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Super needs retirement product shift: Challenger

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Annuities provider Challenger has pushed for a product overhaul in retirement, declaring the main flaw with the superannuation system is it has not been designed to produce a level of guaranteed income for life.

The comments have followed the recent release of the long-awaited Retirement Income Review from Treasury on Friday.

Challenger has urged for a greater focus on retirement income strategies, with $400 billion now in the retirement phase in large APRA-regulated funds. 

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From July 2022, all super fund trustees will need to commence rolling out a comprehensive income product for retirement (CIPR), an annuity-style product, that is supposed to provide a steady stream of income to members throughout their retirement. 

The level of assets in the decumulation phase is growing, with a number of Australians shifting from supplementing the age pension, to substituting for it with their super. But while three in five retirees have sufficient means to reduce or eliminate their need for government support, Challenger noted there has been little focus on income strategies in retirement. 

Simon Brinsmead, head of institutional partnerships at Challenger Life said funds will need to develop strategies for their members after they reach the retirement phase, “rather than just rolling them into an account-based product”. 

“This is a fundamental shift and super funds will need to more broadly consider options for members in the decumulation phases, including options that may not be currently available in account-based pensions,” Mr Brinsmead said.

Similar to Challenger, the Retirement Income Review has placed emphasis on the decumulation phase in retirement – stating it is more significant than raising compulsory super contributions. 

“The focus of superannuation has often been on building larger superannuation balances through increased contributions,” the report stated. 

“But lower fees and higher investment returns will increase superannuation balances. Crucially, there has been insufficient attention on assisting people to optimise their retirement income through the efficient use of their savings.”

The review has also recommended advancing the CIPR concept, developing the Retirement Income Covenant under which super trustees would be required to develop a retirement income strategy and provide guidance. The goal is to make available “regulated, simple and safe retirement products”.

Mr Brinsmead has recommended managing the transition to decumulation with strategies addressing sequencing risk, ensuring that super fund retirement products deliver income for life (however long that is) and upside for growth, and that the products should be simple and seamless for members. 

The result might look like the combination of an account-based pension with another option, to meet member needs for flexibility, cost, simplicity, sequencing and longevity risk management and exposure to growth assets. 

“A retirement income solution that integrates a guaranteed lifetime income stream with an account-based pension can manage key risks in retirement and be more likely to meet members’ needs,” Mr Brinsmead said.

“Superannuation trustees have a rare opportunity to lead by example and redefine the retirement experience for members.”

In a research paper released in August, Challenger noted that defined contribution super is “not fit for purpose in retirement”, having not been designed to produce a level of income or last for life, as well as exposing members to risks they are not well placed to bear. 

Further, the system was not designed for today’s retirees, who now live over the age of 80, the report added. Former prime minister Paul Keating has previously conceded it was initially conceived for 55 to 75-year-olds. 

“Members often underspend and don’t enjoy the standard of living they deserve. Why? Because they find it hard to estimate how much they can spend each year to fund a retirement of an indeterminate length,” the Challenger report stated. 

“They self-insure, buffering this risk by holding onto their capital. To date, it has been common to make sense of this difficulty by using averages: average length of retirement, average investment returns and average rate of consumption. 

“This doesn’t help members, almost none of who will have an average retirement.”

 

Super needs retirement product shift: Challenger
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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