CPD: Retirement Income Strategies

An ageing population and an influx of retirees not only foreshadow more retirement customers in the coming decade, but a need for more comprehensive, accurate, and secure financial planning tools.

It has been almost 40 years since award superannuation was introduced in Australia, and 33 years since the introduction of mandatory occupational superannuation. This means the next decade will see the retirement of the first generation to benefit from an entire career collecting their ‘nest eggs’ for a comfortable retirement.

Australia’s economy is entering a serious period of transformation as the population ages, financial priorities shift, and the number of retirees climbs. This means superannuation and the regulations surrounding it are coming under the microscope, aiming to give retirees more security and flexibility for the future. And while some of the transformation described below may initially concern financial advisers, there are plenty of opportunities arising too.

In 2021-22, the median super balance for 65 to 69-year-olds was $198,715^[1] and 130,000 Australians retired in 2022,^[2] thus equating to roughly $25 billion in super balances being opened.

With these figures only forecast to increase, there is a growing need for more tailored retirement income strategies (RIS). This will require greater regulation, caring advisory services, and the technology to complement them.

The days of biannual financial advice are fading fast and retirees are becoming increasingly invested in how their super is handled and what it means for their retirement. So, it pays for financial advisers to understand how their key value propositions are evolving.

Changes in legislation

Since the retirement income covenant^[3] was introduced to the Superannuation Industry Supervision Act 1993 (SIS Act) in July 2022, any registrable superannuation entity (RSE) must create and offer an RIS to its members. This inherently involves the offering of financial advice, presenting a threat to a key cash flow for independent financial advisers.

Promisingly for those advisers, not all RSEs hold the correct license to offer such advice and are wise to refer members to external advisers. This is where those third parties must present the best value proposition to win referrals and potentially long-term partnerships with RSEs.

The Australian Prudential Regulation Authority (APRA) has even provided a Letter of Recommendation to RSEs on the Implementation of the retirement income covenant^[4] and much of the information contained can be applied to the work of independent financial advisers. These recommendations include:

• “Consider providing factual information to members about retirement income, for example, information about eligibility for the Age Pension or aged care, the concept of drawing down capital as a form of income, or the different types of income streams available.
• Consider making available budgeting tools or expenditure calculators that do not relate to specific financial products.
• Consider providing forecasts, such as superannuation calculators or retirement estimates, to help some members think about how superannuation can be part of their retirement income.”

These three points speak to some alarming statistics released by Australia’s largest independent corporate foundation, AMP, on the financial illiteracy of Australians aged 50 and over:

• “3 in 4 find the retirement system complex;
• 2 in 5 don’t know if they’ll be eligible for age pension benefits;
• 7 in 10 don’t know what an account-based pension is;
• 3 in 4 have not sought financial advice for retirement planning;
• 3 in 5 wish they’d started planning for retirement earlier in life;
• 3 in 5 are ‘extremely concerned’ about the rising cost of living.”^[5]

The statistics highlight the importance of providing more than super distribution services to imminent retirees, but to educate them on how to prepare for retirement. Superannuation regulation is clearly still evolving and the education around it remains a step further behind. Advisers and RSEs must prepare to maximise the opportunity for themselves and for their retiring customers, as this trailblazing generation approaches retirement with an unprecedented super balance.

Advisers should do so with confidence, given the final APRA recommendation:

• “Where an RSE licensee is not licensed to provide general or personal advice, or would be unable to comply with the obligations for giving advice, consider alternatives such as referring members to externally provided financial advice services…”

This affirms the suggestion that RSEs should look to third-parties as a means of providing financial advice, which includes financial advisers and trusted groups such as Retire360 (previously known as Link Advice) that have the required scale and expertise leveraged by funds. As RSEs have “a broad responsibility to act in the best interests of superannuation fund members”^[6] it should be expected that they realise the value of independent advisers to their members.

The Government’s response^[7] to the Quality of Advice Review^[8] – complementary to the covenant in how advice is provided – has also shifted the landscape and presents advisers as an equally viable option to retirees.

This is because legislation is now being drafted which makes it easier for superfund holders to pay for financial advice using funds from their super – giving them more financial freedom and flexibility to receive relevant RIS advice.

In particular, Recommendation 7 will benefit advisers moving forward:
“Superannuation trustees should be able to pay a fee from a member’s superannuation account to an adviser for personal advice provided to the member about the member’s interest in thefund on the direction of the member.”^[8]

This will relax existing regulations which currently complicate the process of seeking and paying for advice out of a superfund.

