The RIR made it clear that super funds can do more for members in retirement, particularly around helping retirees spend their nest eggs with confidence. While the RIR was supportive of the strength of Australia’s superannuation system, it noted several hurdles to delivering the best result to members.
The report didn’t make any recommendations, but its observations provided very strong guidance. For example, the report noted that the typical approach to retirement preserved the savings ‘nest egg’ and, as a result, left retirees short of what they could be spending. This reflects the idea that superannuation is really a ‘consumption smoothing’ mechanism. By deferring some consumption during working years, super can give members roughly the same lifestyle in retirement, but only if they spend their savings – rather than just sitting on their nest egg.
The RIR also applied this consumption concept to the family home, noting that many retirees could have more to spend by using a reverse mortgage to access some of their capital while still alive. While this might be a step too far for current retirees, many baby boomers may prefer this option.
This observation echoes parts of David Murray’s 2014 Financial System Inquiry which also noted that the super system could do more for retirees.
Super funds are already working on improving their retirement offering, considering how to get the best for their members in retirement. While the CIPR concept was probably a bit too prescriptive for most, the retirement income covenant is likely to be more principles-based and provide funds product design flexibility. Some funds looking to provide certainty for their members have used an allocation to lifetime annuities to manage their member’s longevity. Other funds are moving down the path of scalable innovations to target lifelong retirement income with various degrees of longevity protection, that can still swing with markets.
A common thread in all the developing products is better use of the nest egg. Instead of preserving the capital, the best outcome for members is one where they spend their money - capital and income. A good retirement income solution is like allowing the nest egg to hatch into a productive chicken. Instead of trying to preserve the nest egg for later, retirees can safely consume any egg today knowing they will have another one tomorrow.
Hatching the chicken is like converting capital to income. This is the key to a successful retirement outcome for members and it can be achieved in different ways. It is quite a different process from accumulating the nest egg in the first place and funds are considering how to get a better retirement outcome for members ahead of the government’s coming nudge in the form of the retirement income covenant due to start on 1 July 2022.