Member retention is the new engagement warns Rice Warner

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The issue of fund member retention at retirement has supplemented member engagement as one of the more pressing issues facing Australia’s $1.4 trillion superannuation sector according to Michael Rice, Managing Director of independent actuarial and financial services consulting firm, Rice Warner.

Mr Rice says new thinking and urgent attention is required by superannuation funds not only to deliver adequacy in retirement for members, but also to find innovative ways to retain members in appropriate investment structures during the retirement phase.

“The superannuation industry has for many years focused on ways to engage members in their super. It is now time to shift gears and construct better ways to also retain members as they retire,” Mr Rice said.

Rice Warner’s recent modelling under Principal Bill Buttler highlights the need for super funds to consider better member analytics and more effective member retention strategies.

“In order to ensure that members are given meaningful advice on the best investment strategy to meet their retirement funding needs, our modelling suggests that formulating these strategies based on projected retirement balances is a useful starting point,” said Mr Buttler.

According to Mr Buttler, using this approach, three distinct member cohorts emerge: those with retirement balances of under $250,000; those with balances between $250,000 and $500,000; and those expecting to retire with more than $750,000.

“This approach recognises the validity of grouping members with other members with similar needs. However, as with any investment strategy, its ultimate success relies on effectively engaging with members to ensure their needs as individuals are in line with those of the rest of the group,” explained Mr Buttler.

Mr Buttler outlined some broad considerations for each cohort.

Retirement balances below $250,000: most will have few assets outside their home and super, so will qualify for a full Age Pension. 

“Advising these people to invest their income to counter longevity risk is beside the point,” said Mr Buttler. “They don’t want to turn their $100,000 into a $5,000 supplement to their Age Pension and are more likely to use their tax-free lump sum to pay off debts and provide a small reward at retirement. They will probably hold on to their nest egg for some time but it should be possible for them to do so in a liquid, secure option with an account-based pension. They need guidance, but don’t need a comprehensive financial plan as their path is not complicated.”

Retirement balances between $250,000 and $750,000: these members will need to take longevity into account.

“These members – and the numbers in this cohort are growing – will want security of capital for liquidity to enable drawdowns from account-based pensions, while at the same time wanting most of their funds to grow so they last as long as possible,” said Mr Buttler. “Within this group, financial advice can be homogenised for many members as their circumstances will be similar.”

Retirement balances above $750,000: these members should be able to live off the earnings in their accounts and start drawing on capital later in life.

“To the extent they need to draw on their capital, this group will also want to source their pension payments (draw-downs) from secure assets whilst investing the bulk of their assets to grow in real terms,” said Mr Buttler. “For this group, individualised financial advice is more likely to be necessary as they are more likely to have complex financial arrangements.”

Mr Rice said that the message for the superannuation industry is clear.

“Solutions are available – but they rely on accurate analysis that can inform strategies and hold members loyal to their superannuation fund at the point of retirement- at least to the extent that their broader needs can be determined and addressed.”

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