Designing super solutions for retirement
The retirement phase of superannuation is different from accumulation. In retirement, the focus switches from accumulating wealth to providing an income for retirement.
At its core, a retirement solution should aim to deliver retirees:
- regular income that lasts for life;
- access to additional lump sums in case of emergencies;
- a potential estate value to support family, particularly in the event of early death; and
- the highest level of income while meeting these aims.
Trustees looking to design solutions to meet the needs of today’s retirees face several uncertainties in meeting these outcomes. These include:
- how long a retiree will live;
- how investment markets will perform; and
- what inflation will mean for the future purchasing power of income.
Income for retirement can come from super, the age pension or additional sources outside super. Financial advisers tailor solutions to the personal circumstances of a retiree to find their best retirement outcomes. However, a super fund trustee will have incomplete knowledge of a member’s personal circumstances, the fund might only know a member’s age, gender and account balance. A challenge for trustees is how to use this limited information to design a suitable retirement offer that improves member outcomes and simplifies the member experience.
Blended retirement solutions
A single product is unlikely to meet the desired retirement objectives for all fund members. Broadly, Trustees can utilise two types of retirement products when designing a retirement offering:
- An Account-based pension (ABP) – which offers flexibility but lacks certainty for members.
- A lifetime income stream – which lacks flexibility but makes payments for life and can provide certainty for members.
An ABP provides members with full flexibility to access their savings and choice of investments, however all risks remain with the member when it comes to certainty. The ABP does not ensure a regular income for life.
A key benefit of a lifetime income stream is that it pools longevity risk. This is why the government developed the innovative retirement income stream (IRIS) concept in 2017, to promote income streams in retirement. Incorporating an IRIS into a retirement portfolio can reduce one of the biggest risks faced by members – outliving their retirement savings. This option ensures an income for life no matter how long that is.
An IRIS provides a fund with flexibility in design and features. Some IRIS products make guaranteed payments, providing certainty for a member on the payment they will receive, others incorporate market exposure into future payments. This second option means trading certainty for higher potential payments.
For some retirees, blending an ABP with an IRIS provides all the desirable features: certainty of income for life; flexibility in emergencies; and an estate value upon death. The blended solution is usually better than either an ABP or an IRIS alone.