Advisers urged to adopt sophisticated retirement modelling
While solutions developed off the back of the retirement income covenant will never compete with personal advice, it’s important advisers demonstrate their value, says Accurium.
From 1 July 2022, the retirement income covenant will require superannuation fund trustees to develop a retirement strategy for members and publish a summary on their website.
While SMSF trustees have been carved out of the legislation, actuarial firm Accurium noted that the objectives of the covenant have historically been achieved for SMSF retirees through financial advice.
A key idea of the covenant is that a one-size-fits-all approach may not achieve the objectives, and trustees are expected to analyse their membership and understand if different retirement strategies might be required to achieve the objectives for different cohorts of members, Accurium explained in an online article.
“That is, strategies may be developed based on key characteristics such as Age Pension eligibility or level of savings,” it said.
Super funds will now be creating solutions that look to achieve these objectives for members, the firm said.
“However, financial advice continues to offer retirees something that the strategies offered by super funds will not. Personalisation,” Accurium explained.
“Solutions designed for cohorts of members may improve upon the status quo but [are] not expected to deliver the optimal solution for any individual member. Personal financial advice remains in the box seat to develop a strategy personalised for a retiree’s individual circumstances and objectives.”
The actuarial certificate provider noted that most advisers already know how to manage risk, maximise income, and balance flexibility to achieve a client’s goals for retirement.
“However, to showcase the value of their advice it may become important to think about how to evidence those considerations,” it stated.
“Super fund trustees are engaging professionals such as actuarial consultants to undertake sophisticated and comprehensive retirement modelling to comply with the covenant and develop retirement strategies for cohorts of members. However, there is no reason why financial advisers cannot access similarly sophisticated tools to evidence the benefits of their personalised retirement strategies.”
Accurium said that approach still widely used in advice is deterministic modelling.
“This uses fixed assumptions e.g. 5 per cent p.a. investment return, to model outcomes such as cashflows and balances,” it said.
“However, this does not allow an adviser to illustrate how a strategy manages risk, as there is no variation in return or inflation assumptions, and typically a fixed timeframe is considered.”
Advisers, the firm said, may want to consider adopting a more sophisticated approach.
“A stochastic modelling approach involves analysis of the range of possible outcomes by considering thousands of simulations to stress test the likelihood of a strategy achieving a client’s goals. This more sophisticated approach allows an adviser to understand and evidence how a strategy manages risk,” it said.
Miranda Brownlee
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 also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
