Australian DC pensions: retirement products

The UK defined contribution (DC) pension market is well behind its Australian counterpart in many aspects. In a new series of blogs, we highlight the advancements the Australian DC pension market has made, and what this could mean for UK in the future. In part three, we focus on retirement outcomes.

Members of Australia’s superfunds have built up relatively generous pension pots, partly due to the effect of mandatory contributions and consolidation across the sector over recent years. 

But there are concerns that a lack of innovation on the decumulation side has resulted in members being failed and making unwise decisions in retirement. 

When we went to Australia in 2014 and 2017, we asked why there was little innovation in the at-retirement space. Generally, the response we heard was “what's the return for innovation?” and “there’s no demand from members”.

Since then, there has been a response from the regulator. 

In our previous blog, we explored how the introduction of the Retirement Income Covenant in 2022 will encourage superfunds to develop a strategy to help members with their retirement income needs. Longevity pooling products could be an answer, creating a group of assets that is managed by the superfund provider. However, a mindset change will be required by the public, as solidarity with regards to pension savings is not currently popular.

As the regulator puts pressure on superfunds to be more innovative in the at-retirement phase, we consider what these products could and should look like, and what this could all mean for the UK down the line.

Better retirement outcomes for members

Research shows spending requirements reduce over time, meaning people need more income during the early years of retirement while they are healthy and mobile. Principles put in place for inflation, investment and longevity risk in new products will also need to take account of expected spending habits. 

A retirement income solution also needs to be flexible because people's circumstances can change during retirement – often in ways we have not always considered as an industry. 

It is also sensible for people to only think about aspirational spending when the basics are covered. 

Members need a safety net to cover the cost of housing, water, food, insurance and basic bills before they can even think about going on holiday or making home improvements. Retirement income products that take account of longevity risk could play a role by providing some form of guarantee to cover the basics. This would allow savers a more flexible income to cover aspirational spending. 

Importantly, the ideal retirement solution should not just focus on pension assets, rather it should consider people's total assets. Drawing from home equity – like equity release in the UK – is becoming more popular in Australia, allowing people to draw income this way before touching their pension assets. 

We believe a retirement framework should enable people to view their total assets, including their home, and facilitate the drawing of income from multiple different sources. And couples should be able to view and plan their household finances together, rather than relying on products designed for individuals in isolation. 

Engagement with members

Retirement income products will only work if there is good engagement with members. As a system, the superfund industry engages well with members on contributions and accumulation, but it needs to improve its education and information around retirement and beyond to enable them to make robust decisions. 

Generally, the engagement tools we’ve seen so far are relatively basic and webpage based. While these don’t feel especially personalised for members or intuitive to use, providers are starting to invest in more sophisticated online calculators and applications. We expect to see better online engagement tools that don’t just help people from a financial perspective, but also support them in a more rounded or holistic way in the run-up to retirement.

Interestingly, Australia’s superfunds have been looking to the UK, which it sees as a step ahead, for inspiration around engaging with individuals. For example, the UK’s Open Finance sector is used to help people manage all their finances, outside of pension assets, through some interactive and intuitive engagement tools.

Advice and regulation

Given that at-retirement products are complex, members need advice. But it seems the general focus in Australia is on capital preservation rather than retirement income. 

We suggest this may be tied to some vested interests on the part of some advisers, as they may be keen to keep the capital and continue to earn fees.

However, we feel it is important that regulations are eased to allow superannuation funds to give advice and provide more clarity over what they can do in-house compared to a third-party adviser. 

The recently published results of the Quality Advice Review will introduce changes in the Australian industry to make it easier for superannuation funds to give advice. The regulator will remove red tape that adds to the cost of advice with little benefit to consumers and will also expand access to retirement income advice. 

An additional issue for the industry is the reducing number of advisers – particularly those who can advise on at-retirement solutions. 

The regulator is concerned. Yet, this is where digital products can play a large role, as scaling up with human interaction alone will not be possible. The regulator recognises this and is focusing its efforts on easing the regulation around advice.

What this all means for the UK

As we wrote in our first blog, while Australia is less than a day’s travel from the UK, it seems to be ten years ahead in terms of market development. However, the UK might take far less time than that to catch up given the current pace of consolidation. 

Our fear is that some UK providers’ desire to build assets under management is distracting them away from making much needed improvements to the at-retirement space. As in Australia, we suspect the regulator will need to step in to force UK providers to create more sophisticated products that help people manage their retirement income.

It will not be that long until the first UK generation relying solely on DC benefits will retire. These people will need much more sophisticated retirement products to cope with a matrix of demands: maximising income, managing longevity risk and utilising flexibility to cope with changing circumstances. And these products need to be easy to understand and intuitive to use. This will come, but we fear not soon enough. 

We encourage you to look out, in the coming months, for our blueprint of the ideal at-retirement framework. It will hold the key to supporting people to make the right decisions and achieve the best outcomes.