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Time to build a super system fit for retirement

When the modern super system was introduced under former Prime Minister Paul Keating, it wasn't designed for a mass market of people reaching the age of 80, but that's exactly what it has to deal with today.

The system Keating conceived was for a life expectancy around 75, where retirement could commence at 55. Today’s retirees are typically living into their late 80s, more than nine years longer than they did in the 1990s. A 65-year-old woman today can expect to live to 89 years on average, with a one-in-five chance of living to 98. Australians have added about four months of longevity every year since the start of the superannuation guarantee in 1992. That greater longevity means we need to rethink how super is delivered.

Is super doing its accumulation job?

By 2030, our national super savings will double in size from the current $2.6 trillion to around $5 trillion. Over that period, something in the order of $1.3 trillion of super savings will move into the retirement phase. This is in addition to the $760 billion that is already there.

Super is also moving from merely supplementing the age pension to substituting it for an increasing proportion of retirees. The evidence is already in. At June 2017, only 42% of the over-65 age cohort were getting a full age pension, with a further 28% on a part age pension.

Put another way, 58% of today’s retirees have sufficient means to reduce, or eliminate, their entitlement to government income support. Growing super balances play a material part in this story.

Super is doing the first part of its job; it is allowing people to accumulate assets for retirement. Our system is more mature than most people think. Average member balances in retirement are now exceeding $250,000. Typical household super wealth at retirement is in the $350,000-$500,000 range and increasing.

The pension-phase drawdown task of super

However, there is no structure to the drawdown phase of superannuation. Flexibility is prioritised at the expense of risk management, income certainty, and sustainability.

That’s what a current Treasury position paper on a Retirement Income Covenant sets out to address. The position paper outlines two principles to be included in a retirement income covenant in the Superannuation Industry (Supervision) Act 1993 (SIS Act) that will require trustees to:

  • Assist members to meet their retirement income objectives throughout retirement by developing a retirement income strategy for members. This will plug a significant gap in the SIS Act. Retiring members currently do not have the benefit of such a provision and neither do fund trustees.

  • Assist members to meet their retirement income objectives by providing guidance to help members understand and make choices about the retirement income products being offered by the fund.

The retirement income covenant is designed to fit into the SIS Act next to covenants that are similar in style and intent, such as the investment and insurance covenants. It has the potential to send a strong normative signal about what is expected of trustees in the retirement phase.

The retirement income covenant is an important part of the structure for a retirement income framework. It’s a top priority reform for six reasons:

  1. About 700 Australians are retiring every day, more than 85% of whom have a need for reliable income for life, but less than half of them are entitled to the full age pension.

  1. The industry standard is that accumulation-style products are presented to retirees as retirement income streams. This is effectively our current default retirement product.

  1. Diversification is the only risk mitigant applied to most retirement income streams, with all other risks currently borne by retirees who are consequently self-insuring, living too frugally and leaving ‘unintended bequests’ to the next generation.

  1. Over $760 billion is already in the retirement phase, but the industry is substantially under-prepared for this.

  1. There is very limited governance currently dedicated to retirees and retirement income.

  1. Risk pooling and insurance are widely used in the accumulation phase but are not routinely used in the retirement phase to reduce the risk of running out of money in retirement.

The Treasury position paper argues it is preferable for superannuation fund trustees to have an obligation, rather than an option, to offer a Comprehensive Income Product for Retirement (CIPR) because providing appropriate income streams to retirees is fundamental to the purpose of super. It might also overcome inertia and ensure quick progress in delivering better outcomes for retirees. It will also ensure that all retirees, regardless of their fund, are provided the same opportunity and range of choices. The proposed requirement in Treasury’s paper that all large APRA-regulated funds (other than eligible retirement funds [ERFs] and defined benefit [DB] lifetime pension funds) must offer CIPRs is the right policy setting.

Member choice on CIPRs

Importantly, of course, there is no compulsion on the part of the member. The decision (and consent) of the member is a key part of the proposal. It follows from this that a CIPR will not be a default. Retirees will have a clear and simple choice of whether they want to take up a CIPR or not. CIPRs will provide a wider range of choices for retirees than the currently have. Just as is the case now with account-based pensions, some retirees will choose a CIPR without advice and some will do so with advice.

