The Australian Perspective – Navigating the next stage of retirement product design

Introduction

Following the introduction of the Retirement Income Covenant on 1 July 2022, the management of retirement assets continues to grow in importance in the Australian market.

A few key statistics from the Australian Bureau of Statistics (2020) ‘Retirement and Retirement Intentions, Australia’ release, include:

• There were 3.9 million retirees.
• 55% of people over 55 were retired, up from 53% in 2016-17.
• The average retirement age (of all retirees) was 55.4 years.
• Half a million people intend to retire within 5 years.
• The average age people intend to retire is 65.5 years.
• The Pension was the main income source for most retirees.

Furthermore, life expectancy continues to increase, with life expectancy at birth being 81.3 years for males and 85.4 years for females in 2019-21 (Australian Bureau of Statistics, 2022, Life Tables).

The projected growth in post-retirement assets can be seen in the Chart below, from the ‘Deloitte Actuaries & Consultants (December 2021) Dynamics of the Australian Superannuation System – The next 20 years to 2041’ report.

Projected superannuation assets (2021 to 2041)

For superannuation fund trustees, this highlights that:

1. Pension assets will increase as a percentage of assets under management;
2. Member retention from the accumulation phase to the pension phase is critical; and
3. Therefore, the need for a fund to review its in-retirement product offering is vital.

JANA recently conducted a retirement questionnaire of product providers to understand their latest thinking on the retirement market in Australia, where they see the industry evolving over time, and their views on retirement product design.

Key Themes from JANA’s Retirement Questionnaire

A common theme across the questionnaire responses was that it is unlikely that one product will be sufficient to meet the needs of all members. Many responses noted that it is likely that funds will need to offer a range of retirement products which can cater to different member risk profiles, retirement income objectives, member circumstances, risks and flexibility requirements.

This is consistent with JANA’s view that funds will need to offer a range of products (rather than one single product) to meet the different needs of their member cohorts. Super funds will need to manage the retirement product design trade-offs, which include maximising income, sustainable and stable income, flexibility and the member’s risk appetite.

There has been a rise in lifetime income product offerings in the market, and this was evident in the questionnaire responses. Many of the responses from product providers noted that a retirement product structure could include a form of a lifetime income product alongside an existing retirement product.

From JANA’s perspective, this is an area that is constantly evolving. We have seen some early innovation of retirement income products. The opportunity for first movers in this space is the competitive advantage of having a differentiated product launched early to members. On the flip side, there is the risk of being a first mover in this space with a product that could become a legacy product. There is also unknown member demand and take-up for these products. How a product interacts with the Age Pension is also an important consideration for retirees in Australia.

In terms of product innovation overseas, target date funds, glidepaths, liability driven investing, and insurance based solutions were mentioned as products that have been offered in overseas markets. From JANA’s perspective, the interaction of a retirement product with the Australian Age Pension is an important consideration when considering the applicability of overseas retirement products to the Australian market. In the Australian market, account based pensions and bucketing approaches have been adopted in the pension phase.

Aiming to tackle the risk of members outliving their savings, responses noted that an increased use of longevity income products along with increased financial advice and member guidance could lead to higher drawdown rates by giving members the confidence to spend comfortably in retirement. Many suggestions to achieve this again focused on using hybrid annuity/pension products which provide regular income as well as access to capital (to allow members to have a regular income as well as the ability to fund larger purchases in retirement).

Implementation challenges were mentioned frequently as being a major hurdle in the provision of new products, especially individualised solutions. Administration is an important operational consideration in the provision of retirement products. A common theme was that funds are likely to need to invest in developing their platforms to facilitate the integration of new solutions or otherwise partner with other funds or third parties to achieve this.

The importance of financial advice and guidance in a retirement offering was also a common theme amongst questionnaire responses. Robo-advice was also mentioned as a strategy that has been used for retirement solutions in overseas markets, utilising technology as a simple and scalable option for providing advice to members.

The role of tools to demonstrate the outcome of options was also a common theme. Member communications was also noted as another important consideration.

Conclusion

Retirement product innovation has been at the early stages of evolution, however this is an area that is constantly evolving. In recent times we have seen a rise in retirement income products coming to the Australian market, as was evident in our retirement questionnaire. Whilst investment considerations are important, non-investment considerations such as administration, technology, advice and member communications are all important factors in a retirement product offering.

A next step in the evolution of the industry is measuring the success of retirement strategies. At JANA we have been working on a framework to assist Trustees of super funds in assessing their retirement product offering, across a range of quantitative and qualitative factors. We have expanded our modelling to include different decumulation solutions in our framework.

Please contact the JANA Retirement Team (retirementresearch@jana.com.au) or your JANA Consultant if you wish to discuss further.