The Financial Services Council (FSC) has urged for a shift in the focus of superannuation from simply being a “nest egg” to retirement drawdown.
This proposed shift is part of a package of reforms identified by the FSC which could boost retirement incomes by an estimated 10 per cent per year, or a total of $397 billion by 2050.
At the centre of these reforms is a push to improve how Australians spend their super savings, which forms the basis of the policy roadmap produced for the FSC by NMG Consulting.
“To date, superannuation has been positioned as people’s ‘nest egg’, framing it as savings and implying it shouldn’t be consumed. Instead, terminology needs to recognise superannuation should be drawn down to pay for retirement consumption,” the FSC said.
To support this reframing, the FSC said that fund reporting should support and encourage these outcomes by shifting focus from “balance” into what level and how long capital drawdowns are likely to last.
The FSC proposed that an objective of superannuation, which the government is currently working to legislate, should rephrase the terminology of the post-retirement market to reflect the concept of “drawdown” rather than “income”.
Alongside changes to terminology, the FSC said that success needed to be reframed as drawing down sufficient income to live comfortably throughout an individual’s retirement and to more completely exhaust their capital.
“This change needs to be implemented across all super fund communications, by reframing the retirement ‘income’ product outcome definition as ‘drawdown’,” it stated.
“Reporting standards for super funds further need to evolve to shift annual member statements focus from balances to likely drawdown amounts supported. This should also cover tools, calculators, and other member communications.”
As part of its research, the FSC identified two factors that impede the amount of super individuals use in retirement: anti-hawking rules that constrain superannuation funds from discussing retirement income products on a large scale and the exorbitant cost of comprehensive financial advice, which the FSC deemed “prohibitively expensive”.
As such, the body’s reform roadmap emphasises the necessity of making financial advice more affordable, especially given the projection that only a fraction of retirees, less than one-third, are likely to receive such guidance in the next decade.
“A retirement system that is designed around the needs of retirees, providing them the products and advice they need at retirement, and encouraging them to enjoy their savings in retirement, will enhance the long-term sustainability of the superannuation system and take pressure off future tax settings,” said the chief executive officer of the FSC, Blake Briggs.
In order to arrive at this optimal retirement system, the FSC suggested the implementation of areas of the Quality of Advice Review (QAR), regarding specifically the recommendation to allow trustees to better engage and guide members on retirement.
The FSC projected that, in addition to drawdown reforms such as introducing guidance to target the depletion of superannuation savings for individuals at a certain age, its proposed adoption of certain QAR recommendations could lead to over $20 billion in annual withdrawals from superannuation, and 2 million more retirees receiving retirement advice.
Other reforms recommended by the body include those centred around the removal of regulatory barriers for innovative new retirement income products.
Namely, the body touted the creation of a mechanism to avoid legacy products, which, it said, would require more flexibility from government and regulators to allow providers to undertake product terminations and subsequently shift individuals to suitable alternatives.
Also on the FSC’s radar is the development of a disclosure framework for consumers to easily compare features and fees between comparable retirement income products.
Finally, the FSC highlighted the need for enhanced cohesion of system components. This, it said, entails simplifying the interaction super has with other parts of the retirement system, such as the aged pension, aged care, and health care.
“Realising the superannuation system’s potential to maximise living standards in retirement and higher retiree spending would take the load off a federal budget with a 2 per cent structural deficit partly due to increasing health and aged care pressures that could be better met from individual savings,” said Mr Briggs.
Reflecting on the retirement income covenant (RIC), which passed through Parliament on 10 February 2022, the FSC said it was only a “first step” in getting trustees to consider drawdown issues but noted that it had seen “limited change”.
“The retirement income covenant should only be the start of policy reform in retirement incomes if the government is genuinely committed to helping retirees, who as the FSC research shows, are currently drawing down 17 per cent less income from their superannuation than an optimal system could achieve,” Mr Briggs said.
Ultimately, the FSC found that optimising the drawdown phase would mean that approximately 100,000 more Australians would draw down an additional $10,000 in increased retirement incomes per individual on average every year.
Additionally, the amount of super benefits left as a bequest each year would be set to halve by 2060 and total super assets would be 12 per cent or $1.6 trillion lower, with retirement phase assets representing 30 per cent of total assets instead of 40 per cent.
