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This month we look at APRA’s MySuper heatmap, the new ‘Right to remain’ test recommendation, longevity tables in need of an update, new research shows that the majority of Australian retirees are independently navigating their way through their retirement finances and Treasury invites submissions as it considers the present and future performance of our retirement income system.
APRA unveils MySuper heatmap
The delivery in December of the new MySuper product heatmap is part of APRA’s commitment to improving transparency in the superannuation sector.
Speaking at the ASFA 2019 conference in Melbourne in November, APRA Deputy Chair Helen Rowell revealed a sample of the heatmap, which is a key tool in the prudential regulator’s ongoing efforts to improve outcomes for superannuation members.
The heatmap uses a graduating colour scheme to provide stakeholders with clear insights into the outcomes that are being delivered by Registerable Superannuation Entity (RSE) licenses, especially investment returns, fees and costs, by providing credible, clear information that is comparable with other MySuper products.
“The heatmap is intended to help drive improvements across the industry by highlighting which MySuper products are underperforming and where they need to improve,” Mrs Rowell told the conference.
Director of Super Consumers Australia Xavier O’Halloran welcomes the new product calling it a step towards removing serial underperformers.
“We welcome APRA’s efforts to clearly show which funds have proven themselves unable to deliver a healthy default MySuper product,” says Mr O’Halloran. “Trustees must answer why they should continue to exist, as those in the heatmap red zone have been serving up chronic underperformance for long enough.
“The only difference here is that we now have some transparency over who has consistently been at the bottom of the barrel for the last five years. It’s time for poor performing funds to look for mergers and stop inflicting any further harm on the retirement savings of Australians.”
We take a closer look at the APRA heatmap in SuperGuide article APRA ‘heatmap’ raises the heat on underperforming super funds.
‘Right to remain’ recommendations
Research company Chant West says in order to weed out underperforming super funds, we first need to set the bar.
In a paper released 28 November, the company named unintended multiple member accounts and the defaulting of members into underperforming funds as the two main weaknesses of Australia’s superannuation system.
“The problem of multiple accounts could be solved relatively easily by changing how the default fund procedure works,” the paper states. “But the problem of defaulting members into underperforming funds is more complex.”
Rather than nominate an arbitrary number of funds, Chant West suggests a better solution is to identify a qualifying standard that funds have to meet in order to retain their MySuper status.
Underperforming funds would be removed from the $2.8 trillion superannuation industry under a tough new ‘Right to remain’ test recommended by the Productivity Commission. Funds that do not meet the standard could lose their right to retain their MySuper status and would need to either rectify their shortcomings to APRA’s satisfaction or else surrender their MySuper licence.
Longevity tables need an update
The Actuaries Institute warns tables currently used in software to estimate retirees’ longevity and calculate how long their savings will last need a critical update.
Actuaries Institute President Nicole Rubinsztein says the government has made a strategic commitment to improve retirement income products, but it is clear the tools financial planners use may not reflect best practice when it comes to Australia’s increasing life expectancy.
While there is uncertainty around how long any one person will live, Ms Rubinsztein says there are significant factors to take into account that result in big variations for groups.
A couple of average health, aged 65 (male) and 62 (female), need a plan that lasts until he is 100 in order to be 80% sure their financial plan meets their potential lifespan.
“That is 16 years longer than if the adviser used the simple look-up table for a 65-year- old male,” Ms Rubinsztein says.
Over the past 50 years, Australia has seen a rapid and consistent increase in lifespans. In 1970, the average age of death for women was just over 80. In 2010 this had increased to 87, which is what today’s basic lookup tables are using.
The Institute says financial planners need to consider how much this will increase between now and the time someone retiring today reaches their 80s or 90s.
Australian retirees are going it alone
New research from the global asset management firm Franklin Templeton shows the majority of Australian retirees are independently navigating their way through their retirement finances without involving financial advisers or even their partners.
The research reveals that even though almost half of the 2000+ Australian retirees surveyed believe a financial adviser is important to their retirement planning and generating income in retirement, only 24% are working with one.
In Canada, 57% of retirees consult financial advisers and 47% in the US.
Not only that, but 54% of Australian retirees say they included their partner or spouse when coordinating their retirement income prior to retiring, which is the lowest among our global peers.
Mr Manuel Damianakis from Franklin Templeton’s Australian office says everyone should take a strong personal interest in their retirement finances and attempting to ‘fly solo’ may come at a cost.
“Of those retired Australians, 81% have never developed a written retirement income plan and only 43% told us they have a strategy to generate income for retirement that could last 30 years or more,” Mr Damianakis says.
Furthermore, one in three retirees say that when it comes to spending their retirement savings, they just spend what they need each year and hope it will last. Many lack a contingency plan if they’re unable to manage their finances.
“Given ongoing market volatility and protracted low interest rates, it would be unwise for retirees to adopt a set-and-forget approach to their savings and investments and this is often where those working without professional advice become unstuck,” he says.
Time to have your say
Treasury is inviting submissions from all Australians on which issues and material it needs to examine as it considers the current state of our retirement income system and how it will perform in the future, especially in response to an ageing population.
A retirement income review consultation paper released on 22 November outlines many likely issues and is intended as a guide for those wanting to make a submission.
An independent panel has been established to consider all issues relevant to the review as well as those outlined in the paper, but requests data and evidence be provided to support any views that are expressed.
Submissions can be lodged electronically or by post until 3 February 2020. A report is expected to be ready for the government by June 2020.
The retirement income review consultation paper can be downloaded at treasury.gov.au and postal responses can be mailed to Retirement Income Review Secretariat, The Treasury, Langton Crescent, Parkes, ACT 2600.