Zenith Investment Partners has outlined several obstacles that have contributed to the comparatively sluggish development of Australia’s retirement income market, but the firm anticipates a transformation in the coming year as regulatory scrutiny intensifies and international entities enter the arena.
In December last year, Treasury kicked off a consultation on the retirement phase of superannuation, to ensure super delivers on its foundational promise of providing a dignified retirement for more Australians.
The number of retirees with a super account is expected to more than double over the next 10 years with 2.5 million Australians set to retire, but according to Treasury, they lack access to appropriate products to maximise their savings.
Some 84 per cent of retirement savings are held in account-based or allocated pensions, highlighting an opportunity for funds to create more products and services tailored to their customers’ needs. Treasury also revealed that longevity products are scarce, indicating further prospects for funds to do more.
Longevity products like annuities and lifetime pensions offered by some super funds typically provide a pre-determined income for life or a set term, with no option for lump sum withdrawals.
However, as Treasury found, the take-up of lifetime income products by members remains low, and the market remains underdeveloped, which does little to inspire funds to innovate.
But Zenith’s chief executive, Jason Huddy, is optimistic, having sensed a growing emphasis among funds on the subject.
“We’re starting to see a lot more attention being given to [retirement income] through superannuation funds, and we do get a phone call, an email or knock on the door sometimes from offshore managers who think they’ve got something to contribute in retirement income knowledge,” he said at a media briefing on Thursday.
“Whether that translates into products, we’ll wait to see, but there is global recognition that this is a really well superannuated market, which needs to think better and think smarter about serving retirement income outcomes.”
Australia’s income retirement system was also praised in the 2020 Retirement Income Review, but it too confirmed the government and funds should focus more on the retirement phase.
Mr Huddy believes that the interest shown by overseas players, which are “big names”, could act as a catalyst for local managers and providers to think outside the box and pick-up speed when it comes to retirement solutions.
“It’s going to be a bit more creative and will start innovating a bit faster than what they probably have the last few years,” he said.
Reflecting on why funds have been slow to innovate thus far, Mr Huddy agreed that there hasn’t been as much urgency as there should have been in dedicating time and effort to this area of retirement.
“It’s one of those things – being careful about going first because as you go first, others are watching, and you can afford to be a fast follower but you can’t necessarily be too late,” he told InvestorDaily.
Additionally, from a profit perspective, he explained that funds have experienced solid cash flow from member contributions, which has made them less eager to innovate.
According to Zenith’s director, David Wright, another key factor is regulation, which hasn’t done enough to convince funds to dip their toes in new products.
“Part of the slowness, let’s face it, has been regulatory, and Treasury not providing certainty on how certain things are going to be treated … so super funds and fund managers lack certainty around product development,” he said.
The slow take-up of solutions already on the market also serves as a deterrent. According to Mr Wright, many of the solutions have been complicated to understand, making them less appealing to advisers who ultimately have the power to bring these solutions to consumers.
Namely, having also encountered this issue, the retirement review in 2020 highlighted behavioural studies that found retirees are more likely to take up longevity protection when they receive sufficient explanation and information.
“Some of those products calibrate the asset allocation based on how you move through the life cycle, so a lot of advisers got threatened by it, ‘that’s my job, that’s what I was going to do for you’,” he said.
Looking ahead, Zenith’s chief executive believes things will change as funds move towards providing their members with more holistic solutions.
“Super funds are now engaging more with the advice community. They realise they’re losing some of their retiring members, some of the bigger balances, if they don’t have the right advice solution because retirees are wanting that peace of mind, that someone’s thinking about them, worrying about them,” Mr Huddy observed.
Last year, a joint report from the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission found funds were falling short of meeting their obligations under the retirement income covenant (RIC) to help members plan their retirements and lacked urgency in developing their capabilities to improve retirement outcomes for members.
Since then, two super funds, NGS Super and TelstraSuper, have unveiled offerings for their ageing members, with TelstraSuper’s RetireAccess Lifetime Pension understood to be the first profit-to-member guaranteed lifetime income stream since the commencement of the RIC.
