The retirement income covenant seems to imply Australia has solved the retirement adequacy problem. But Sunsuper’s Anne Fuchs doesn’t see this reflected in the circumstances of the fund’s members. Segmenting your member base might be a better way to address member outcomes.
The scramble among superannuation funds to design a retirement solution with a suitable income element was given impetus by the federal government’s decision to implement a retirement income covenant.
This covenant requires trustees to consider the retirement income needs of their members, expand individuals’ choice of retirement income products and improve standards of living in retirement.
It is now due to come into effect on 1 July 2022.
Anne Fuchs, Head of Advice and Retirement at Sunsuper, believes while the covenant is an important step, it might assume circumstances that don’t apply to a vast number of fund members.
[The retirement income covenant] assumes that retirement adequacy is a problem that has been solved for Australia and we certainly don’t see that if we look at the Sunsuper membership. That is just not the case
“It assumes that retirement adequacy is a problem that has been solved for Australia and we certainly don’t see that if we look at the Sunsuper membership. That is just not the case,” Fuchs says in an interview with [i3] Insights.
“Our constituency includes women with interrupted work patterns, women in casualised jobs, a lot of agricultural and blue-collar workers, so basically people who aren’t earning a lot of money. And there is a real link between retirement adequacy and what your remuneration and work patterns are during your life.
“I think there is a bigger issue around how society remunerates those carer-type professions: aged care, teachers and nurses. There is a stark contrast between the remuneration of female-dominated, caring professions and others with similar levels of qualifications.
“I think that is part of the reason why retiring women are the fastest-growing group of people experiencing homelessness in this country.”
No matter how good the investment strategies that a fund offers are, there are limits to the problems they can solve, she argues. Therefore, solving the issue of retirement adequacy needs a broader policy response.
“I think there are some things that are just outside of any super fund’s control, because there are broader policy settings that need to be solved. A super fund can’t solve this for a cohort of workers that are probably always going to be up against it in terms of achieving financial security at retirement,” Fuchs says.
Segmenting Members
Fuchs believes funds can get the best outcome for members in retirement by tailoring investment options and advice more to an individual’s circumstances. And in order to get a better understanding of a member’s view on money and the circumstances they are in, Sunsuper has been segmenting its member base into different profiles.
“You can’t go out and talk to someone who’s quite sophisticated and financially savvy about retirement in the same way as you would talk to someone who is feeling underprepared,” Fuchs says.
“So Sunsuper has done a lot of detailed work on segmenting our membership by their individual profile, by what we know about them. You’ve got those who are actively in charge and financially savvy, but there is a raft of different people.
“We’ve got people that we describe as having ‘other priorities’. These are the people that would prefer to do anything else rather than talk about money.
“So we’ve got these cohorts and our job is to talk to and coach these member segments really differently.”
Sunsuper has done a lot of detailed work on segmenting our membership by their individual profile, by what we know about them. So we've got these cohorts and our job is to talk to and coach these member segments really differently
One of the findings of Sunsuper’s membership segmentation is that 50 turns out to be a pivotal year for many members. Members are then only 10 to 20 years out from retirement, but it is around this age many experience life-changing events that will influence their financial futures greatly.
“Fifty seems to be quite a defining time at Sunsuper and life events start happening more. They get divorced or they lose their job, or the life events create an opportunity for people to engage with their super,” Fuchs says.
It makes sense to segment this cohort out of the member base and provide them with digital advice that is specific to their needs.
“The way we’ve been using our segmentation over the last six months at Sunsuper has seen a big, material difference in engagement and take-up. It is profound, so we believe that this is the way to go,” Fuchs says.
Sunsuper implemented its segmentation strategy about 18 months ago and it is now part of the fund’s client relationship management system, which means call-centre staff can see what decisions members have made in the past and what their circumstances are.
They can then decide what the most suitable step forward is.
“It is all about talking to that one individual person and looking at what’s happened on their account,” Fuchs says.
As the amount of data on member circumstances grows, she believes it can also be applied at the investment level and to product design.
“I think that there is some opportunity for the investment team to, as we get more rich data about how these people think, use this segmentation and potentially apply portfolio construction design differently, based on what we think their risk appetite is,” she says.
“Generally, we find that the financially savvy people have a higher level of appetite to take on risk as opposed to the underprepared or other segments.”
Complexity
The superannuation industry is looking at various ways to achieve reliable income streams in retirement and a broad range of solutions are being considered, including annuities, protection overlays, insurance-style guarantees and pooled survival funds.
But in developing these solutions, Fuchs says there is a danger of losing the member in the process.
“In my 20 years’ experience dealing with retirees, the thing that prevents them from actually engaging in their retirement is fear of complexity,” she says.
“That would be the number one thing and so I just worry that if the industry gets a bit too clever in terms of creating more products, with more complexity, whether that’s actually going to do more harm than good.
In my 20 years’ experience dealing with retirees, the thing that prevents them from actually engaging in their retirement is fear of complexity. I just worry that if the industry gets a bit too clever in terms of creating more products, with more complexity, whether that's actually going to do more harm than good.
“I think the industry’s challenge is to find simplicity and recognising that most Australians will have other assets outside of super.
“So I think integrating Centrelink into this is really important. You can’t solve for retirement without solving for the individual member’s Centrelink needs and so that’s what we’re thinking about: ‘How do we integrate centrelink needs and advice?’”
But equally important is to not take the individualisation of options too far, she says.
“We had our member analytic insights team define what the average member is, because when you’ve got 1.4 million people, there’s always going to be a cohort that is different, but ultimately you have to view it from the collective,” she says.
For [i3] Insight’s guide to retirement, please click here.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.