Melissa Fuller

Leading consultants to the financial services and superannuation sector Rice Warner has outlined the scale of the retirement incomes bulge facing Australia’s ageing population, its policymakers, superannuation funds and product manufacturers.

The next 15 years will see more Australians leaving or winding down from the workforce than entering it. On Rice Warner analysis, Australia’s ageing nation will comprise two million men and 2.3 million women in retirement drawing a pension from their superannuation savings by 2029.

This represents a shift to around 40 per cent (or $1.3 trillion – in 2014 dollars) of Australia’s retirement savings assets being converted to some form of retirement income stream. Currently that number sits at 30 per cent (or $492 billion of total superannuation assets) in today’s dollars.

At a personal level, many retirees will not have adequate savings for their retirement. Rice Warner’s latest Retirement Savings Gap research, commissioned by the Financial Services Council, measured (at 30 June 2013) a $727 billion savings gap. This is $67,000 per person less than the amount required for an ‘adequate’ retirement, which would pay retirees up to their life expectancy (more than 20 years).

Compounding this issue is longevity risk: half of Australia’s retirees will live well beyond their life expectancy age.

“It’s great we are all living longer, but the fact is too many retirees will simply run out of money and be forced back on the Age Pension,” said Rice Warner CEO Michael Rice, who has led Rice Warner’s many contributions to the Abbott government’s Financial System Inquiry (FSI), chaired by Mr David Murray.

The FSI’s recent interim report specifically mentions the issue of retirement savings policy, calling for solutions to the problem. “The picture of Australia’s retirement demographic ‘bulge’ is not new. But new ways are needed to address the underlying problems of adequacy, funding and product design – even the fundamental need to deliver people more choice, greater dignity and a better standard of living in retirement,” Mr Rice
said.

“The problem represents a looming challenge requiring a comprehensive range of solutions from industry and government. Our own investigations show today there is not one Australian superannuation fund provider that has in place the right default retirement incomes package to meet the wave of retirees preparing to shift their super into pensions,” he said.

The Rice Warner Retirement Incomes Solution

Mr Rice said the current default option of the superannuation industry is to treat retirement income as handing over a lump sum payment to members when they retire.

“Superannuation fund members are currently given no default option for managing this lump sum. We believe there are better ways to approach this, and have devised what we think is the first comprehensive solution,” Mr Rice said.

Melissa Fuller, deputy CEO, Rice Warner and a leading advocate for the unique retirement savings needs of women in Australia, said the great anomaly is that Australia has a world class retirement savings system but “lags when it comes to an effective and comprehensive retirement incomes system.”

Ms Fuller said the Rice Warner Retirement Incomes Solution, which effectively takes into account the needs of members through the various phases of retirement, provides a comprehensive alternative.

“Rice Warner believes the essential solution is to separate the money needed for any lump sum at retirement and to invest the balance long-term to provide inflation and longevity protection,” Ms Fuller said.

“The account-based pension is converted to a distributing trust so members can derive income from stable fund earnings (and any tax refund from franking credits). Meanwhile, the capital would be projected to grow steadily in real terms. The risk of market volatility impacting the underlying assets is also reduced as the member is not spending his or her capital.

“We’ve received keen interest from some leading superannuation funds about implementing the Rice Warner Retirement Incomes Solution,” she said.

“Our thinking is based on many years of data and insight in this sector, and draws upon numerous submissions, research reports and intellectual property invested by our firm on behalf of clients and various government and independent inquiries held during that time,” she said.

‘We look forward to continuing our contribution to the debate in Australia, particularly as these issues become ever more prevalent in the future planning for the national interest.”

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Nathan Bonarius

Recent discussion in the media suggests just that. However, some of the publicity is based on inaccurate claims or assertions that a single national fund would be much cheaper than a competitive environment. Let’s look at the facts…

The arrival of no frills MySuper accounts has placed downward pressure on management fees, creating further impetus for funds to properly review their overall value proposition for members.

The sector is already subject to an overall decrease in fees. Rice Warner research released in May shows as at 30 June 2013, management fees accounted for 1.12% of assets ($16.9 billion annually), down from 1.20% in 2012.

So, is 1.12% too high? It is certainly much lower than a decade ago when the average was 1.37%. Further, we expect the level to trend down to 1.00% of assets within two years as legacy products are gradually brought into the modern pricing structure.

