Comprehensive Income Products for Retirement (CIPRs) stand to transform Australia’s underdeveloped post-retirement space. They represent an opportunity to tackle longevity risk and increase retirement income. To deliver these benefits super funds need to develop new offerings and ready themselves operationally to deliver these new innovative retirement income solutions to retirees.
Developing products that can balance competing retirement objectives – that is, managing longevity risk, securing a high income, and retaining flexibility – is difficult. CIPRs are expected to address these needs by combining account-based and pooled longevity features, allowing super funds to leverage in-depth knowledge of their member base and investments to create their own ‘default’ retirement solutions. With industry consultation still underway, the government’s proposed ‘MyRetirement’ framework is slated for release in July 2018.
Some super funds are already offering alternative retirement income solutions that provide a taste of what future CIPR offerings might look like. So far, we have seen three approaches to how this ‘default’ style of retirement product might work.
The first approach is a combined pension and annuity product. In 2015, Victorian super fund VicSuper teamed with investment firm Challenger to deliver the first combined pension/annuity product, with several other super funds following suit. The government’s favorable tax treatment of deferred annuities following the Financial Systems Inquiry has sparked interest in this approach.
The second approach combines an account-based pension with a pooled investment. This type of retirement product provides a guaranteed income plus a living bonus from age 75, with the bonus pool accumulating from deductions made from investors who exit either through death or withdrawing their money. In 2016, this approach was adopted by Energy Super in partnership with Mercer.
The final approach employs an investment bucket strategy within an account-based pension. In 2015/16, Australian Catholic Super and Equip Super launched products that separated their members’ account balances into buckets based on pre-set investment models. A cash bucket includes sufficient funds to cover a safety net in pension payments, a conservative bucket invests in low risk assets providing stability, while the growth bucket is invested in higher risk assets to achieve capital growth over the medium to long term.
As super funds take up the challenge of delivering greater certainty around income and longevity risk there are likely to be many more variations on these approaches. To deliver these new products super funds will need modern agile administration solutions and operational capabilities to manage far greater complexity in the form of add-ons to allocated pension products, multifaceted product suites and/or standalone products that bundle together desirable features. Systems must allow for flexibility in product design and mix, simplicity in administration, efficiencies in service delivery and adaptability as products evolve.
Members will increasingly expect a more holistic treatment of their super and retirement income products as they progress through their lifecycle. Funds that haven’t already done so will need to consolidate these products within unified, member-centric solutions that support a single customer view. To achieve this many funds will need to partner with one or more third party providers to deliver the various components of a CIPR – such as a life insurer for an annuity product. Best practice solutions will support multiple, seamless third party interactions in real-time, via secure processes to deliver effective member outcomes.
While the CIPR space promises to be fertile ground for Australian super funds in the years ahead, the funds who prepare their operating environments now will reap the greatest rewards. By transitioning to modern technology solutions that support the delivery of better retirement outcomes for their members, astute funds will enjoy a considerable competitive advantage in the fast growing post-retirement marketplace.