Ensuring all retirees find a suitable retirement solution - Part 1
The Government is currently drafting the Retirement Income Covenant (RIC), which is expected
to come into operation on 1 July 2022.
The RIC will “codify the requirements and obligations of superannuation trustees to improve the retirement outcomes for individuals” . This piece outlines what is needed to establish a retirement framework that ensures super funds assist all retiring members to find their way to retirement solutions that are not only suitable for their needs, but also accord with how they want to engage with the process .
Our central theme is the need to cater for substantial differences in the willingness and capacity to make financial decisions, and to seek financial advice. We argue that reliance should not be placed entirely on retirees to actively choose a retirement solution for themselves.
The ability for retirees to request that their super fund either recommend or select an option on their behalf should be accommodated, which we call ‘fund-guided choice’ .
A mechanism is also needed to address fund members who do not choose at all, which might entail a ‘safety net’ provision whereby trustees can assign retirees to an option under certain conditions.
Our focus is the delivery mechanisms for suitable retirement solutions by APRA-regulated funds. We do not let the existing legal and regulatory environment nor policy guidance constrain our considerations, although do attempt to identify where our recommended mechanisms sit outside existing and indicative constraints.
We also offer suggestions on how the RIC might be framed to accommodate differences across member types in their preferred mode of engagement.
Where we currently seem to be heading
The RIC will establish the principles under which super funds provide retirement solutions, which might be seen as comprising a joint drawdown and investment strategy involving one or a combination of products.
The fact that accumulated savings of retirees are stapled to a super fund under the Your Future, Your Super legislation makes it more likely that super funds will be the dominant provider of retirement solutions and services to their retiring members, at least initially.
The Government has indicated a strong emphasis on consumers making an active choice, which is confirmed by the RIC Position Paper (Treasury, 2021). A substantially choice-based architecture in retirement would be quite different from that in accumulation. Diagram 1 outlines what such a system might look like, based on current indications from Government representatives.
The choice architecture outlined in Diagram 1 generates some observations worthy of further reflection. Default settings have an important role during accumulation: we estimate that 59.4% of accumulation assets in APRA-regulated fund are invested in MySuper options .
However, there has been no mention of comparable arrangements in retirement, with the RIC Position Paper making only indirect references to defaults.
This implies that default members during accumulation will need to become active choice-makers once they enter retirement. Under such a choice-based architecture, the ability of consumers to compare retirement products and access the necessary assistance to make an informed decision will become even more critical.
The potential dissonance in choice architecture between accumulation and retirement runs the risk of exposing many retirees to a complex decision problem that they are not well-equipped to make.
The wide spectrum of retirees
Retirees vary along many dimensions. Many of these dimensions relate to solution design and member cohorting, including their financial situation (financial means, home ownership, single or partnered), and personal preferences (such as desired income and ability to tolerate risk). Many of these dimensions are mentioned in the RIC Position Paper. Catering for these differences requires a variety of retirement solutions, which will itself present a challenge for superannuation funds and other providers.
However, there is another important dimension that needs to be considered: the willingness and
capacity to engage . This gives rise to an arguably even greater challenge: how to help retirees find their way to a suitable retirement solution.
This is no simple matter under a largely choice-based architecture. Retirees need to address a complex multi-dimensional problem. They are likely to have access to multiple products that many will not fully understand. The problem is only compounded by large differences in the capability to make financial decisions or preparedness to seek and pay for financial advice.
Diagram 2 recognises these differences by presenting a spectrum of retiree types based on the mode they might prefer when engaging with their fund in identifying a retirement solution. We also note the decision frame implied for each type.
Some implications for how a super fund might cater for each type of retiree are discussed below. Our comments allude to various desirable features and delivery hurdles, while recognising that adjustments to the legal and regulatory framework may be required to overcome some of these hurdles. These may be viewed as suggestions that policy makers might want to consider.
1. Fully-advised: Seeks comprehensive financial advice. Some retirees will be willing to engage with, and pay for, comprehensive financial advice. This might be provided by the super fund or outsourced to external financial planners.
This decision frame is currently challenged on three fronts. The first is capacity to service retirees en masse. Adviser numbers have fallen significantly, and it might be some time before they recover. Second, comprehensive advice is time-consuming and hence expensive to deliver.
Many retirees might be unwilling to pay the $3,000-$4,000 it reputedly costs for a full statement of advice, and cost-effectiveness is problematic for those with low assets. Third is the complexity of retirement.
The use of stochastic tools to assess retirement risk and address these risks using a variety of different products is not mainstream practice among the advice community. While digital solutions (e.g. robo-advice) might ultimately address some of these issues by increasing capacity and reducing cost, fully digitised comprehensive advice is a future rather than a present reality.