While the trend in the fee level is positive, the evaluation of the simplistic percentage is more difficult. For example, there is a large variation in the level of fees paid by different fund members. The variables that determine superannuation fee levels may include any one of the following:

• the type of fund (retail, industry, public sector, corporate or SMSF)
• the size (and bargaining power) of the employer
• account balance
• investment risk – for example whether you pay more for fund managers to outperform market return
• the level of services provided to you
• whether you are in a defined benefit fund and
• whether you manage your super yourself in an SMSF.

These differences can mean that some members may be paying less than 0.5% p.a. while others may pay well in excess of 2.00% pa. There are also fee subsidies for some members where employers meet some of the costs.

In some cases, higher fees can be justified by the level of service received or higher expected investment returns that the fund may deliver. In other cases, supporting a niche product offering may also justify a higher level of fees.

Although many members are getting a good deal, it is arguable that overall fees are too high and have not fallen as far as they could have given that assets have nearly tripled in the past 10 years. However, super funds today provide a much broader range of choice and services than they did a decade ago.

So what can funds do to provide members with the best value and compete in a world where a commoditised MySuper product is shifting members’ focus onto fees?

Funds would ideally gain a deep understanding of the exact drivers of expenses, and a strategic sense of where other providers are heading in order to not be left behind.

Sub-scale funds would also identify a strategy to achieve their optimum size or identify a niche that allows them to survive in a MySuper world.

If members are able to spend more time demanding better value for money and funds spend more time acting in members’ best interests, the result would also create higher retirement incomes for all Australians.

Nathan Bonarius, Head of Superannuation Market Insights, Rice Warner

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Alastair Adamson

Innovative product development coupled with speed to rationalise non-performing offers has helped underpin strong growth in Australia’s direct life insurance segment.

In the 12 months to December 2013, direct life insurance sales accounted for $558.1 million, with in-force annual premiums worth $1,459.3 million for the same period.

This represents significant growth over the 2013 year, as sales increased by 8.2%, and in-force premiums rose by 8.8%, according to Rice Warner’s latest Direct Life Insurance Market Report.

In comparative terms, market share for direct life insurance remained reasonably steady at 11.4% of Australia’s overall risk insurance market, compared with 11.6% at end December 2012.

“During 2013 we saw a great deal of activity amongst direct insurers, increasing the range of products and features, “ said Alastair Adamson, Head of Life Insurance Market Insights for Rice Warner.

Mr Adamson said while product development was a key industry feature, so too was the rationalisation of non-performing offers.

“Australian direct customers have access to a diverse number of risk insurance products which has helped to stimulate growth within the sector. However, direct distribution provides a challenging environment with shifting demographics, and subsequently each year we see a number of product closures,” he said.

“Product manufacturers move on quickly should products not meet success criteria, going on to build other products with more successful outcomes.

“The direct market is constantly willing to explore new domains and develop new sales partners, which reflects a commitment to innovation that is unique within the insurance market.”

Key Product Segments & Pricing

Results for the three main product segments within Direct Insurance included:

• Credit-related insurance, covering mortgages, loans and credit card debt (in-force premiums up 10.6%)
• Funeral insurance (in-force premiums up 11.9%)
• Term, income protection and accident insurance (in-force premiums up 6.2%).

“Credit card debt increased by only 0.7%, whilst related risk insurance grew by 5.3% in in-force premium, delivering a strong result for this segment,” Mr Adamson said.

In terms of competitive pricing, direct insurance has maintained strong margins relative to the group and retail sectors, each of which have increased premiums over recent years.

Despite several high profile increases in group (and some lower key increases in retail), direct remains significantly more expensive compared to group prices.

This premium pricing is explained by relatively higher acquisition costs and higher lapse rates for direct products.

“Clearly, the group insurance market is a key competitor to direct, and direct insurers should recognise that a potentially strong source of future sales would derive from group customers.”

Mr Adamson said a tightening of definitions within the group (superannuation) segment may provide space for direct insurers to offer TPD and income protection features and definitions that cannot be offered in group policies, thereby gaining a competitive edge over group products despite a clear price discrepancy.

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Push to allow joint super accounts.

Finding ways to truly engage superannuation fund members with their retirement savings outcomes is a long-term industry conundrum in Australia.

Superannuation funds have embarked on numerous approaches to improve member engagement levels, with mixed results.

Aside from the economic imperatives for funds to attract and retain members, there is a long list of member and community benefits – beginning with the simple outcome of closing a multi-billion dollar retirement savings gap.

For many superannuation funds, the member engagement journey has been a long campaign. However, many question whether the effort has been cost-effective given the large numbers of members who remain unengaged.

