Simple ideas for a complex retirement

Demographic changes demand financial literacy or retirement defaults.  Do you have the knowledge to decide? Anthony Saliba gives us a glimpse of his session at the upcoming Actuaries Summit.

One of the most common arguments for change within the superannuation system is the demographic shift already taking place in Australia. As noted by the most recent Financial System Inquiry (FSI), the growing ageing population and increased longevity are expected to result in a significant reduction in the workforce participation rate.

This is potentially problematic because a lower revenue base for the government will be funding an increasing Age Pension liability. Even former Prime Minister Paul Keating, the architect of compulsory superannuation, has recently advocated for change within the system, acknowledging that the demographics were much different in the early 1990s when the system was devised [1].

Although not perfect, the accumulation phase of the superannuation system is mature, accounting for the majority of the system’s $2.6 trillion assets and growing rapidly as the super guarantee charge increases and acts over a longer time frame, producing larger super balances at the point of retirement.

Additionally, Australia’s pre-paid expenditure tax model (whereby superannuation tax is collected on the way in and throughout, but not on the way out) is susceptible to intergenerational equity issues if tampered with in any significant way. Therefore, it is commonly acknowledged that the most pragmatic solution is to develop the drawdown phase of superannuation.

There are several areas within the drawdown phase of the system that are identified as requiring improvement. Barriers to entry restrict the types of drawdown solutions possible and, even for longevity products currently available, such as lifetime annuities, take up is low due to behavioural biases, amongst other things.

Additionally, solutions such as variable annuities and group self-annuitisation schemes fail to gain traction due to complexity, inflexibility and lack of perceived value.

A product may have desirable features, but if the benefits cannot be conveyed and understood, then it will not be taken up. This is exacerbated by the fact that only 20% – 40% of adult Australians have seen a financial adviser.

It is no surprise then that an overwhelming majority of retirees take their retirement income in the form of an account-based pension, drawn at minimum rates (the default). In many cases, this leads to retirees having unintended bequests pass on to their estate when they die – this is at odds with the proposed enshrined primary purpose of superannuation, being to “provide income in retirement to substitute or supplement the Age Pension .”[2]

The FSI recommendation aimed at addressing these issues was to require all super trustees to provide a pre-selected comprehensive income product for members’ retirement (CIPR). This product would ideally contain all necessary features and protections that a retiree needs, and any impediments to developing such products would be removed.

The Australian Government has subsequently accepted this recommendation and Treasury has launched a consultation process[3] on the implementation of the CIPR, or MyRetirement, product framework. However, the direction from Treasury to date is to open up the industry to all different types of “innovative” MyRetirement solutions and have trustees target them at member cohorts, with no compulsion along the way. This will simply not address the lack of take up issues that were described earlier.

This leads to the crux of the proposed solution: improved financial literacy when it comes to retirement. An admirable goal, sure, but not currently feasible in our current framework, nor the one considered by Treasury so far. For instance, how can financial literacy be improved if only a minority of pre-retirees are receiving financial advice?

How can an education program be rolled-out if providers offer products with varying features, each with complex product disclosure statements, making it nigh on impossible for financial advisers, let alone members, to consider all options and make an informed decision?

This is where a fundamental change in thinking is required. If the desire is to provide all retirees with the building blocks to implement their retirement solutions, then let us provide those building blocks.

One could argue that any retirement plan involving considerations of capital expenditure, liquidity, risk management, bequests and longevity risk can be addressed to a greater or lesser degree by existing products; account-based pensions and lifetime annuities (immediate or deferred).

Could a combination of these provide a viable solution?


Register to attend the 2019 Actuaries Summit to hear author of the article, Anthony Saliba, present the full paper on this topic. Anthony’s full paper is also available on the Summit website.

[1] Four Corners. Super Risk. 2018.

[2] Australian Government. Superannuation (Obective) Bill. 2016.

[3] The Treasury. Development of the framework for Comprehensive Income Products for Retirement. 2016.

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