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Meeting the retirement income challenge

Glenn Freeman  |  29 May 2017Text size  Decrease  Increase  |  

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Individuals, government, and financial services organisations are grappling with a core challenge presented by Australia's ageing population--how they will fund their retirement.


Federal Treasury's pending MyRetirement framework--an ongoing inquiry tasked with generating an industry-led system of comprehensive income products for retirement--will only be part of the solution, says Anthony Serhan, Morningstar's managing director of research strategy, Asia Pacific.

Launched in response to the Financial System Inquiry of 2014, this framework is intended to "increase individuals' standard of living in retirement, increase the range of retirement income products available, and empower trustees to help their members with the transition to retirement".

Morningstar is submitting its feedback and recommendations on Treasury's plans for the program, alongside dozens of industry stakeholders including financial institutions, lobby groups, and consumer organisations.

In broad terms, Serhan says the MyRetirement framework approach appears to be "too product-centric".

"The solution will use products, but it's focused on the world as we know it ... there should be more flexibility for the use of data and technology," he says.

Serhan highlights two key reasons why this lack of flexibility can be problematic. These revolve around the search for a default solution--similar to the way every Australian employer nominates a default superannuation arrangement for new employees who don't select their own.

"When you default someone [into a financial product] while they're in the accumulation phase, it's very different to defaulting someone who's in retirement, for a couple of reasons," Serhan says.

"When drawing money down, it makes it more complicated. What people want and need in retirement is different. And secondly, the ability to readjust future savings isn't there."

From a policy perspective, the MyRetirement framework will be attempting to walk the fine line between balancing the needs of the government and those of the individual.

Australian annuities are rare

Another challenge is the dearth of annuities in the Australian market--there is only a handful of financial services organisations in Australia who provide them. Challenger (ASX: CGF) is the leader in this space, and by a substantial margin.

While others are working to create new products, "it's going to take a few years for the product availability to catch up to demand," Serhan says.

The big four banks--Westpac (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA)Australian and New Zealand Banking Group (ASX: ANZ) and National Australia Bank (ASX: NAB), along with AMP Limited (ASX: AMP)--will also likely launch new annuities products in the months and years ahead. More super funds will also add them to their product line-up.

But beyond products, Serhan emphasises the financial advice shortfall, which is a problem right across the spectrum of Australian individuals, but is particularly important for people planning their retirement.

"Superannuation trustees need more flexibility to be able to provide better intra-fund advice ... yes, those with enough money will get advice," Serhan says, but he argues there needs to be advice solutions for the majority of Australians who aren't high net-worth individuals.

"Advisers need better technology selections, to provide advice about how long people's money will last in retirement ... the data is out there, but more needs to be done in helping people think about retirement in a better way," he says.


Life cycle of human capital and financial capital


Source: Morningstar


Wealth Forecasting Engine

Morningstar does a lot of work in the retirement space, having developed comprehensive models to help guide advisers and individuals on how much money to put into a pension fund.

The value advice and research can add to an individual investment portfolio, including annuities and super funds, is described as gamma--which sits alongside alpha and beta as descriptors of investment returns in relation to benchmarks. Asset allocation, dynamic withdrawal strategies, annuity allocation, and withdrawal sourcing are all specific types of gamma.

They are described in detail within a whitepaper developed by David Blanchett, head of retirement research, Morningstar Investment Management, and Paul Kaplan, director of research, Morningstar Canada.

The Wealth Forecasting Engine (WFE) is a key underpinning of Morningstar's approach to retirement research. WFE employs sophisticated, research-driven methodology to model investors outcomes, which can in turn help enable automated solutions.

It uses a wide range of data, including investor information around demographics, account behaviour, and investment goals. This is combined with technical information on taxation, local capital market assumptions, and investment product parameters.

"We're already talking to institutions, super funds, and financial planning dealer groups about how they can leverage this for their clients and members," Serhan says.

Morningstar sees automated advice solutions as a key part of bringing financial advice to a broader audience, including retirees and those approaching retirement.

"But digital advice is starting to hit more roadblocks here, and I think that will be a continual process. Governments at all levels should all be looking at better advice solutions, and how regulations can facilitate that," Serhan says.

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Glenn Freeman is a senior editor at Morningstar.

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