Super funds fail clients by not reporting retirement income

I thank Bev for making these excellent points, especially the importance of changing the focus away from account balances towards retirement income estimates. After all, this is the primary purpose of superannuation.

But our regulators do not seem to get it. ASIC muddies the water, by issuing Class Order 11/1227, which implies that trustees need to use a simplistic and often misleading method of calculating a point estimate retirement income to avoid such estimates as being deemed "advice". I am advised that this implication is wrong in law. Objectively calculated retirement income estimates made with a stochastic model that takes into account investment volatility, and uses sensible assumptions, is not "advice", but a clearer presentation of the a member's facts.

And many of the recent regulatory changes exacerbate this failing. For example, the requirement to disclose details of individual investments that make up the account balance seems only to benefit the fund's competitors (and thus hurt the member). Not only this, it is another example of costly focus on the wrong thing: the account balance.

Another example is the crazy Standard Risk Measure, which again focuses on annual changes in the account balance. Indeed, this measure is so stupid that, in many cases, it will deliver perverse risk measures if risk is, instead, measured in terms of the levels of retirement income that a member has good chances of receiving. (Note, "good chance" is not the 50:50 chance that is implied by simplistic point estimates.)

Surely in the 21st Century we have the technology and computing power to incorporate investment risk in our models when it make a huge difference to our estimates.

Bev has suggested that retirement income estimates be made using standard assumptions. But let's make sure that those assumptions include investment risk, and do not just lead to more of the same misleading point estimates.

As Bev notes, Australia is a couple of decades in advance of most countries on the DC journey. We cannot look to them for answers, as they are not yet facing into the issues to the same extent. We have the smarts in this country to lead the way, and we should continue to do so.

My reading of attempts to introduce income-focused super projections is a little different. As someone who has long held the view that the dominant investment frame of our DC-centric system sends the member down a path of looking for answers to the wrong question (i.e. how much super is enough?), I too would welcome change. Asking questions in a consumption frame (i.e. how can I achieve an adequate income that can be sustained throughout my retirement years?) results in very different considerations, and quite likely choices, both prior to and in retirement.

I have been a keen follower of attempts to introduce super projections at the individual member level; particularly into annual member statements. And I have to give ASIC its due here; it was ASIC who, in 2008, led the way and put this exact issue on the table for industry discussion. Their Consultation Paper 101 of 2008 said as much: "Our view is that consumers may benefit from some form of personalised superannuation forecast, which could give them an indication of what will be available to them at retirement. We envisage that such forecasts could serve an educative purpose, helping consumers to make choices about their super savings that will assist them to achieve financial security in retirement."

The usual consultative dance followed thereafter, with various industry bodies and a number of financial services entities providing feedback on CP101 and a subsequent consultation paper (CP122). ASIC's approach was to my mind thorough, seeking views from the Australian Government Actuary, who in turn consulted a number of actuarial firms for their views. In reading the final ASIC report on the matter (Dec 2011) it appears that ASIC has given its tacit approval for super funds to, if they so choose, prepare and present superannuation 'estimates' at the individual member level, without this being considered personal financial advice. This was implemented via the Class Order CO 11/1227 that you referred to.

The fact that no super fund (to my knowledge) has taken up the relief offered by CO 11/1227 is probably due to two factors. First, it was perhaps unfortunate that the two inquiries (Ripoll and Cooper) that led respectively to the Future of Financial Advice reforms (in the case of financial advice) and MySuper (in the case of APRA-regulated funds) happened in the intervening years. ASIC was asked by the government of the day to take into account the prospective changes that FoFA and MySuper would entail. This clearly muddied the waters in what was otherwise a pretty clear-cut case for allowing super estimates (both of lump sums and income stream equivalents) to proceed at the individual member level.

Secondly ASIC, having had to consider the impact of both FoFA and MySuper, adopted some of the industry feedback but held firm on the need for a single standard investment earnings rate (at 3% p.a. real) and for fees to be based on all actual administration fees and costs paid by the member over the preceding 12 months. Likewise estimates had to take into account the individual member's actual annual insurance premiums. The return calculation methods, as with the format of the presentation of estimates, are highly prescriptive and not conducive to the application of any marketing 'spin'.

What super trustees think of ASIC's final stance in their regulatory guidance on super estimates is not known, although I'd hazard a guess that the relief provided by the class order will not be utilised anytime soon. It is not that super trustees are apathetic to the potential engagement benefits that might be derived from providing members with individualised retirement projections. In my dealings with superannuation executives they are only too aware of the need to re-frame the conversation away from the dominant lump-sum mentality and toward retirement income adequacy. But the burdens of MySuper, SuperStream, FoFA and greater regulatory reporting obligations to APRA leave the issue of individualised retirement estimates as a distant 'nice to have, not need to have' on the agenda. As you point out super funds must now have product dashboards for their MySuper products. There will be many trustees and fund executives breathing a heavy sigh of relief at the just announced deferral (to 1 July 2015) in implementing the product dashboards for choice funds and in portfolio holdings disclosure .

I believe the provision of member estimates, both of retirement balances and their income-stream equivalent, will happen in due course. That replacement income-based projections are a reality in the Netherlands and Switzerland pension systems today suggests that the issues here are not insurmountable, whilst the benefits are many; members better engaged with the key decisions needed for retirement planning, and with information relevant for the task.

An update on CO 11/1227:
It is being used! I have assisted some large super funds to provide projections to members using the Class Order relief, and there are more coming on board.
ASIC issued a draft updated CO in 2013 as part of CP203, allowing the incorporation of the age pension, which in my view improved its relevance immensely. The Commission received industry feedback, but the release of the final version is still pending, apparently to allow the harmonisation of fee definitions with APRA. In the meantime ASIC has indicated that it is happy for the draft updated CO to be applied.
Nevertheless, due to the prescriptive methodology, I find that the implementation of the CO requires quite some judgement to ensure that projections are not provided to members for whom they might be misleading.

I have also assisted funds to provide member projections as statements of advice (ie not using the CO relief). I find this approach to be far more flexible, in particular in allowing for default returns that are more suited to the member current investment choice.

I think historically the reason for the lump sum preference was the favorable taxation treatment (only taxed on 5% of the receipt-even at 60% tax rate, a rate of 3%) Pensions were taxable in full.

The pension stopped at death, the lump sum could be left to children.

Excellent article Bev. Most super funds in Australia only report an end of period balance. They might have a web based calculator to project a future balance based on various assumptions but they invariably allow the user to vary those assumptions. I don't think many members use these calculators or if they do then not in any constructive and informative way. A set of standard assumptions that all super funds use to then incorporate a retirement income projection in their annual of biannual statements might just engage more members to take greater control over what is a long term and critical investment. I hope your institutional clients heed your intelligent observations.

Hi Dave,

Thanks for your comments. I think that the standard assumptions are absolutely necessary to allow comparisons across funds and help members get a total picture of income if they own several funds.

In the UK the regulator defines these and makes it compulsory to show the projection at 3 different rates of return. Interestingly the original rates to use were 5%, 7% and 9% growth rates on the investment. But in this new era of lower interest rates brought about by the GFC and financial repression these have been amended recently to 3%, 5% and 7%.

This highlights yet another way that information about retirement income savings can be sensibly communicated to members. The same pot size will then show a projected lower income in retirement as the growth rates are reduced.

Sadly DC people have not been warned of this topic because the accumulation pot approach does not typically allow for such messages to be communicated. This is yet another way in which DC members get a raw deal. All DB schemes have been markedly affected by the recent low interest rate market conditions - and have to deal with it to fund the incomes. In comparison poor DC members - even though they are also affected - have been sailing blindly through this period without any notice of the need to save more for retirement.

In my view using DB-like income reporting tools to DC members will also help them to grapple with the low growth, low return environment that markets have challenged them with since the financial crisis.

Its no wonder the 'old defined benefit schemes' of the public service and larger corporations were 'gold' if you happened to be a member of such a fund. Unfortunately most funds nowadays concentrate on DC approach and readily report what the lump sum may look like in the future. As Bev says most people hitting retirement age in an industry or retail fund have no idea how long it will last or how it should be invested to meet life expectancy. Often it will mean that their life in retirement will not look anything like the level of affluence they experienced whilst working. I guess that is why annuities have a place. Except that their costs and returns are mediocre on both counts but at least they provide some guarantee of consistent pay days in retirement.. Maybe they will be the halfway house result between DB and DC approach in the future. Challenger must think so as its where there marketing is pitched. I suspect the popularity of SMSF's as a growth sector has something to do with those more astute investors taking more interest in the longevity and maintenance of income into old age. Well written article and very timely. Still ignorance is no excuse for future poor results when it comes to taking care of ones' future.

Bev, Good article. You are correct. A dollar figure is much easier for the member to understand and has a much greater chance of fostering member engagement; and action when it is required.