Rice Warner recently placed into the market some ideas for developing joint superannuation accounts. The basic thinking on this can be found in Rice Warner’s recent newsletter. The pros and cons of joint accounts are argued in the newsletter, including the key question: why can’t the 7 million families of working age pool their superannuation into a joint account?

The most important message in this is that a joint account system, easily implemented, has the potential to truly lift engagement levels by members.  Couples will be interested in their combined superannuation outcome.

If two thirds of Australians are in a marital relationship at retirement age, it simply makes sense that they would be looking at life post-retirement through the lens of their combined net wealth (including any eligibility for a couples Age Pension).

The trick is to boost the amount of engaged planning during the accumulation phase by targeting the family finances, and the joint account may well deliver a neat solution. In any event, raising engagement levels is a difficult enough task, even with the array of tools at the industry’s disposal (financial advice, online calculators, sophisticated direct marketing and other communications methods).

An industry push with Government and other stakeholders towards creating a workable joint account system may well open up a practical new front in the long engagement campaign.

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Rice Warner introduces female super ininiative.

Consulting firm Rice Warner has adopted an innovative approach to bridging the retirement savings gap for its female employees. The initiative addresses a fundamental gender imbalance that affects the retirement incomes of a majority of Australian female employees.

Rice Warner today released details of what is believed to be a first for an Australian business – offering its female employees a package of benefits designed to bring their expected retirement savings outcomes into line with those of their male counterparts.

The new arrangements commenced on 1 July 2013. It means Rice Warner’s female employees will be provided with a package of benefits – including flexible working conditions, generous paid parental leave, superannuation payments and long service leave accrued during parental leave, access to an educational program – and an additional superannuation payment of 2% of salary.

Rice Warner Deputy CEO, Melissa Fuller, who led the firm’s research into the retirement savings gap for females, said her investigations helped spark her interest to uncover a practical solution suitable for Rice Warner, in respect of its own female staff, to help redress the financial wellbeing challenges faced by females in retirement.

“From the outset Rice Warner saw an opportunity to tackle a systemic issue that has a broad impact on Australian females and society, but which also directly impacts our own female employees. Our business enjoys a leading position as an independent voice in the superannuation sector, so naturally it was an area we felt equipped to explore, canvass some options and adopt our own policy,” said Ms Fuller.

“As a consulting firm advising superannuation funds, Rice Warner is an expert in the field. We understand the underlying data and statistical evidence that clearly shows a stark reality that most females fall behind males in their level of retirement savings.”

“We also wanted to make a difference by showing others that with resolve, the savings gap can be dealt with. I am proud of the way our entire team has supported this package,” she said. Ms Fuller also consulted with the Australian Human Rights Commission to ensure that the initiative does not discriminate against males. The Commission considered that the package of measures was likely to be considered a special measure designed to achieve substantive equality between men and women.

We can now move forward with confidence showing other Australian employers they too can proactively support similar arrangements for their staff. Ms Fuller, with the support of Rice Warner senior management and the Board, said it makes sense to leverage the firm’s superannuation expertise and understanding of the issues to improve the outcomes for its female employees.

“This is an important employee benefit, designed specifically around the issues females face in saving adequately for their retirement. Of course we can’t control inequities within society or the superannuation system, but we are pleased to show positive change is possible by focusing on those areas where we can make a material difference”.

Superannuation Savings Gap Facts

• The total female savings gap is $383 billion.
• On average, 65 year old females today retire with approximately $40,000 less than 65 year old males.

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Rice Warner founder and Chief Executive Officer Michael Rice says: “The SMSF trustees surveyed identified many risks concerning them, including investment and associated risks, and keeping the value of their savings and investments in line with inflation. 

“But their biggest concern, identified by 83% of respondents, was the possible adverse impact of legislative change.” 

SPAA and Vanguard Australia engaged Rice Warner to undertake the 69-question survey to identify the financial needs of members and review their general concerns about retirement. It was undertaken by 384 SPAA members with 279 completing it in full, with the questions ranging from SMSFs and risks, to demographics, to financial advice, and retirement planning and spending. 

SPAA CEO Andrea Slattery says: “This in-depth survey confirms what we have been saying for a long time – that continual change to superannuation and the tax regime around it is undermining our universal system. What people want from Government is certainty about the rules governing their retirement savings, and this survey clearly indicates they believe they are not getting this.

“From SPAA’s perspective, this survey sends a clear message to all political parties: stop moving the superannuation goal posts to allow people to make long-term plans for their retirement.”

 Vanguard Principal (Market Strategy & Communications) Robin Bowerman agreed saying: “Trustees of SMSFs are stating loud and clear that the government’s constant tinkering of contribution rules and tax positions is beginning to seriously undermine confidence in superannuation.

