well-respected superannuation system has helped millions save for retirement. Now we need an equally effective mechanism for delivering that income,” he said.
“Our proposal gives superannuation funds the flexibility to design account-based pensions to suit their members and continue to engage with them. Funds know their members best and we want them to continue developing solutions that deliver the best outcomes for their members.”
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason