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You can't have it all: Retirement income strategies

While greater availability of retirement income products is a positive, the three objectives of these products as set out in legislation don't necessarily reflect members needs or desires.

Appearing on a panel at the Australian Institute of Superannuation Trustees' ASI Conference on the Gold Coast, Spirit Super manager, product and innovation Ruvinda Nanayakkara pointed out the inherent difficulty in designing a retirement product that meets all the objectives of the Retirement Income Covenant.

Under the legislation, which is effective July 1, retirement income products provided by super funds must help members achieve and balance three key goals: maximising expected retirement income, managing risks related to sustainability and stability, and provide flexible access to funds in retirement.

Challenger general manager, institutional partnerships Simon Brinsmead said the clear definition of success that underscores the Retirement Income Covenant is that every last dollar in an account is spent. But that isn't necessarily the goal of all retirees.

"In designing our product, we [Spirit Super] asked ourselves what do our members worry about in retirement, is it just finances?" Nanayakkara said.

Surveying members, Spirit Super found "about 80% of their concerns are financial". Diving deeper, Spirit Super asked members about what they wanted to do with their money, knowing that the decision-making process for different cohorts varies.

"What about those members that want to leave a bequest? How do we manage their money in a way that meets the requirements of the reforms but also meets their goals? It's important to understand that nobody can have it all; there is a very clear trade-off there," he said.

He added that this complexity is probably why the industry has been on the back foot in regard to the Retirement Income Covenant.

His comments led the panel moderator, AIST senior policy manager David Haynes, to ask whether that means there is a place for a 'soft default' product under the reforms.

Brinsmead believes there is, given the number of retirees that don't want to be too involved.

"There is a role for a soft default, or a guided choice. There is a large segment of the membership that is just looking for the trustee and the super fund to provide them with something that just works," he said.

Nanayakkara said 'soft default' is a loaded term because retirees are all so different, but that there does need to be an option for those members who don't want to make a decision or receive financial advice.

"If you look at those members, what are you going to do for them? We can call it 'soft default', we can call it whatever we want to call it, but they need something," he said.

He added that there will also likely be a need for legislative change as it pertains to the kind of advice super funds can provide. For example, retiree members would benefit greatly from expenditure advice, he said, as so many choose to drawn down the minimum so as to not run out of money but are simultaneously not giving themselves enough money.

"They often don't know the expenses they're going to have in retirement... So, we give them some expenditure advice and that way we could have a product in place that provides them with that level of income with a certain amount of flexibility for unexpected expenses," he said.

"That way they have the income they need, they have the flexibility they need and we're still helping them manage risk."

He added that what's lacking right now is a super fund's ability to talk to members about their household situation.

"That is making it difficult for us to provide good advice, good guidance and good information to our members, because we know most members go into retirement as a household, so if you're only looking at the superannuation interest of a single member in one fund then, excluding Age Pension, you're not really looking at the entire picture," he said.

"From an advice point of view, we need to be able to take that whole situation into account - that's what I'd do differently."

Mercer's Richard Boyfield agreed, saying there is confusion as to where "the line" is.

"If you know the rules of the game, you will be able to play to them. But, ideally, it would be great for it to be very clear and for us to be able to provide some guidance and clarity as to where that line is," Boyfield said.

"Then at least we can set up frameworks to deliver to that and not have to fear that the regulator will come knocking with glorious hindsight."

Read more: Spirit SuperRetirement Income CovenantRuvinda NanayakkaraRichard BoyfieldSimon BrinsmeadAISTAustralian Institute of Superannuation TrusteesChallengerDavid HaynesMercer