2. DIY-active – Wants to choose by themselves, perhaps with some assistance. A self-directed retiree is dependent on a combination of financial literacy and access to appropriate decision support to help them assess the range of possible retirement outcomes and design their own solution by selecting or combining available products.
There are several hurdles to the effectiveness of this decision frame. Most important is the capability of retirees to make informed decisions, which we discuss further below.
Another is the rules around delivery of financial advice, which arguably need to be (re)framed to remove the barriers around providing retirees with the support they need (even accounting for scope to offer single issue advice).
Finally, the required tools need to be made more widely available to consumers. Digital tools (e.g. interactive calculators) would help, although retirees would still be left to interpret the output by themselves.
While provision of decision support tools and services may form part of a super fund’s retirement strategy, provision may also come from other financial service providers or even the Government (e.g. through ASIC MoneySmart).
3. DIY-reactive – Would welcome a recommendation from their fund, but wants to decide for themselves. Some retirees might prefer a recommendation from their fund, which they can then either accept or decide to look elsewhere (thus transitioning to ‘DIY-active’).
This decision frame aligns with the framework suggested for Comprehensive Income Products for Retirement (CIPRs) by the Financial System Inquiry (FSI, 2014) .
The provision of product and other information along with tools such as interactive calculators could assist these retirees to gain comfort that the recommended solution is suitable for their needs.
This decision frame might be accommodated by super funds applying a cohort segmentation approach to their membership, and developing cohort-based ‘tailored defaults’.
The recommendation might be presented as designed for the cohort that appears to be the best match for the retiring member, coupled with highlighting the availability of other options, tools and financial advice , .
Again, the rules around the delivery of financial advice may need to be changed in order to facilitate this decision frame.
4. Guided – Would prefer their fund to choose an option. We anticipate there might be some retirees who have no appetite to choose for themselves due to a lack of understanding of even the most basic financial concepts. Such retirees might be willing to make an explicit choice to outsource the selection of their retirement solution to their fund.
The choice mechanism to accommodate this situation could be a variation on that discussed above for ‘DIY-reactive’, with the exception that the retiree could be asked to sign-off on the solution they are provided .
5. Disengaged – Does not engage at all. There has been minimal focus on the possibility that there could be a class of members that might not engage at all. How totally disengaged retirees may be addressed under the retirement choice architecture is unclear.
Nevertheless, the retirement framework would be incomplete if it failed to cater for these members. This might be done by placing obligations on trustees to address retirement-age members who do not make a choice. Trustees might at least be required to attempt to engage with these members, and potentially be given the power to assign them to a solution without their prior consent under certain conditions.
Part 2 of this article will discuss the issues surrounding this decision frame in further detail.
*Geoff Warren, Associate Professor, Australian National University and David Bell, Executive Director, The Conexus Institute.
Originally published here. Republished with permission from The Conexus Institute.
 RIC Position Paper, Treasury (2021, page 2). See: https://treasury.gov.au/consultation/c2021 188347.
 Our thanks to the following people for very helpful comments and suggestions: Anthony Asher, Hazel Bateman, Ron Bird, Marisa Broome, Adam Butt, John Coombe, Jeremy Cooper, Jeremy Duffield, Don Ezra, David Gallagher, Graham Hand, Pamela Hanrahan, Graham Harman, Ashton Jones, David Knox, Estelle Liu, Aaron Minney, Xavier O’Halloran, Deborah Ralston, John de Ravin, Nicolette Rubinsztein and Young Tan.
 The expression ‘guided choice’ was also used by the Retirement Income Review (RIR, 2020) to describe much the same thing (see pages 454-458).
 Based on the APRA (2021). Note that this statistic probably understates the degree of choice, as it does not capture choice of fund or active selection of the MySuper option. We thank Aaron Minney for assistance with this calculation.
 Research identifies different groups of super fund members by willingness to engage. Deetlefs et al. (2019) form five groups based on trust in their fund and revealed interest in their super. A survey by Super Consumers (2021) identifies three groups denoted ‘disengaged’, ‘engaged delegators’ and ‘engaged DIY’.
 In development of the initially proposed framework, a limited degree of member fact-finding was
considered to facilitate CIPR customisation, which was to occur under a safe harbour arrangement. For details, see Discussion Paper (2016) at https://consult.treasury.gov.au/retirement-income-policydivision/comprehensive-income-products-for-retirement/.
 For example, the fund might say something like: “We have three retirement income options tailored for ‘representative members’ Bill, Jane and Sue. The representative member most like yourself is Sue, so the option that we tailored for her is more likely to be suitable for you. We recommend that you should choose that option. If you do not view yourself as similar to Sue, we invite you to consider other options or take financial advice. We can also provide a range of information and tools to assist you with your decision.”
 Warren (2021) outlines a process of this type.
This might happen in lieu of highlighting the availability of further options and decision support.