Estelle Liu, Jim Hennington and Anthony Asher recap the key points from their research into retirement income modelling.
Concerns with current practice
The retirement phase of superannuation currently pushes all risk and most decision making onto the member. Treasury’s proposed Retirement Income Covenant lists income projections as an avenue to assist members with balancing their competing retirement income objectives. The Actuaries Institute provided a submission supporting this provision, highlighting key concerns with current practice. Furthermore, we offered to help ASIC develop suitable requirements for calculator construction.
There are a range of ASIC Regulatory Guides on retirement projections and calculators (see below for links). The Institute also has Practice Guide 499.02 which covers projected superannuation benefit illustrations. The current guidance implies that deterministic projections, which only give the average or expected outcome, are adequate. There is a focus on simplicity without necessarily illustrating the risk/range that individuals face and the impact this has on their financial decisions. There is no clear requirement to take a holistic household view – which is vital when projecting a person’s future Age Pension entitlements.
Current guidance doesn’t require models to quantify or spell out the implications of longevity risk. Existing tools (including ASIC’s MoneySmart calculator) are not sufficient to help members understand the core trade-offs they are facing. They are not necessarily helpful to guide users to appropriate retirement solutions.
Draft Information Note on Good Practice Principles of Retirement Modelling
The Institute’s Superannuation Projections and Disclosure Subcommittee (SPD), Retirement Income Working Group (RIWG) and Superannuation and Investments Practice Committee (SIPC) have been working on producing an Information Note on Good Practice Principles for retirement modelling. It is based on a paper that Jim Hennington and the late Glenn Langton presented to the Actuaries Summit in 2016.
Retirement models are used for a range of purposes, including:
- Online calculators
- Digital advice tools
- Superannuation fund benefit projections
- Software used by financial planners.
They are also a vital part of product design and even government policy.
The Good Practice Principles address the scope of what a retirement model should cover and the calculations required. They help to ensure calculators ask for the right inputs, and provide sufficient and relevant information to help with informed trade-off decisions in light of retirees’ various objectives. Important principles include projecting outcomes at household level, including partner details and allowing for other assets, liabilities and income outside superannuation. Critically, they underline the need to present the variability of different outcomes and their consequences for decision making.
Actuaries want to lift the bar
A Virtual Insights session was held on 23 August with about 110 Institute members who shared their views and feedback. A poll asked opinions on whether the Institute should incorporate the principles in an Information Note (IN), a Practice Guideline (PG), a Professional Standard (PS), or something between an IN and PG. About 60 participants responded to our polling questions, and 98% thought that the Institute should help raise the standards by issuing at least an IN as a next step. Over half of the respondents felt that the Institute should push for stronger requirements – more or less equally divided by between support for a PG, or something between an IN and PG. We ran the poll before and after the presentations, and the number of people supporting a stronger line went up slightly. (Support for PS went up from 1 to 3. Projecting this rate of change would require another 15 Insights sessions to get majority support, so probably not before 2035!)
In answering other questions, about 60% of the respondents believe the main reasons that stop existing calculators from providing household level projections and showing the range of outcomes were due to overly focusing on simplicity. It does look like time to lift the bar. Model design needs to be member-centric and simple to understand. i.e. ‘how’ the outcomes are communicated to members is as important as ‘what’ needs to be communicated. The IN will lift the requirements in relation to ‘what’ need to be considered, but actuaries will need to work with member-centric design experts on ‘how’ to present the information to make this helpful, not confusing. Several actuaries have shared examples of innovation when it comes to communicating results designed to empower confident decision making, which we expect will be incorporated in the IN.
If you have any specific feedbacks on the draft Information Note, please reach out to the working group members listed below.
ASIC Practice Guides
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