Challenges and opportunities for advisers

It’s becoming easier for financial advisers to offer an effective RIS, as super regulation is refined and technology develops, but there remain some key challenges.

Regulation pertaining to the type of advice allowed to be paid for from a customer’s superfund has previously been a hindrance to advisers and their customers. However, this obstacle appears to be easing as Recommendation 7 of the QAR addresses the quandary.

Another challenge to advisers is that such a service relies on some level of proactivity from customers in need of an RIS. The issue being that 75% of Australian over-50s haven’t sought financial advice for retirement planning.^[5] This is partly due to a perception that the value of financial advice may not outweigh the cost of the service,^[9] as well as a drop in the number of financial advisers available – falling from 28,000 in 2019 to around 15,600 in 2024.^[10] Promisingly, the government response to the QAR has introduced a new class of financial adviser to increase availability of the service. Currently titled ‘qualified advisers,’ this new class will have a lower bar to entry than professional advisers and will offer simpler advice for a lower cost. While these plans may allow RSEs to keep advice in-house, it will also allow advisory firms to broaden their offering while encouraging more staff to join the industry.

The third challenge surrounds the limited data that is available to advisers as a means of providing RIS services. A survey conducted by the Financial Times Insider found that 56% of financial advisers “agree that retirement clients have specific investment requirements, but say they do not have the tools or skills to advise them differently.”^[11]

This is a technological gap that begs to be filled, as such a solution would provide the necessary means for advisers to improve their value proposition in the face of competition from RSEs.

The influence of open banking

Since the Australian Government agreed to implement the Consumer Data Right^[12] (CDR) in 2018, and open banking began in major Australian banks, the outlook for financial advisers has improved. Despite the red tape which is only now being cut, open banking gives advisers those tools and skills which they need to service retirement clients.

The secure access to key financial data enabled by open banking has given advisers a new value proposition where such access gives them a more comprehensive overview of a client’s financial situation. This data could include mortgages, household expenses, and investments, as well as simpler factors such as balances, income, bank product info, and transaction summaries.

The concept of open banking remains elusive to most Australians, however, as one survey found,55% had not yet heard of it.^[13] Meanwhile, there is a slight lack of trust in technology companies to keep banking customers’ money safe.

PwC’s Australian Customer Banking Survey 2021 discovered an interesting paradox in the psychology of respondents. It stated 69% of Australians say that ‘having the most up-to-date technology is important’ when it comes to choosing a bank for a financial product or service. In fact, respondents see this factor as increasingly important over the next five years.

However, only 40% reported trusting digital or neo banks to keep their money safe, while 45% trusted technology companies. Considering this figure was significantly skewed by millennial trust (55 and 58%, respectively), the trust among Baby Boomers slides closer to one in three.^[14]

This presents a challenge for advisers to convince customers of the security of open banking. How to convince a digitally untrained cohort of the benefits of a new and unknown banking technology?

Showcasing the technology

If there’s one thing that matters as much to retirees as trust in financial institutions, it’s the security of a well-planned and accurate RIS. So, it’s the adviser’s job to foster one using the other.

As open banking becomes more trustworthy and commonplace in Australia, more fintech options are hitting the market. This means more options for advisers and their customers to sift through in order to find the most reputable RIS solutions. Primarily, they’ll be looking for solutions that are secure, accurate, and efficient, and which have preferably existed since before the CDR and open banking was introduced to Australia. This will give an ageing population more faith that the technology is ready to handle an influx in retirees.

Trusted RIS solutions, such as Moneysoft, can provide comprehensive modelling tools, enabling customers to visualise their retirement outlook. By integrating open banking data with more basic information like income and super balances, advisers can provide detailed reports for their customers to digest.

However, merely emailing clients a detailed report won’t be enough for advisers to win them over. The PwC survey found that 72% agree that “it is important for companies to connect their digital and in-person experiences,” proving that human touch is still vital in a digitised world. Additionally, only 60% of respondents believed that banks (admittedly, not advisers) do it well, presenting an opportunity to please new clients.

Rather than diving straight into the details of open banking technology, it’s advisable to begin by spruiking the benefits – enhanced insights, security, and accuracy – without overloading customers on the finer technological details. Cultivating healthy scepticism among customers may encourage them to self-educate and ultimately engage with open banking for higher quality financial data.

Developing an RIS

According to the RIC, the purpose of an RIS is to:

1. Maximise retirement income;
2. Manage any risks to the sustainability and stability of retirement income, and;
3. Offer flexible access to funds during retirement.

