Low cost guidance needed as part of retirement income review

From

Andrew Boal

Improved access to affordable financial information, guidance and advice should be one feature of the looming review of Australia’s retirement income system, the Actuaries Institute said.

A new regulatory regime governing financial advice should ensure that people can access low cost guidance to help them to make better decisions about how they manage their savings, allowing them to improve how they live in retirement, said Andrew Boal, Convenor of the Actuaries Institute’s Retirement Strategy Group. Mr Boal is also a member of the Institute’s Public Policy Committee.

“We need a regulatory framework that allows for affordable access to information and guidance for the majority of retirees,” Mr Boal said. “That advice could cost as little as $200-$300,” he said. “It could be single issue scaled advice, or a modified version of intra-fund advice.

“While the retirement experience is generally quite heterogeneous, there are still a lot of people in quite large cohorts who have very similar circumstances with similar needs in retirement. We should be able to come up with a system to give people the guidance they need at an affordable price.”

Mr Boal said more complicated personal advice can cost thousands of dollars. “Only retirees in the top 5-10 per cent of savers typically have the level of complexity to justify expensive personal advice,” he said.

His comments come ahead of the Federal Government’s retirement income review, which is expected to be handed to the Treasurer later this month.

Other issues that should be canvassed include improved retirement strategies and products, taking into account how they work together, especially the way taper rates and asset test impact spending and access to the Age Pension. Longevity risk products, and whether they help retirees manage risk; the potential to better manage sequencing risk, and better targeted assistance for retirees who need it the most, such as single renters, should also be reviewed.

Mr Boal said in a Dialogue paper released by the Actuaries Institute that while Australia has one of the best systems in the world for accumulating savings for retirement, Australians continue to struggle with a retirement ‘spending system’. While the current system is still relatively immature, over the next 20 years more than 60% of superannuation balances at retirement will reach $250,000 or more, and over the next 40 years, 40% will hit $500,000 in today’s dollars.

The retirement income review should provide the Federal Government with the relevant information to help improve the cohesion of the system, so that all components work together to more efficiently deliver fair and equitable outcomes.

“The system needs to be efficient so that the cost to taxpayers meets its core objectives; it must be affordable and sustainable, and produce adequate outcomes that still allow some flexibility to meet an individual’s needs, and be simple enough so that retirees can optimise their position without having to spend a lot of money on advice,” Mr Boal said.

The Actuaries Institute broadly supports compulsory superannuation as a means to providing decent standards of living for retirees. Superannuation has also provided a significant buffer for many people currently suffering hardship as a result of COVID-19.

Mr Boal also said he expects further industry consolidation, resulting in fewer funds, and continued downward pressure on fees. The industry has already undergone a noticeable reduction in investment fees, and operational fees will gradually fall as well, which is a good outcome for members. However, he added that there will also be pressure on funds to spend more money on financial information and guidance to help members make better decisions that affect their retirement, especially as balances grow.

“The industry does need to spend a lot more time and money on the future provision of information and guidance, as well as the future retirement income products, which might mean that some of those fees might not fall by as much,” he said.

The Actuaries Institute looks forward to the Government’s response to the review and any policy options it considers. The Institute, and actuaries, advise the private sector and governments, both here and offshore, on public policy outcomes across a broad range of sectors from retirement to health, insurance and banking, climate and social policy outcomes.

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