Avoiding the potholes on the road to MyPension

Retirement income was widely considered as the unfinished business of the Cooper Review. Last year’s Financial System Inquiry called for each super fund to implement a Comprehensive Income Product for Retirement (CIPR) that would provide income, longevity risk management, and flexibility, and argues that trustees are well placed to do so.

But are most super funds really well placed? A quick review of the evolution of Australia’s retirement income market to date offers a cautionary tale and suggests that the road to a “MyPension” product is full of potholes. This is potentially significantly more complex than implementing MySuper for the accumulation phase, and may well prove beyond the resources of small to medium funds.

What about the members – what do they want?

So far, in the contest between control / flexibility (ie account based pension) vs management of investment and longevity risk (ie annuity structures), there has been an overwhelming vote in favour of control / flexibility, whether in collective funds or via an SMSF. Despite the commercial success of Challenger, there has been little growth in annuities market share of pensions over the past decade, and as today’s chart shows, the annuity category is a relatively tiny niche in the overall retirement income market. Indeed, most of the annuity market is term annuities, which arguably have more in common with term deposits than retirement income streams.

Funds and asset managers looking to building CIPR solutions or product component parts face a series of obstacles:

• Account-based pension products are relatively simple. Move beyond that to longevity risk pooling, guarantees, and investment smoothing, and product design becomes incredibly complex – and may involve some form balance sheet or life company backing. Not a core capability of most super funds and a product development graveyard for the past decade.
• Because of their complexity, these types of products are hard to communicate to members in simple terms. Members don’t buy what they don’t understand, which MTAA can testify to. Yes, you can default members into such a product, but you still need to be able to communicate clearly how it works.
• That means you need to solve for retirement specific financial advice as well as solving for the product. This is not simple advice and it is probably not where you would try robo-advice. Funds will need an advice capability that is both complex, comprehensive and scaled up. Fine if you are a big vertically integrated retail competitor with large advice networks on hand. But if you’re a not-for-profit, that’s a problem – you’ve got rapidly growing numbers of members needing advice but in virtually all cases very limited advice resources.

Even if you can tick the above boxes, you’re still not home. Past management at what was ING Australia’s OnePath business invested heavily in their MoneyforLife retirement income product, gave it substantial marketing support, and enjoyed extensive advice channels.

MoneyforLife still failed to reach sustainable scale and was closed to new business. In addition to the above issues, advisers found it expensive and the long terms benefits difficult to demonstrate to their clients given the then economic climate. Adviser tools and training at the time were generally modelled to life expectancy, approximately 15 years after retirement, making it uncommon to incorporate longevity risk and model the product’s positives.

BTFG and MLC have both introduced protection overlays for their platforms, and Mercer has brought the first major longevity experience pool to market in LifetimePlus. But the bulk of recent efforts have been investment-led approaches focused on improving on the account-based pension model. Approaches we have noted (by increasing sophistication) include:

• Tax optimised – recognising the zero tax environment of the pension division.
• Yield orientated portfolios – greater focus on higher yield assets and income strategies
• Post retirement lifestage funds – typically de-risking clients in pension phase
• Buckets – splitting pension accounts into (typically) different risk or goals based buckets
• Cohorting – seeking to target income levels for age cohorts and minimise volatility around that target

It’s early days and which – if any of these – will emerge as a dominant successor to or choice to accompany an account-based pension in a CIPR is unclear. Developers need to be flexible and remember that regardless of how much research you do, you almost never hit the bullseye first time – adjustments are almost always needed in the wake of first contact with the market.

The distinct lack of development success to date is a sobering reminder that there is a big gulf between what we think members should want from a retirement income product, and what they actually want. The vast bulk of members today in account-based pensions are in relatively standard balanced or conservative risk based investment options or similar fund model portfolio profiles, and are getting a relatively strong, low cost solution. We may be (relatively) clear as an industry on we think we are solving for – investment and longevity tail risk – but how much value can we really add over today’s baseline, and at what cost?

It is also important to note that implementation of a CIPR / MyPension is also not just a product solution. As challenging as that is in its own right, implementing in the absence of an advice solution will most likely result in another entry in the retirement income product graveyard.