Where to for retirement incomes policy?

The Financial System Inquiry’s (FSI) final report, released in December last year, focused attention on the future direction of Australia’s retirement savings policy and the role of superannuation in particular.

The report urges the government to seek broad political agreement for, and enshrine in legislation, the objectives of the superannuation system and report on how policy proposals are consistent with these objectives over the long term.

It also recommends superannuation fund trustees be required to pre-select what it’s calling a comprehensive income product for retirement (CIPR) for their members. That is, they should be defaulting their members into retirement income streams.

Both recommendations are fundamental to the future health of the retirement savings system, however, they don’t go far enough and there is one startling omission.

First of all, the first recommendation only relates to superannuation policy. Superannuation, however, is only one component of retirement savings. A comprehensive retirement savings policy must also include the age pension and non-superannuation savings, particularly the family home, and how they interact.

The FSI panel suggests the primary objective should be “to provide income in retirement to substitute or supplement the age pension”. But is that enough? Should we be aiming higher?

The age pension, as the first pillar of our three pillar system, was originally designed as a safety net, however, even the last Intergenerational Report forecast that 80 per cent of retirees will still be accessing at least a part age pension come 2050.

If we look at a broader retirement savings objective, should we instead be aiming for poverty alleviation, something like the modest level of the Association of Superannuation, Funds of Australia Retirement Standard or even maintaining our standard of living in retirement?

A comprehensive retirement savings policy also needs to consider adequacy targets in retirement, age pension age and eligibility, coverage of superannuation, and accessing super and when.

Secondly, we need to move away from superannuation being regarded purely as a savings vehicle and need to start considering it as a lifelong retirement incomes vehicle.

We need to encourage the transition to a retirement incomes culture. I imagine many SMSF trustees already consider their fund this way, but it is not always the case in the wider superannuation community.

The FSI’s recommendation for trustees to pre-select a CIPR for their members is a step in the right direction.

A CIPR would most likely be a portfolio of products that would provide an immediate income stream, such as an account-based pension or annuity, paired with a deferred income stream, such as a deferred lifetime annuity or group self-annuitisation scheme, to insure against longevity risk.

There would also have to be access to a lump sum.

The onus would be on trustees to select a CIPR that suits their members’ needs, but given the diverse needs of members in retirement, there is a risk we will end up with cookie-cutter-type products for the masses, such as MySuper, that will not suit everyone.

What is needed as a starting point is a default into a flexible immediate income stream, such as an account-based pension, and then flexible access to deferred income streams to address longevity risk.

However, shifting the focus to retirement incomes will only succeed if the government removes the regulatory impediments to the development of income stream products to encourage product innovation and policy incentives are provided to encourage the use of longevity risk products.

This brings me to the glaring omission in the FSI recommendations. With around 1 million members in SMSFs and an increasing number of SMSFs in retirement phase, there is no mention of providing retirement income solutions to SMSF members.

The FSI has focused on Australian Prudential Regulation Authority fund trustees providing CIPRs to their members.

What is also needed is the regulatory flexibility and incentives for product providers to develop flexible retirement income solutions that can be used within SMSFs, such as deferred income streams or pooled longevity risk schemes, or easily transferred to without penalty.

A long-term retirement savings goal would give our system stability and direction and would minimise the short-term political interference that has characterised the system in recent years.

Only when we have a long-term goal and objectives for our retirement savings system can we then have the conversation about the level of government support through the super tax concessions and the cost of the age pension.

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