Current retirement policy direction ‘asking too much’ of financial advice: Grattan

In a report released over the weekend, the think tank said Australia’s super system is “too complicated”, proposing a three-pronged reform strategy to simplify superannuation in retirement.

The institute highlighted that retirees are struggling to draw down their super, resulting in the system functioning more like an inheritance scheme than a retirement income plan.

Unlike other countries that provide automatic lifetime income, Grattan said Australia's system offers little guidance, leaving retirees to navigate complex decisions about spending, investment performance, and the age pension.

The institute described the “little” guidance available as “unhelpful”, often pushing retirees towards account-based pensions, which require careful management to avoid outliving their savings.

“Half of those using an account-based pension draw their super at legislated minimum rates, which leave 65 per cent of super balances unspent by average life expectancy,” the report stated.

Pointing to the government’s plans to introduce a new class of adviser (NCA) that super funds could employ to provide personal on a narrower set of topics than existing advisers, the Grattan Institute said that even combined with the Retirement Income Covenant and plans to boost the tools available to retirees, the initiatives are “not sufficient”.

“They might improve fund offerings for some, but they fall short of the more systemic changes needed to improve retirement outcomes for all,” it said.

The report added that while freeing up funds to provide a greater level of financial advice could help some retirees, they will need to be “lucky enough to be in a fund that does it well”.

“But relying on more financial advice alone to help retirees navigate such a complex system will prove less effective, and more expensive, than simplifying the choices retirees face in the first place,” the think tank said.

“Further, loosening the regulation of financial advice is dangerous without better consumer protections in place. The most recent announcements are small steps in the right direction, but do not match the magnitude of the problems.

“Overall, current policy direction is asking too much of private financial advice to overcome the systemic flaws in the super system.”

That doesn’t mean the institute is completely against the government’s Delivering Better Financial Outcomes reforms, however it urged that the package should proceed only once account-based pensions are performance-tested and all retirement products are included in APRA’s assessments.

“The complexity of the retirement income system means funds should be able to help their members on a more personal level. But if these moves are to work in the interests of retirees rather than funds, the government should first create a stronger market design,” it said.

Reform strategy

As such, Grattan has proposed a three-pronged reform strategy to simply super in retirement.

“First, retirees should be encouraged to use a portion of their super to buy an annuity from the government, which would pay an income that lasts retirees’ the rest of their lives,” Grattan said.

According to the institute, retirees should be guided, by both the government and their super fund, to use 80 per cent of their super balance exceeding $250,000 to purchase an annuity. This, it argued, could boost retirees’ incomes by up to 25 per cent, while also ensuring that the bulk of retirees’ incomes, irrespective of their super balances, would be guaranteed to last the rest of their lives.

“Retirees remaining super would be drawn via an account-based pension, giving them flexible access to capital,” it said.

Second, Grattan called for the government to fund a free service to provide personalised retirement income advice for retirees and those approaching retirement.

“This service should aim to advise at least one-third of new retirees, and would cost about $360 million over its first four years and $50 million a year thereafter, which should be funded by a levy on super fund balances,” it explained.

According to the report, a government guidance service, which it dubbed RetireSmart, would be “less likely to be conflicted” than the advice offered by super funds, and therefore more likely to be trusted by many retirees.

“It would be much better placed than super funds to help couples plan their retirement income, and to service people with diverse linguistic or other needs. It could consolidate existing government services, integrate with the myGov online portal, and could also assist retirees to apply for the Age Pension,” Grattan said.

It added that the RetireSmart service should have staff that are “empowered to take individuals’ circumstances into account”, suggesting that it could employ the proposed NCAs to deliver this personal advice.

“Offering personal advice is a much bigger endeavour than offering general advice. It introduces new risks, such as a retiree feeling as if the government has given them a bad steer, hurting their financial well-being. It is also more costly,” the report said.

“But the retirement income system will remain complex, meaning Australians will inevitably have questions that they need answered in a more personally-useful way than general advice can provide. This covers all elements of the retirement income system.”

Lastly, Grattan suggested the government create a list of the top 10 super funds, selected by an independent expert panel, and then steer retirees towards those funds.

“The performance test and comprehensive assessments of fund performance by APRA should be extended to account-based pensions. These reforms could boost the incomes of future retirees who continue to opt for an account-based pension by up to $70,000 over their retirement,” it noted.

Elaborating on the top 10 listicle, Grattan said it would implement the 2018 Productivity Commission recommendation to create a single ‘best in show’ shortlist of funds, compiled by an independent expert panel and extended to retirees’ offerings.

Funds should be selected on their capacity to deliver strong risk-adjusted returns in the long term, sound governance, and their capacity to provide the best guidance and advice, the institute said.

“‘Best-in-show’ would encourage all super funds to lift their game, because funds would compete to make the top 10 and stay there. Market discipline would come from experts who have the time, resources, and expertise to decide which funds to list, rather than individuals who don’t,” it explained.

“It would also create a safe and simple choice environment for retirees, in contrast to the complex and perplexing one retirees currently face.”