Complex system makes advice critical

Superannuation is designed to ensure people can financially support themselves in retirement. However, media coverage and public debate tends to overwhelmingly focus on the savings phase (accumulation) rather than the spending phase (decumulation). With so much of the conversation dominated by how to grow your retirement nest egg, it’s easy to feel unprepared when it’s time to decide how to actually access the money you’ve saved.

The system is too complex
One of the reasons this is daunting is that Australia is the only OECD country that has a mandated, pre-funded accumulation structure without a mandated decumulation structure.

Unlike in other countries, where a defined benefit pension is more common, Australians have to make an active decision about when and how they’ll access their super in retirement – whether as a transition to retirement pension initially, a lump sum, an account-based pension, an annuity or as a mix of these.^[1]

In making this decision, people need to consider a range of factors and projections, most of which they are not well equipped to deal with on their own. People want simplicity in their finances. Instead, they are left to navigate decisions on tax, access to the Age Pension and other government benefits. When coupled with the uncertainty of life expectancy and future expenditure needs, the system is setting people up to fail. This is compounded by very human responses to complexity, known as behavioural biases. For example, people tend to place more focus on the immediate concerns before them, making long-term planning harder. It’s no wonder that pre-retirement can be a stressful stage of life.

Earlier this year, Super Consumers Australia conducted a Retirement in Australia survey, which found that a sizable majority of the more than 10,000 respondents struggled to navigate the retirement income system.^[2] They perceived planning for retirement as more complicated than almost every other consumer decision they need to make.

Good advice is hard to find
We asked respondents to tell us what (if any) resources they used to help them with retirement planning. Many people nominated super funds (41.6 per cent) and financial advisers (40 per cent) – two sectors that the financial services royal commission identified as struggling to overcome conflicts of interest in their business models.

Super funds can and should provide targeted and strategically timed information to people about the decisions they will need to make in the lead up and during the decumulation phase, and when they will need to make them. Their educative role can also extend to encouraging people to think about their super not as just a current lump-sum balance, but as a potential future income stream – for example, by projecting potential ranges of retirement incomes in member statements.^[3]

Beyond this, it is problematic for super funds to have a role in providing personal retirement planning advice to members given the potential for such advice to be conflicted. A recent review by the Australian Securities and Investments Commission (ASIC) found that superannuation fund advice failed the best interests duty in 51 per cent of cases.^[4] The superannuation fund business model is built on growing the size of the fund and, for some, extracting profit from charging percentage-based fees on invested capital. Therefore, there is a strong disincentive to give advice that sees this capital move elsewhere, for example to a better-performing fund or what might be a more suitable investment option outside of superannuation (e.g. paying down a mortgage).

The picture gets worse when we look at financial advice provided by vertically integrated providers such as banks, with ASIC finding 75 per cent of the advice files they reviewed were in breach of the law.^[5] Meanwhile, financial advice in the self-managed super space fared even worse, with ASIC finding that 91 per cent of the advice files they reviewed did not demonstrate compliance with the legal requirement to provide appropriate advice.^[6]

Government resources such as Moneysmart and the Financial Information Service (FIS) can be helpful, but also have drawbacks. For example, Moneysmart is a free, valuable service run by the regulator, but doesn’t give personal advice, while the FIS does not offer online access to its service or tools and has been criticised for not being appropriately targeted at those who actually need it.^[7]

Australians aren’t alone in facing this problem; retirees in the UK have faced similar struggles. In 2015, UK retirees were given new ways to access their retirement savings, such as lump sum payments. However, they weren’t given much advice on how best to maximise those savings. This saw people making poor decisions and, in some cases, being scammed out of their retirement savings.

The UK government’s attempt to fix this problem is still in its early days, but it is promising. The Money and Pensions Service was announced by the Queen in 2017 and launched a couple of years later. It is funded out of a small levy on everyone’s pension savings, but then costs nothing extra to access.

The service provides answers to common financial questions people have throughout their lives, from saving for a first home to planning for retirement. Its Pension Wise service gives people access to free, impartial, specialised guidance – delivered face to face or over the phone – about their pension options. It also provides a free, online tool to help people choose how to access their pension money.

The tool provides users with a brief summary of the different options for taking a defined contribution pension. Users can select those they are more interested in for more detailed information, and can then choose extra information, e.g. how their pension is taxed.^[8]

Back in Australia, we still lack access to a one-stop shop for independent, affordable and trustworthy retirement advice. It was something we  urged the government’s Retirement Income Review to consider.

Access to advice provided by an independent, trustworthy organisation (such as the UK Money and Pensions Service) would remove many of the inherent conflicts created by conflicted remuneration and vertical integration.^[9] The Retirement in Australia survey found that older pre-retirees, particularly, wanted access to a helpline and a trusted person to help them navigate retirement decisions. Given that the complexity of decision making increases as people near retirement, this added level of assistance is understandable.

Advice has its limits
It is fair to say a lot more thought has gone into the accumulation phase of retirement saving compared to when people come to spend it in retirement.

As people save, they are supported with generally higher quality default options, so if they aren’t making active choices the system still offers some protection.

The retirement system does much less to guide people through the complexity.

It is open for debate whether the degree of flexibility (and the associated decision making that’s required of consumers) in the current decumulation system is the optimal approach. For example, the Centre for Excellence in Population Ageing Research (CEPAR) has suggested that mandated annuities, which are a feature of the retirement system in the Netherlands and convert an investment into an income for a period of time, may be more cost effective in providing for people in retirement and may even simplify decision making.^[10] They have also proposed a ‘MyPension default’ option that could meet the needs of the majority, while allowing for people to ‘opt out’ into a choice product.^[11]

Super Consumers is a strong advocate of extending the benefits of default product design from the accumulation to the decumulation phase. As we noted earlier, a large majority of people find retirement planning decisions complex and, therefore, lack confidence in navigating the system. The quality of financial advice is still being held back by conflicts, and many people can’t or won’t seek advice because it is expensive and can’t always be trusted. Also, decision making becomes more difficult and rates of cognition impairment increase as people age.

For some time now, the government has been considering a policy measure that would require funds to offer Comprehensive Income Products for Retirement (CIPRs) to members as part of a covenant introduced in legislation governing super. CIPRs would include risk-pooling, with simplified and standardised information disclosures. Progressing this framework has been paused pending the Retirement Income Review.

As Australia’s population continues to age, the weaknesses in the decumulation system discussed above will be magnified. Like others, we  eagerly await further developments after the recent release of the Retirement Income Review.

Have you found good financial advice hard to find? What are your tips to find an adviser?

Xavier O’Halloran is the director of Super Consumers Australia, an organisation committed to ensuring everyone gets a fair outcome from Australia’s $3 trillion superannuation industry.

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Related articles:
https://www.yourlifechoices.com.au/retirement-affordability-index/retirements-holy-grail
https://www.yourlifechoices.com.au/retirement-affordability-index/lies-damned-lies-and-statistics
https://www.yourlifechoices.com.au/retirement-affordability-index/converting-savings-to-income

Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.