The notion that trustees should have a duty, via the proposed covenant, to assist members with their retirement income objectives through guidance about their choices makes sense. Regardless of the account balance threshold below which a CIPR need not be offered to a member, all members should benefit from the engagement aspects of the covenant. Leading funds are already engaging with members about retirement income and the covenant will ensure that it becomes a core activity of all funds.

It’s important to note that CIPRs will not affect a large part of the system. CIPRs will not affect members in accumulation, not apply to SMSFs, and only apply to retiring members who choose one. Even then, many CIPRs will still comprise around 75-80% in account-based pensions, which is the current pension default.

Pooled lifetime products

The pooled lifetime component of superannuation envisaged under the Treasury position paper would initially only represent a very small proportion of the overall system and even a modest proportion of the retirement phase. We have estimated that if all retired members opted for a CIPR with a 20% allocation to a pooled lifetime product in the first year of the new regime, this would amount to around $40 billion allocated to a pooled lifetime income product.

It will not be a disruptive or revolutionary change, but a necessary enhancement for a system with around $1.3 trillion heading towards the retirement phase by 2030.

While other regulatory measures needed to implement the retirement income framework will follow, setting appropriate governance standards that place emphasis on the needs of members in retirement is a critical first step.


Challenger has provided a submission on the May 2018 Treasury position paper on the retirement income framework. This outlines the proposed principles for the retirement income covenant. We support the direction of the paper and believe now is the right time to drive this reform forward. Read the full submission here.

Jeremy Cooper is Chairman, Retirement Income, at Challenger, a sponsor of Cuffelinks. For more articles and papers from Challenger, please click here.

July 12, 2018

Make financial advice available for everyone, they are in the best position to be an educator to the client. Even if it means making advice fees tax deductible.

Y Generation and Millenials
July 09, 2018

Reminds me of Aesop's fable - The Ant and the Grasshopper.

We do need government policy to ensure people save for themselves. SG is a great example of this.

Younger taxpayers cannot let retirees just empty their savings and fall back on the Age Pension.

July 09, 2018

Albert, are you on the dole too?

Have you considered the impact on family if you can't afford your own age care? Government policy with age care is toward user-pays, and care delivered at home. If you can't afford enough support then family usually try to provide it for you and many suffer from carer-fatigue.

Albert Uo
July 07, 2018

longevity risk is BS. we should not bother planning for this because of the age pension fall back position. More important to enjoy yourself whilst you have the health and 'youth' left.
If you run out of money at age 80yr + you can always go on the pension and quite frankly for most people there will not be much you care about towards the end of your life except a meal and a warm place and a good BA.

David Williams
July 05, 2018

Having just spent two days in the company of quite a few actuaries from commerce and academia, my impression is that there is far from unanimous agreement that the Treasury's goal is in practice achievable let alone commercial. Some alternative proposals espoused innovative financial planning strategies as having more flexibility for the ongoing management of evolving individual differences.

As well as seeking product solutions, we should be devoting much more effort to educating individuals about how their longevity (the rest of their life) might evolve and how they can influence the impact of increasing longevity other than through financial means. While the financial literacy program has undoubtedly delivered benefits to younger age groups, it seems to have done little for people beyond midlife. In part this reflects the increasingly complex financial landscape.

There is much that can be done to address the fear of increasing longevity, which is largely based on ignorance and at times fostered by marketing efforts. We need to match our efforts on financial literacy with programs that build more confidence in the power of informed personal action on longevity. This can offset some financial concerns (such as through greater productivity for longer, and lower health costs). It will also improve quality of life for individuals and the community. Time for a change of emphasis?

Mark Hayden
July 05, 2018

I welcome discussion on this topic as long as the debate also considers the value to the retiree and to the economy of maintaining an “appropriate” weighting to shares etc.

Below are two relevant quotes:

Challenger’s submission state : “Annuities are part of the defensive component of a retirement income portfolio and are not a substitute for growth assets….. an annuity should replace the bonds in the portfolio”

The Productivity Commission report is critical of life-stages and life-cycle products – “most life cycle products have a relatively modest impact on sequencing risk, while forgoing the higher returns that come with a larger weighting to growth assets”

Gary M
July 05, 2018

“Diversification is the only risk mitigant applied to most retirement income streams, with all other risks currently borne by retirees who are consequently self-insuring". In fact, 80%+ of retirees are being funded by tax payers – they are not “self-insuring”. Therefore, for the majority, longevity risk is taken care of via indexed pension income for life. And because they are indexed, inflation risk is also covered.


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