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3 key principles of retirement income--part two

Anthony Serhan  |  03 Jul 2017Text size  Decrease  Increase  |  

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Part two of Anthony Serhan's discussion of MyRetirement, the federal government's proposed structural response to retirement income and longevity risk. The first part of this article is available here, as published on Thursday, 29 June 2017.

 

2) Technology

Advances in technology will see ongoing improvements in the way retirement incomes can be built for Australians. Technology has a key role to play in better forms of communication, more efficient administration platforms, increasingly sophisticated modelling engines, and data-gathering techniques. Technology and advice should be the instruments used to pull together different product components into an overall retirement income solution for retirees.

Technology will bring down the cost of providing retirement incomes to more Australians. Technology means that it will become less important to "product-ise" solutions to make them commercially viable.

These factors must be recognised in the formation of the CIPR framework. The CIPR framework must make it easier for trustees to provide online advice to address individual requirements in retirement. If safe harbour provisions are being considered for a product, they should also exist for expanded intra-fund advice.

3) Preferences

The CIPR framework was originally envisioned for members who do not make a choice on retirement--defaulting members. However, even a defaulting member will have preferences.

My US colleagues have published research around optimal levels of annuitisation. Two of the biggest drivers are bequest preferences and the desire for certainty in retirement incomes.

From a policy perspective, superannuation is not intended to be used as an estate planning tool. This policy objective is managed through minimum drawdown requirements and the tax treatment of superannuation and pension assets.

However, it is incorrect to extrapolate this to a position where no superannuation assets should be left to dependants in any instance. Within these policy settings, some Australians will prefer to live more frugally so that their dependants may live better, while others may prefer more certainty around retirement incomes. People will have different preferences.

The fear of running out of money can be a factor in lowering drawdown rates. In some cases, this can be a justified fear. In other cases, it is more of a behavioural bias. In both instances, the result can be better informed through the utilisation of improved advice tools.

If no advice is provided, it is not surprising that members gravitate towards the published minimum drawdown rates. While much progress has been made, I doubt there is anybody who would say the industry has nailed the way in which we help retirees to manage their account-based pensions in retirement.

Using an annuity as part of a default would make more sense if the recommendation could be personalised. Given basic demographic information on each participant, such as age, compensation, savings rate, and balance, coupled with plan-level data on any type of additional pension benefits, would better enable the annuity recommendation to be tailored to that participant.

Even if a member hasn't communicated preferences, the ability to customise the portfolio based on available data is there today and will continue to grow. The cohort-based approach suggested by the government's consultation paper may be a good initial step on the road toward individual solutions.

Product options must include advice

In summary, a composite approach to CIPR that pairs digital advice--a low-cost, individualised component driven by data and technology, with a mix of transparent "best of breed" product options is the best path toward improving retirement outcomes for Australians.

The CIPR framework needs to acknowledge likely future digital capabilities and not just the tools at hand today, and to review the regulations governing the ability of trustees to provide individual recommendations.

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Anthony Serhan is Morningstar's managing director of research strategy Asia Pacific.

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