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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 develop annuity-style retirement income products. These typically provide a certain level of 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 stalled pending the release of the retirement income covenant (RIC) and clarification of its goals. Now the RIC has passed through Parliament, a flurry of new annuity-style pension products is anticipated.
In the meantime, many 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.
More flexible super pensions
In its latest annual survey of pension funds, SuperRatings found a major shift towards more flexibility around pension payment set-up, frequency and payment date options.
This is occurring alongside digital development, as funds play catch-up with the banks and other financial service providers. The aim is to make it easier for members to engage with their super online when and how it is convenient for them.
“Retirees are typically a more engaged sub-set of members so funds are looking at what they can do for these members,” says SuperRatings market insights manager, Camille Schmidt.
Traditionally, funds have offered payments from their account-based retirement pension products monthly, quarterly, twice a year or annually. But change is afoot, with a major trend towards fortnightly payments. Schmidt says the latest survey found:
- 83% of funds now offer fortnightly payments, up from 74% a year earlier
- 12% of funds offer weekly payments
- 20% of funds allow members to choose their regular payment date, up from 12% in the previous survey
- 44% of pension funds enable people to open a pension account online
- 68% of pension funds allow partial withdrawals online (that is, occasional lump sum withdrawals in addition to regular pension payments).
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.
Some industry examples provided by SuperRatings are HESTA, which offers fortnightly payments from any date you nominate, while QSuper, AustralianSuper and Cbus offer fortnightly payments on a Wednesday, Thursday or Friday respectively.
Funds offering weekly payments include Qantas Super, LUCRF Super (recently merged with AustralianSuper), LGIASuper, Australian Catholic Super, First Super, Plum Retirement Income and AMG Super. Interestingly, this innovation is being led by some of the smaller funds.
Automatic increases to pension payments
Another development SuperRatings looked at was funds that allow members to set up automatic increases in their pension payment amount. For instance, to keep up with increases 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:
- 73% of funds allow members to increase their pension payment amount by a certain percent each year
- 90% allow members to increase their payments by increases in the Consumer Price Index (CPI, a measure of inflation).
Some of the many funds offering automatic CPI increases are AustralianSuper, Aware Super, Care Super, Cbus, Australian Retirement Trust (formed by the merger of Sunsuper and QSuper), Hostplus, Telstra Super, HESTA and AMP.
This function is particularly important in the current environment where inflation is rising sharply and interest rates are still relatively low. 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’s called a bonus, but it’s essentially your own money,” says Schmidt.
SuperRatings found a small increase in the number of funds offering a retirement bonus to around 22% of pension funds.
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 $330,000 in June 2021, a jump of 13% over the year. The average new pension account balance was slightly lower at $317,000.
These figures highlight the fact that pension account balances continue to grow during periods when market returns exceed the amount withdrawn, as has been the case in recent years.
Take the year to June 2021, when the median Growth and Balanced pension funds (where most retirees are invested) returned 20.1% and 14.5% respectively. That was an especially strong year, but even looking at the 10 years to June 2021 the returns were 10.2% per year and 9.2% respectively. Yet retirees often choose to withdraw the minimum amount allowed 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 substantially 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, but just $260,900 for women, well below the average new pension balance of $317,000. 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 71% of members elected to receive a lump sum benefit as at June 2021, compared with just 29% who started a super pension.
This situation should reverse in time, as many of today’s retirees have not had the benefit of compulsory employer-paid super for their entire working lives. But 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.
Fees are falling
While average account balances have gone up strongly in recent years, 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 fees have been falling a bit on average, 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 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 between cheap and expensive in terms of fees.
Pension fees on a $250K account balance – capital stable options
|Fee as a % of|
|Investment-related fees and costs|
As you can see, the most expensive funds charge $2,992 or more compared to $1,815 or less for the least expensive funds in the market, a difference of $1,177.
Fortunately, this gap is closing. The previous year the most expensive funds charged $3,326 or more compared with $1,802 or less for the least expensive funds; a difference of $1,524. The industry median fell slightly from $2,455 in 2021 to $2,420 in 2022.
Innovation in the retirement phase of super has been slow, partly due to the government delay in releasing its retirement income covenant. While they waited for clarity, super funds have been working at improving their existing pension products. These improvements have focused on flexibility, accessibility, convenience and more personalised experience for retiree members, harnessing developments in digital technology.