Mega super fund, Australian Retirement Trust, is currently pushing for super industry reforms which revolve around some proposed “soft default” retirement product solutions with added flexibility and personalisation.
While the notion of “soft default” retirement options is far from new, it’s not well understood by investors. Basically, the cohort arguing the need for “soft default” retirement product solutions believes it simply makes little sense to have a compulsory retirement system that switches to voluntary at the point of retirement.
What the “soft default” brigade wants to see is an opt-out option, rather than the hard default, which is used in the accumulation phase.
However, added flexibility and personalisation aside, the Australian Retirement Trust (ART) also argues that the soft default retirement options are integral to unlocking billions of dollars to Australia’s economic productivity, which the Reserve Bank believes is at an all-time low.
If you’re not connecting the dots in ART’s argument, here’s their basic argument in a nutshell.
Anne Fuchs, ART executive general manager for advocacy and impact claims there are millions of Australians around the country who aren’t taking up an income stream in retirement.
So what’s wrong with that, you ask, after all, it’s their money.
Too much complexity
ART’s Fuchs argues that this is a squandered economic opportunity for the country because it’s just tied up in savings.
In other words, it’s just sitting there in an accumulation environment.
Fuchs points the finger at super funds - presenting members with too many complex decisions -for the intransigence they display moving from savings and into the income phase.
“Apathy tends to win the day. We know, at ART, there is no fund that is a greater proxy for Australia than us with our diversity of employers and diversity of membership… and 60 per cent of our members would literally rather do anything else than talk about how to set up an income stream,” said Fuchs.
Nudge, guide and advise
One of the good things to come out of COVID is that after multiple bouts of market volatility, members are more engaged with their super fund than ever before.
While that’s a major step in the right direction, Fuchs reminds Australians that the vast majority of people only retire once, with many still perceiving retirement planning to be complex to navigate.
Interestingly, while the fund currently invests more than $71 billion on behalf of members aged 65 or older, only around half (57%) of those funds are in the pension phase with members drawing down on them.
The starting point, adds Fuchs, is that funds should be doing everything they can to nudge, guide and advise their members.
In an ideal world, she says every single individual member would engage as early as possible.
However, if they don’t respond, she says there still has to be a smooth pathway for them.
“There is a lot of data we can use for the good of our individual members that would result in the income stream for them – that was the purpose of the superannuation system in the first place,” she says.
“We have the information – we know their age, we know their gender, we know their balance, we know their investment history, we know life expectancies.”
Opt-in soft default
ART wants to see the introduction of a “suggested product” – an opt-in soft default.
The super fund wants the government to consider super industry reforms that encourage members with a non-contributing accumulation account towards an age-based conversion to an income-generating pension account.
ART’s suggested reforms could also compel funds to offer their members a default retirement solution that includes a longevity solution.
While soft defaults would reduce the friction in retirement, which often sees members search for alternative fund, Fuchs reminds members that ART’s funds under management (FUM) would go backwards due to it paying out more.
She strongly rejects suggestions that a soft default would potentially marginalise financial advisers, especially those with a large retiree cohort as clients.
“We know at ART that a soft default is for the members who aren’t engaged or get overwhelmed – these are people that aren’t getting financial advice and are never going to get financial advice,” she said.
“This is money that is sitting in a taxed savings environment up until, potentially, they depart the earth. That’s how much apathy there is; they aren’t getting financial advice.”
If more members were drawing an income stream in retirement, Fuchs argues that this money would circulate in the Australian economy - that’s not circulating at the moment – because it’s just tied up in savings in super funds.
Benefits of moving from accumulation to income phase
Research from the Super Members Council (SMC) early this year suggests that 700,000 Australians who are over 65 and are not working full-time still maintain an accumulation account.
This means they are paying an extra $650 in taxes each year on average for not switching into a pension.
The research surveyed retirees with lower balances – defined as having less than $100,000 – who have an inactive accumulation account and discovered that six in 10 kept it because they either haven’t decided or don’t know what to do with their account.
Interestingly, there’s a little-known administrative hurdle that prevents tens of thousands of less well-off retirees from accessing tax-free account-based pensions (ABP).
The hurdle relates to a minimum balance requirement that most super funds have placed on retirees to apply for an ABP.
For example, industry super funds like AustralianSuper and HESTA require a minimum balance of $50,000, while Australian Retirement Trust and Fire & Emergency Services Super require $30,000.
Meanwhile, Several retail pension funds have similarly high bars – including $50,000 for Fiducian Super and Russell Investment, and $40,000 for Vanguard Super.
Super Consumers Australia CEO Xavier O’Halloran believes it’s literally impossible for people with low balances to get access to the tax benefits if they stayed within those funds.
“Pump out more low quality super fund advice telling people to roll into the pension phase?! The super fund’s own policy doesn’t actually let people do this, guys…” he recently wrote on social media.
“The best advice would likely to be to leave the fund, but good luck getting that guidance from conflicted in house advice.”