In order to meet these three objectives, one public-sector super fund (Commonwealth Superannuation Corporation (CSC)) details a helpful walkthrough of its own RIS, stating how it developed the strategy.^[15] Of course, an adviser has a responsibility to tailor each customer’s RIS to their specific needs (the first step in the CSC’s RIS), so copying it exactly is inadvisable.

Nevertheless, just as CSC began by undertaking research to understand customer preferences, so too should advisers develop a clear, accurate, and detailed understanding of the customer’s lifestyle and their expected lifestyle in retirement. From a customer service angle, this requires an empathetic and hands-on approach. From a financial and technological angle, it requires comprehensive open banking technology capable of budgeting, goal tracking, and creating detailed reports based on securely accessed financial data.

Once the data has been scraped, it’s important to identify any data gaps and any opportunities or obstacles these may present in retirement. For example, if a customer has no history of investing their money, then an opportunity arises to do so and maximise their retirement income.

It should be noted that the Treasury’s Retirement Income Review 2020 stated that maintaining “65-75% of working-life income will allow most retirees to maintain their standards of living in retirement.”^[16]

To manage any risk of falling below this threshold, advisers should outline all types of risks to the customer and discuss their tolerance for each scenario and consequence. These types of risk may include ‘longevity risk,’ where the retiree outlives their retirement savings; ‘investment risk,’ where returns underperform initial forecasts; or the risk of higher than expected inflation.

A capable open banking platform, such as Moneysoft, should model each of these scenarios and provide a tailored retirement plan. The responsible adviser would then reconvene with the customer at regular intervals to assess their position and update their risk appetite.

To satisfy the third objective from the RIC, advisers should make it clear how retirees can access their funds at any stage of retirement and model how this would affect their future financial situation. It may be advisable to offer simple calculation services to assist customers in understanding how any withdrawals could impact subsequent pension payments. Additionally, as many Australian retirees may not understand the basics of their own superfund, an adviser may offer simple educational materials on how to withdraw funds or view a current balance.

Summary

The introduction of the RIC and QAR, as well as Australian developments in open banking will have significant impacts on financial advisers. While some may see the changes as a threat to the dwindling number of advisers in Australia, they also present opportunities to those 15,000 who remain. An ageing population and an influx of retirees not only foreshadow more retirement customers in the coming decade, but a need for more comprehensive, accurate, and secure financial planning tools. Open banking will allow these retirees to receive detailed reports that plan their entire retirement, but not before trust is garnered between them, their advisers, and the technology at play. Ultimately, not even the most comprehensive RIS will convince a sceptical and uneducated retiree to give up their financial data – the first step must be a warm handshake and the trust that their data is in good hands. 

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Notes:
[1] https://data.gov.au/data/dataset/taxation-statistics-2021-22/resource/6dd981d6-0323-427f-a19e-ed4b74061ae8?inner_span=True
[2] https://www.abs.gov.au/statistics/labour/employment-and-unemployment/retirement-and-retirement-intentions-australia/latest-release#superannuation
[3] https://treasury.gov.au/policy-topics/superannuation/retirement-framework
[4] https://www.apra.gov.au/implementation-of-retirement-income-covenant
[5] https://corporate.amp.com.au/newsroom/2023/september/australians-financially-illiterate-when-it-comes-to-retirement-
[6] https://www.apra.gov.au/sites/default/files/regulation_of_superannuation_entities_by_apra_and_asic.pdf
[7] https://ministers.treasury.gov.au/ministers/stephen-jones-2022/speeches/address-association-superannuation-funds-australia
[8] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[9] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-223mr-consumers-see-value-in-financial-advice-but-lack-of-trust-remains-an-issue/#:~:text=%27While%20Australians%20believe%20financial%20advisers,only%20for%20the%20wealthy%2C%27%20ASIC
[10] https://www.adviserratings.com.au/adviser-movements?hss_channel=lcp-74880326
[11] https://www.ftadviser.com/investments/2024/04/15/under-pressure-financial-advisers-should-be-updating-retirement-strategies-as-needs-change/
[12] https://www.cdr.gov.au/about#goto-background
[13] https://content.frollo.com.au/Marketing_Content/The+State+of+Open+Banking+2024.pdf
[14] https://www.pwc.com.au/consulting/assets/customer-banking-survey.pdf
[15] https://www.csc.gov.au/Members/Retirement/Plan-retirement/Retirement-income-strategy
[16] https://treasury.gov.au/sites/default/files/2021-02/p2020-100554-udcomplete-report.pdf