“It also underscores the importance of good advice and the need for SMSF trustees to be vigilant and engaged with their super fund – which they clearly are based on the survey findings.” 

Michael Rice says the survey specifically asked whether retirement plans have been affected by reducing the contribution caps for pre-tax contributions, with 55% not only angry about the change but prepared to say why. Their reasons included: 

• Not being able to save much until their children become financially independent. Yet when the time comes to increase contributions, the rules have changed and they cannot contribute as much as they had planned.
• Many say they will never trust the Government again.
• There was anger that the contribution caps do not apply to many government employees and MPs as they are members of constitutionally protected funds and they can contribute an unlimited amount.

“As a result, many respondents indicated that they will now have to contribute more when there are conflicting financial needs (e.g. cost of children’s education), while some will have to delay retirement by many years.”

Another major risk identified by the survey (68%) was the possibility of a major fall in investment markets.

“But perhaps more interestingly, only 32% say that the Global Financial Crisis (GFC) had impacted on their retirement plans, perhaps reflecting the fact that the average investment performance for the SMSF segment out-performed the average for all APRA funds for six of the seven financial years to 2011.

“We suggest that those managing an SMSF are more closely aligned to their investments than members of other funds,” Rice says.

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The Cost of ‘opt-in’ – confusion over what is and isn’t included in our calculations
Rice Warner’s estimate of $11 per client per annum for ‘opt-in’ is the ONGOING cost, and excludes ‘opt-in’ implementation costs.  It also excludes any costs associated with other parts of the FOFA reforms.  We have also made an important underlying assumption that advisers are already in regular contact with their clients, meeting at least once every year.  Importantly, the proposed grandfathering provisions will mean that ‘opt-in’ will only apply for new clients from 1st July 2012, so the first ‘opt-in’ will occur on 1st July 2014.  Thus, advisers who adapt their business models to include annual or biennial client reviews for all new clients will be able to incorporate ‘opt-in’ processes as part of their normal client management.

 In summary, the cost of ‘opt-in’ should not be confused with:

• the cost of contacting clients who are not serviced regularly
• the implementation and ongoing costs of other FOFA reforms.

 How was the cost calculated?
Costs were estimated for both dealer groups and product providers.  When calculating costs, consideration was firstly given to key functions that would be required under an ‘opt-out’ regime.  This was to show a complete picture of the relevant advice processes, including areas where items required under ‘opt-out’ can be leveraged to support an ‘opt-in’ approach.  This demonstrates why the costs of many additional business processes required to support ‘opt-in’ are relatively modest (they would be required for an ‘opt-out’ scenario anyway). 

                                                 One-off                                 Ongoing

Dealer Group                      $105,000                           $110,000

Product Provider             $1,400,000                           $450,000

For an industry wide cost, Rice Warner assumed there these costs will be incurred by 25 product providers and 100 dealer groups, resulting in the following total costs:

One-off            Ongoing (per annum)

$46m                     $22m

ASIC estimates that approximately 2,000,000 people receive advice every year.  Consequently, the cost per client is $11 per annum.

Number of Dealer Groups
Rice Warner has been criticised for restricting its calculations to only include the top 100 dealer groups.  It is generally accepted by industry stakeholders that there are about 17,000 advisers operating in the market.

An analysis published in Money Management on 29 July 2010 covering 100 dealer groups shows the following statistics:

Interestingly the smallest Dealer Group included in this analysis had just 12 Authorised Representatives.  There will clearly be some advisers who fall outside the top 100 dealer groups.  However, their number will be small relative to the accepted industry total of 17,000.  Overall, it is reasonable to conclude, from the published data, that no more than 2% to 3% of authorised representatives are with dealer groups with fewer than 30 authorised representatives.

Rice Warner also notes recent media discussion regarding “small advice businesses”.  The table above shows that the average number of advisers per office/practice is around 2 so there are clearly a large number of small advisory practices.  However, this should not be confused with the number of small dealer groups.  We can only conclude that those who talk about significant numbers of small dealer groups are, in fact talking about small advice practices – and most of these operate through larger dealer groups.

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According to Richard Weatherhead, Director and Head of Life Insurance at Rice Warner, this growth will emanate from individual member increases in cover rather than increases to default cover levels.

“The growth we’re seeing is the result of a continued commitment by funds to engage and educate members, in particular through the increasing use of improved member analytics that help in tailoring insurance solutions to the needs of individual members,” said Mr Weatherhead.

