Government releases discussion paper on retirement phase of super

Article published on: 6-12-2023

The Government has released a Retirement phase of superannuation discussion paper. The paper highlights a number of challenges for members relating to the super system in retirement, and the limited innovation and progress since the introduction of the Retirement Income Covenant in 2022. The discussion paper poses a series of questions seeking community and industry views about how the:

• superannuation system can better serve the needs of retirees, and 
• roles that super funds and the Government can play in supporting members.

The paper also highlights the Government’s expectations that:

• super funds do more to understand member’s needs in retirement, including through the provision of access to greater levels of education and support across various aspects of the retirement system (including social security and aged care), and 
• steps are taken to introduce retirement income products which address longevity risk, which was identified as one of the key reasons that many retirees draw down only the minimum required amount from pension accounts.

Challenges faced by retirees when managing super

The discussion paper references challenges faced by retirees due to the complexity of the superannuation system, perceptions relating to how super should be used in retirement, and member sentiment towards longevity risk. Some key points from the discussion paper are noted below.

• The paper references the Retirement Income Review findings. It notes that around 25% of Australians seek advice as they approach retirement age, but that the ability to make well informed decisions is made difficult by the current lack of assistance, guidance, financial literacy and the inherent complexity of the system. 
• Retirement planning requires consideration and understanding of not only the super system, but also managing health and aged care costs, leisure, living expenses and planning for unforeseen expenses. This makes it difficult for members to make well informed decisions.
• The complexity of retirement income products, payment options, inconsistencies in product features and benefits and a lack of ability to easily compare options adds to the difficulty faced by members.
• The retirement income covenant doesn’t apply to SMSFs, who also have a range of unique retirement challenges, such as exit planning.
• Minimum drawdown rates that apply to income streams don’t optimise retirement income, nor are they designed to. Defaulting to the minimum drawdown rates may be attributable to a general lack of access to tools to help determine appropriate amounts to draw down depending on the individual’s own circumstances. It could also be as a result of concerns about longevity risk, a lack of awareness that these rates can be varied, or the incorrect belief that the rates are a Government recommendation. Reviewing minimum drawdown limits could enable retirees to better meet their retirement expenditure needs. Funds could develop alternative drawdown profiles, default solutions based on factors such as balances or expected needs and provide alternative investment allocations in retirement.

Potential policy responses

A number of potential policy responses were put forward in the discussion paper including (but not limited to):

• providing individuals with greater guidance, education and communication to support them in navigating the retirement income system 
• ensuring super funds undertake analysis of their members to assist and default members to better settings that suit their situation
• investing in the provision of tools that support retirement phase to help members make better informed choices, and
• investing in product innovation to address issues relating to investment, sequencing, inflation and longevity risks.

Of note, the paper stated that confidence to draw down on super savings and the change in mindset required to do so, could be supported through changes to member communications, including the provision of factual information and member education. This could be provided by both super funds and the Government and could extend to both the accumulation and retirement phase of super, even at the early stage of onboarding new members. Information should extend beyond superannuation, and policy approach may include:

• providing material relating to other retirement income sources, such as savings, the Age Pension, home equity release and annuities
• ensuring members have information about Government information services, including Service Australian’s Financial Information Service and Aged Care Specialist Officers
• providing free guidance for those who have retired or are approaching retirement (in addition to expanding access to retirement income advice through the Delivering Better Financial Outcomes package)
• enabling super funds to provide support to members when applying for the Age Pension, or even prompting members to apply for benefits, and
• including SMSFs in the retirement income covenant to sure they are also assisted with retirement planning.