As mandated consumers, superannuation policy is something that affects all Australians. It pervades us through our working age and then influences our retirement outcomes. So how do we know whether it is providing us with good outcomes?
Many working in the superannuation industry bemoan the lack of member engagement in their superannuation. However, three events over the past year have highlighted that members are not as disinterested as some may have assumed:
- The Hayne Royal Commission identified poor behaviours by some superannuation funds. Following this, record amounts of cash poured into large industry funds, mostly at the expense of other funds that came under scrutiny during the royal commission.
- Insurance in superannuation became opt-in for young and low balance members. Many funds were inundated with queries when they advised their members of the changes.
- Early access of superannuation for those financially affected by COVID-19 has led to hundreds of thousands of applications and associated queries around member concerns on the impact on their superannuation balance and their default insurance, which has been compounded by recent market volatility.
Are funds providing good customer outcomes?
If the objective of superannuation is to ‘provide income in retirement’, then a good customer outcome would be if the member achieves financial security throughout retirement. However, it’s not realistic to wait until someone is dead to determine whether their superannuation outcome has been good. By then it is too late.
The government and regulator have seemingly risen to the challenge by enacting new regulations, in particular SPS 515 Member Outcomes. Under this prudential standard, superannuation funds are required to take “a forward-looking approach in assessing whether it expects to continue to deliver quality outcomes to its members”.
Partly as a means of supporting this, APRA released its MySuper heatmap late last year. According to APRA, the heatmap is designed to lift industry practices and enhance member outcomes.
This heatmap has garnered significant attention and feedback, but how does it stack up from the eyes of a superannuation member? APRA has defined outcomes in terms of:
- Investment performance – measured over three- and five-year periods since the introduction of MySuper;
- Administration and total fees – based on sample member balances; and
- Sustainability measures – aimed at identifying whether funds will continue to provide appropriate member outcomes.
A key criticism levied at the heatmap has been its narrow lens of examining issues of shorter-term underperformance, rather than reflecting the longer-term nature of superannuation. In addition, these investment metrics seem to only focus on peers and benchmarks i.e. has the fund outperformed similar funds? Such metrics could result in irrational member behaviour with little attention being paid to the true objective.
There is no assessment as to whether funds are meeting their investment objectives, nor a measure of what outcomes members will receive in retirement. Under the heatmap approach, a cash fund is as likely to be assessed as well as a balanced fund, despite the cash fund unlikely to provide an adequate income in retirement.
A customer oriented view
It’s possible to identify instances where superannuation members are concerned about their outcomes or have received poor outcomes, particularly after they have occurred. However, a good customer outcome should not be defined as the absence of a bad outcome.
At this stage, it’s helpful to return to our previous article, “What is a good customer outcome”. In this article we linked a good customer outcome with high financial wellbeing, using the University of New South Wales and Financial Literacy Australia definition:
“when a person is able to meet expenses and has some money left over, is in control of their finances and feels financially secure, now and in the future”.
A good customer outcome in retirement would therefore involve:
- Having an adequate requirement income – the Retirement Income Review is considering adequacy as one of its key points.
- In control of the finances – a self-funded retiree has more control of their finances than one dependent on the Age Pension for their income.
- Feels financially secure – a retiree may be financially secure but may not feel secure because the ongoing changes to superannuation rules create nervousness.
Historically, much less focus has been placed on making retirees feel financially secure and in control. They are important issues. A recent National Seniors survey found that most retirees (53%) worry about outliving their savings. This survey also showed that those reliant on superannuation as their main source of income in retirement worry less than retirees who rely on the age pension as their main source of income.
There is arguably more action needed in improving the actual levels of financial security offered to Australians in retirement. However, good customer outcomes in superannuation are much more than just the objective element of adequacy.
We must ask ourselves what actions can be taken for the majority of retirees who do not feel in control of their financial security. We need to help Australians not only feel financially secure and in control, but also how to objectively measure and assess this for generations both present and future.
We’ll be discussing these issues, with some suggested actions, at the 20/20 All-Actuaries Virtual Summit. Find out more and register today!
This article is the second in an article series produced by the Customer Outcomes Working Group – a subcommittee of the Wealth Management Working Group. Future articles in this series will explore specific emerging developments in the Wealth industry from the lens of customer outcomes.
The Customer Outcomes Working Group consists of:
- Rein van Rooyen
- David Millar
- David Carruthers
- Vivian Yu
- Aidan Nguyen
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