Super funds spend much of their time on optimising investment strategies, but when it comes to retirement, members are better off optimising their access to their entitlements, including aged care and taxation, according to Peeyush Gupta.
Superannuation funds should approach retirement with a broad focus on getting the transition strategy right, where members are made aware of all available entitlements to healthcare, aged care and taxation, and not approach retirement from merely an investment optimisation perspective.
Financial advice will have a key role to play in this, Peeyush Gupta, a Company Director and former Chief Executive Officer of ipac, says.
Too much focus has gone into the optimisation of the investment portfolio. Now, the reality is that 80 per cent-plus members in super funds are in the default options anyway. So this entire emphasis on optimisation is at the margin
“Too much focus has gone into the optimisation of the investment portfolio. Now, the reality is that 80 per cent-plus members in super funds are in the default options anyway. So this entire emphasis on optimisation is at the margin,” Gupta says.
“In fact, the pre-packaged options, provided the client makes the right kind of selection for their age and risk profile, is probably a good solution. But adding on lots of fancy bells and whistles to investment optimisation, as opposed to client access to benefit optimisation, I think is the wrong focus.
“What is needed is an optimisation equation across the areas of healthcare, aged care and tax. Because that can either add or subtract tens of thousands of dollars from a client’s future wellbeing.
“So my warning, I guess, to super funds is: ‘Don’t narrow the discussion.’”
Guaranteed Products Don’t Work
In the current retirement debate, much attention has been on the creation of suitable income products, including annuities and other forms of guaranteed income solutions, such as pooled survival vehicles.
But Gupta sees little benefit in the creation of a whole range of guaranteed products to assist people in addressing longevity risk.
“The financial reality is that the cost of the guarantee is high, necessarily high. That’s no one’s fault; that’s what it takes to construct a guarantee,” he says.
Longevity risk is overstated, especially in the context of Australia, where you have a guaranteed annuity called the age pension and high rates of home ownership
“And because of the complexity, you need it to be sold. Usually these products end up being built for the adviser salesforce’s compensation needs, not for the client needs.
“Besides, I don’t think a guaranteed product is necessarily the answer for all. I think longevity risk is overstated, especially in the context of Australia, where you have a guaranteed annuity called the age pension and high rates of home ownership.”
There are also questions around member equity within a super fund if advisory services are provided to some members who proactively seek out advice from the fund versus all the other members who don’t seek such advice, but pay for the costs.
Addressing Complexity at Retirement
The superannuation system in Australia is already quite complex without the introduction of new heavily engineered vehicles. There are myriad rules around concessional versus non-concessional contributions, bring-forward caps, personal withdrawals, death benefits and nominated beneficiary rules.
And at the point of retirement this complexity can increase substantially depending on the personal circumstances of a member and the entitlements they have.
Gupta believes that at this point most members will need to seek advice to help them get the best outcome and set a strategy for the rest of their retirement.
Yet following the introduction of the Future of Financial Advice legislation in 2013, which sought to address excesses in fee practices through ongoing commissions, a large number of advisers left the industry and this, in combination with the new rules for providing advice services, has meant these services have become quite expensive for many members.
Super funds have tried to address this gap by offering calculators and seminars to raise the level of financial literacy of their members.
But often funds face a lack of data on the circumstances of the individual members, which prevents them from tailoring advice. And this data is not easy to get.
“The key constraint they face before they could provide more comprehensive advice is that they don’t have the data. All they have is the data on members’ interests in the super fund, but you actually need data on the household income statement and balance sheet,” Gupta says.
“You need the full financial profile of the client before you can apply the rules in aged care or healthcare access, or pensions. And that data is not cheap to collect and it’s also complex to collect.
“For example, even where digitisation is used to collect data, if a customer has to go through too many screens, seven or eight, they’ll drop out.”
Gupta sees some potential in allowing super funds access to government agencies (with a member’s permission) such as the Australian Taxation Office, which holds records on a member’s super assets across all funds and data around their household balance sheet and income.
“Those are probably the critical necessary things to inform whether there’s an estate planning issue, whether there’s an access-to-pension issue that you’ve got to be careful of,” he says.
A Question of Adviser Numbers?
But even with access to the right data, a transition to retirement is likely to require some interaction with a financial adviser. There are several funds that have their own in-house advisers, including large funds such as Aware Super.
But industry participants have raised questions about the feasibility of employing enough advisers to provide all members with advice.
Gupta says that while ongoing advice might not be for everyone, an initial consultation at the point of retirement should be achievable for most members.
It's simply about ensuring that you maximise entitlements, that you don't inadvertently give up critical, free, government-provided access to healthcare benefits and age pension benefits in particular
“I’m not sure that I agree with the statement that not everyone requires customised advice. I think the point of retirement is such a significant event that the optimisation can be worth tens, if not hundreds, of thousands of dollars if you get it wrong or right,” he says.
“So it’s worth a quick check to see if you’re not going to be entitled to healthcare benefits, pension benefits, aged-care benefits.”
He argues that if a large super fund employs 200 advisers, who each advise two people a day on their transition to retirement, they will probably be able to service about 80,000 clients a year.
“Those numbers aren’t exact, but it shows it is not out of reach. Even the largest funds could probably offer one comprehensive check-up at the point of retirement,” he says.
“It’s simply about ensuring that you maximise entitlements, that you don’t inadvertently give up critical, free, government-provided access to healthcare benefits and age pension benefits in particular.
“At a minimum, given that we forced these complex systems onto the community, we should all collectively look to provide them with solutions to do the optimisation question and get the right answer for themselves.”
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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.