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In the reams of reporting and commentary on superannuation, the focus is mostly on building your retirement balance. Relatively little attention has been given to what happens next in retirement phase.
Many super funds have been working behind the scenes to improve their retirement income products. Some have also developed annuity-style products that provide income for life or for a set period to address members’ fears about their money running out due to longevity, inflation and investment risks.
But innovation in this area has been disappointingly slow, one year after the release of the retirement income covenant (RIC).
It was generally anticipated that the RIC would lead to a flurry of new pension products, but for various reasons this has not been the case.
A joint review of progress one year down the track by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC), found: “Overall, there was a lack of progress and insufficient urgency from [super funds] in embracing the retirement income covenant to improve members’ retirement outcomes”.
Instead, funds have been tinkering around the edges of their existing account-based pension products, focusing on more flexible, convenient access to retirement savings and improving communication with members in the lead-up to retirement and in retirement phase. But even these efforts have slowed somewhat.
More flexible super pensions
In a July 2023 survey of pension funds, SuperRatings found only a small number of funds have launched new retirement products in the last couple of years.
In recent years there has been a major shift towards more flexibility around pension payment set-up, frequency and payment date options, but this too has stalled. Hopefully the loss of momentum will be temporary.
“Historically, some of the more innovative solutions were being offered by smaller funds that are now merging, resulting in a decline in pension flexibility over the short term. We expect this will rise again as funds launch new products or expand the options available within existing products,” says SuperRatings Insights manager Joshua Lowen.
Traditionally, funds have offered payments from their account-based retirement pension products monthly, quarterly, twice a year or annually. But the trend has been towards fortnightly payments. Lowen says the latest survey found:
- 72% of funds now offer fortnightly payments, down from 83% in March 2022
- 5% of funds offer weekly payments, down from 12%
- 15% of funds allow members to choose their regular payment date, down from 20%
- 53% of funds offer multiple payment dates
- 47% of pension funds enable people to open a pension account online, up from 44%
- 56% of pension funds allow partial withdrawals online (that is, occasional lump sum withdrawals in addition to regular pension payments), down from 68%.
More frequent pension payments allow fund members to better manage their cash flow, especially those members who also receive a full or part Age Pension. As the Age Pension is paid fortnightly, retirees could opt to receive their super pension payments on alternate weeks.
Improvements in digital functionality have also reduced the time members can expect to wait to access their savings. A majority of funds (52%) now provide access to savings in two to three days, while 23% offer access in one day.
Automatic increases to pension payments
Another development SuperRatings looks at is funds that allow members to set up automatic increases in their pension payment amount. For instance, to keep up with rises in the cost of living you might decide to increase your pension payment by a set percentage amount each year or by an amount in line with inflation.
SuperRatings found that:
- 69% of funds allow members to increase their pension payment amount by a certain percent each year, down from 73%
- 86% allow members to increase their payments by rises in the Consumer Price Index (CPI, a measure of inflation), down from 90%.
This function is particularly important in the current environment where inflation has been rising sharply and increases in official interest rates have not been passed on in full to bank savings accounts. Retirees with cash in the bank have seen their investments go backwards, with returns from cash and term deposits well below inflation.
Some funds are also offering a ‘retirement bonus’ as an incentive for members to stick with them as they transfer money from accumulation phase into retirement phase.
Retirement bonus payments go by various names, such as pension bonus or Australian Super’s Balance Booster. It may be called a bonus, but it’s essentially your own money.
SuperRatings found an increase in the number of funds offering a retirement bonus to 28% of pension funds, up from 22%.
Some funds pay a flat percentage of your retirement balance, while others use a more complex calculation based on your length of membership or the investment options you were in. Most are capped at $4,000–5,000 although some caps are as high as $8,000.
Average pension balance rising
While it’s undoubtedly the case that there has been too much focus on super balances and too little on retirement income, balances do matter.
