COVID-19 reveals ‘flaws’ with account-based pensions
With the pandemic impacting the financial positions of many retirees, the inadequacy of account-based pensions has left many superannuation fund members exposed, according to a new research paper.
In a new research paper titled Rethinking Retirement Income, Challenger Life said one of the key issues with account-based pensions is that they aren’t designed to produce a particular level of income guaranteed for life.
“For many cohorts, account-based pensions alone are not fit for purpose in retirement. Members face risks that they are not well placed to manage and, as a result, many retirees will underspend during their retirement years, or run out of money,” the research paper stated.
With $400 billion now in the retirement phase in large APRA-regulated funds, and increasing life spans, the paper argues that there needs to be greater focus on retirement income strategies.
“The federal government has acknowledged this, and indicated that from 1 July 2022, all super fund trustees will need to consider the retirement income needs and preferences of their members. Its Retirement Income Review released last week supported a focus on retirement income strategies,” it said.
Challenger Life head of institutional partnerships Simon Brinsmead said funds will have to develop strategies suitable for their members after they reach the retirement phase, rather than just rolling them into an account-based pension.
“This is a fundamental shift, and super funds will need to more broadly consider options for members in the decumulation phases, including options that may not be currently available in account-based pensions,” explained Mr Brinsmead.
The shift, he said, will impact all parts of the super fund business, from member retention and segmentation, through to the role of advice.
“The need for greater focus on retirement income strategies becomes increasingly important as the level of assets in the decumulation phase grows,” he said.
“Many Australians are shifting from supplementing the age pension to substituting for it. But while almost three in five retirees have sufficient means to reduce, or eliminate, their entitlement to government support, there’s been little focus placed on income strategies for retirement.”
Mr Brinsmead said there are several key tenants of creating a successful retirement income strategy, including managing the transition from accumulation to decumulation through strategies that address sequencing risk.
It is also important to understand the different risks that can arise when members shift to converting capital into income, ensure that a super fund retirement product delivers income for life and that the retirement product is simple and seamless to the member.
Mr Brinsmead explained that this might mean combining an account-based pension with another option, to deliver a holistic product that meets member needs for flexibility, low cost, simplicity, sequencing and longevity risk management and exposure to growth assets.
“A retirement income solution that integrates a guaranteed lifetime income stream with an account-based pension can manage key risks in retirement and be more likely to meet members’ needs,” he said.
“Superannuation trustees have a rare opportunity to lead by example and redefine the retirement experience for members.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.