“Couple this improved ability to assess member needs with other factors and it is clear to see why there is a growth story at play. Increased availability of cover through online, telephone and other technology-based needs assessment is one factor.  Another is regulatory changes in the advice market, which is likely to lead advisers to recommend wholesale insurance arrangements more frequently in the future,” he explained.

The report predicts that the $3.2 billion wholesale market will grow at a rate of 11.1% per annum over the next 15 years, broadly in line with growth of 12.4% per annum over the past 15 years.

Mr Weatherhead said that growth will be driven by the still stubbornly low levels of cover for many Australians relative to their needs and the highly competitive pricing of wholesale insurance.  For example, the average cost of $100,000 worth of death and total and permanent disability insurance is $126 a year or $2.42 a week.

As well as forecasted growth for the market, the report identifies several challenges.

The highly competitive nature of the Australian wholesale insurance market has resulted in gradually reducing profit margins for insurers, making the sustainability of insurance prices an increasing concern for both insurers and trustees.

“The recent deterioration in claims experience, particularly for death and income protection business, suggests that there will be upward pressure on prices in the future, running counter to the more recent experience in which prices have reduced by around 5% per annum. We also believe that the lower margin environment will lead to further concentration of wholesale insurance providers, leaving a smaller number of insurers who will have the scale, resources and focus to ride through the insurance cycle,” said Mr Weatherhead.

“Some eight insurers account for 93% of revenue, and of those, the top four wholesale insurers by annual premium income increased their combined market share from 56.9% last year to 66.4% this year.”

The report concluded that technology developments and service levels will be critical for insurers to gain competitive advantage in an increasingly concentrated market.

“A number of major superannuation funds have reviewed and updated their insurance programs over the last year. Key areas of focus in selecting an insurance partner, apart from price, have been service levels, making it easier for members to get cover and improving underpinning technology and reporting processes.

“Accordingly, automated underwriting is becoming a prerequisite for insurers to be considered, at least for larger funds. There is also increasing demand for online claims lodgement and assessment and case workflow reporting,” said Mr Weatherhead.

Regulatory changes outlined in Stronger Super also threaten more complexity within the wholesale insurance market. 

“Whilst we support auto-consolidation as proposed in Stronger Super, it does present significant challenges in determining whether members whose super is automatically consolidated should retain all their exiting cover, only the default cover available in the new fund or some level of cover in between,” said Mr Weatherhead.

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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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Australia’s life insurance gap has reduced over the last six years, according to a new report from Rice Warner Actuaries.

As at June 2010, the overall level of underinsurance is $669 bn to meet the subsistence needs of families and dependants after death, which compares with $1,000 bn in 2005 on a like for like basis – a reduction of 33 per cent over the six years.

On an income replacement basis, the level of life underinsurance is $3,073 bn. Meanwhile, for total and permanent disability (TPD), the level of underinsurance sits at $7,182 bn and income protection underinsurance at $437 bn.

Michael Rice, Managing Director and Head of Strategy of Rice Warner Actuaries, attributes this shift to significant demographic, financial and life insurance market changes over the past six years and in particular, an increased focus on personal financial risks post-global financial crisis.

“Increased levels of personal insurance have been driven by an increase of default cover within superannuation, a greater focus on risk insurance by financial advisers and superannuation fund trustees as well as the growing direct life insurance market,” said Mr. Rice.

However, while the report points to a welcome development in the face of Australia’s continuing underinsurance problem, Mr. Rice warns we’re not out of the woods yet.
x
“While the market is now providing a substantial proportion of subsistence life insurance cover, this is still only half the amount of cover required to ensure that family members and dependents can maintain their standard of living after the death of a parent or partner,” explained Mr. Rice.
c
“Apart from individual detriment, underinsurance also comes at a substantial cost to the government. Currently the total cost to the government of life underinsurance across Australia is calculated to be $140 million per year as publically-funded social security benefits fill the gap. Meanwhile the situation regarding disability underinsurance is even more serious, costing the government nearly 9 times this amount!”
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Mr. Rice believes there are things the government could do in the short term to remove glaring distortions and inequalities in the market in order solve this ever-present problem.
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“The underinsurance issue would benefit from the government considering the removal of stamp duty from all life, total and permanent disability (TPD) and income protection policies; removal of GST on TPD and income protection products sold by General Insurers; equalization of the tax treatment of risk insurance inside and outside superannuation; and implementation of the proposed ‘scaled advice’ model with a particular focus on risk insurance.
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“While the report proves the issue of underinsurance is still a significant one for the financial services industry and the government in Australia, it also reveals a positive step in the right direction.”

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