Following the strong market recovery since the pandemic low in March 2020, SuperRatings found that the average super pension balance was sitting at around $308,000 in July 2023. This is a slight decrease on the previous year, but the average new pension account balance has climbed to $329,000, up from $317,000 previously.
While pension account balances continue to grow throughout retirement, negative super returns in the 2022 financial year, combined with pension withdrawals, would have contributed to the fall in the average pension account balance.
Returns were better than expected in the year to June 2023. According to SuperRatings, the median Balanced pension fund (60–76% growth assets) and the median Capital Stable pension fund (20–40% growth assets) returned 9.8% and 5.1% respectively.
In difficult years it’s worth remembering that super is a long-term investment, even in retirement phase. In the 10 years to June 2023, the median Balanced and Capital Stable option returned 8.3% and 5.1% per year on average.
Yet retirees often choose to withdraw the minimum amount required under super legislation, set at 5% of your account balance if you are aged 65 to 74 but half that amount in a temporary measure for the four years to June 2023. In other words, most retirees would have seen their pension account balance grow in recent years even after withdrawing a year’s pension income.
Lump sum vs pension payments
Despite the rise in average super account balances, there are still gaps in coverage, especially when it comes to gender.
According to Rice Warner, the average super account balance for men aged 60–65 was $318,500 as at June 2020 (the latest figures available), but just $260,900 for women, well below the average new pension balance of $329,000 in 2023. The reason for this discrepancy is that people with low account balances tend to withdraw their super benefits as a lump sum on retirement.
SuperRatings’ survey found that 59.4% of members elected to receive a lump sum benefit as at July 2023, compared with 40.6% who started a super pension. Even so, this is a significant improvement on the figures of 71% and 29% respectively only two years earlier.
The proportion of retirees opting to withdraw their super as a pension should continue to increase over time, as many of today’s retirees have not had the benefit of compulsory employer-paid super for their entire working lives. Better retirement income products could also help.
As retirement balances increase, member retention is increasingly important for funds. Many funds are also using digital technology to improve member engagement as members approach retirement, with tailored communications about retirement options and advice on offer.
Lowen says funds have a complex task in educating and guiding members through their retirement. “Regulatory certainty around what advice can be given will be required before funds can fully support members. This is getting closer with the outcomes of the Quality of Advice Review now released but will still take more time.”
Fees are falling
While pension account starting balances are on the rise, it’s important not to become complacent. When your financial resources in retirement are finite, every dollar counts. One factor that can be a potential drag on returns is fees.
The good news is that median fees have been falling a bit, but there is still a big gap between the highest and lowest fees on the market.
The table below from the latest SuperRatings survey summarises fees for Capital Stable options (20–40% growth assets) across the main pension products in the market, using an account balance of $250,000. The top quartile indicates the cheapest 25% of funds, the bottom quartile is the cut-off for the most expensive 25% of funds, and the median represents funds that sit at the half-way mark in terms of fees, that is, half of all funds surveyed are more expensive and half are less expensive.
Pension fees on a $250K account balance – Capital Stable options
|Fee as a % of
|Investment-related fees and costs
*Fees used in the analysis are as at 25 July 2023 using most recent data available to SuperRatings at the time of preparation. Fees include percentage-based administration fees, member fees, investment management fees (incl. performance-based fees), transaction fees and costs, and taxes but exclude any applicable employer rebates.
As you can see, the most expensive funds charge $3,128 or more compared to $1,841 or less for the least expensive funds in the market, a difference of $1,287.
This gap has increased slightly. In March 2022, the most expensive funds charged $2,992 or more compared with $1,815 or less for the least expensive funds; a difference of $1,177. The industry median continues to edge lower, however, from $2,455 in 2021 to $2,377 in 2023.
Innovation in the retirement phase of super has been slow, partly due to delay in releasing the retirement income covenant. One year after the RIC was legislated, super funds are yet to implement major changes and only a few have released new retirement income products. Instead, they have been working at improving their existing pension products with a focus on flexibility, accessibility, convenience and more personalised experience for retiree members, harnessing developments in digital technology.