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How retirees might find a retirement solution in future

Developing retirement solutions is the next big challenge facing the superannuation industry. And it is about to get serious. The Government is currently framing a Retirement Income Covenant (RIC), expected to come into operation on 1 July 2022. Treasury recently released a Position Paper that states the intent of the RIC is to:

“codify the requirements and obligations of superannuation trustees to improve the retirement outcomes for individuals”.

The RIC will require trustees:

“to formulate, review regularly, and give effect to a retirement income strategy”.

The impending codification will act as a catalyst for the major super funds to move from navel-gazing towards taking action over their retirement offerings. The focus of this article is how the framework might work for these funds. The RIC will also cover SMSF trustees who will need to consider whether their retirement strategy should be more formalised.

Principles for design, not a prescription

Rather than prescribing a retirement product, the RIC Position Paper focuses on the principles for strategy design. It discusses how funds might develop retirement strategies to balance the provision of income, management of risk (specifically investment and longevity risk), and flexible access to some funds. 

We believe the RIC should also address how retirement strategies are delivered. Arguably matching retiring members with suitable retirement strategies is at least an equal, if not greater, challenge than designing those strategies in the first place.

The Government has intimated they want member choice to sit at the foundation of the retirement system. Indications are that they envisage individuals selecting a retirement strategy for themselves. This might occur through accessing information and decision support tools such as interactive financial calculators, which could be made available by their fund or other providers (perhaps ASIC MoneySmart).

Or it could occur under the guidance of financial advisers. Eventually, robo-advice might even play a role. Basically members would be expected to directly exercise choice over their retirement solution, including the products making up the strategies and their providers.

A purely choice-based architecture of this type would create some dissonance with the framework prior to retirement with which fund members are familiar. The figure below describes what the currently envisaged retirement framework might look like, and how it compares to the accumulation phase. A key point of distinction is that defaults play a central role in accumulation. Nearly 60% of pre-retirement assets of the major super funds are invested in MySuper defaults.

Capacity of members to select a retirement product

Thrusting members into an environment where they need to choose for themselves after they retire gives rise to a number of issues. An important concern is the willingness and capacity of members to engage with financial decisions. Research finds that most individuals have relatively low financial literacy. They can also be subject to various behavioural influences that may lead to sub-optimal decisions. This includes difficulties in processing information, anchoring on obvious choices, myopia and cognitive decline with age – just to name a few.

The difficulty of exercising choice in retirement is only compounded by the complexity of the problem. Managing finances in retirement requires deciding where to invest and how much to draw over a few decades, while accounting for other assets and income sources such as the age pension. Market returns are uncertain and people don’t know how long they will live. The difficulty will only be further exacerbated by a likely proliferation of available retirement products, which the Government seems keen to encourage in order to spur innovation and create competitive tension.

The hurdles to effective self-choice might be overcome if people were willing to seek professional financial advice. Unfortunately, this is not likely to provide a solution for the masses. A full Statement of Advice reportedly costs $3,000 to $4,000, a price many retirees are not willing to pay. Further, the financial planning community is constrained in providing advice at scale. Personal advice is time-consuming, and adviser numbers have fallen sharply post the Royal Commission. 

There is another way of matching retirees with suitable retirement solutions apart from relying on either financial advice or making a self-directed choice. Retiring members could also be given an option to request that their super fund selects a retirement solution on their behalf. We call this ‘fund-guided choice’. 

The selection could be framed as a recommended retirement solution that the member can decide to accept or not. Alternatively, the member might choose to ask their fund to assign them to a solution, followed by sign-off to confirm acceptance.

Some members will trust their fund to make a selection

We suspect that many retirees might welcome the opportunity to ask their fund to make a selection for them. Research indicates that a substantial portion of fund members are willing to trust their fund, and are content to accept options put in front of them due to a lack of confidence to decide for themselves. Fund-guided choice would be closer to what happens prior to retirement for those members who have willingly accepted the default.

Fund-guided choice could also introduce some useful nudges into the decision process that may improve member outcomes. Many retirees arguably limit the amount of value they extract from their retirement savings due to reluctance to draw down on savings to the extent affordable, minimal take-up of longevity insurance and investing too conservatively. Fund-guided choice could assist in addressing these issues through offering solutions to member that embed a suitable mix of higher drawdowns, longevity insurance and growth asset exposure.

The choice framework we suggest might operate through funds asking retiring members to choose one of the four options listed in the figure below. The election of option A or B invokes fund-guided choice, which might be followed by an invitation to furnish additional information to assist the fund to select a suitable solution. The menu of options might be supported by the provision of general and product information and various decision tools.

Choices that might be put to a retiring member by their fund

Please choose one of the following options:

A.  Please assign me to a retirement solution
B.  Recommend a retirement solution to me
C.  I want to choose a retirement solution for myself
D.  Please refer me to a financial planner

Note: A prior step would establish the balance that the member wishes to transfer into a retirement solution with their fund

The question arises as to what happens when members don’t make a choice, perhaps because they are heavily disengaged. At a minimum, the fund might continue to attempt engagement. It might also be helpful for funds to have the scope to assign members to a retirement option under certain conditions, although this would run counter to a purely choice-based system.

Obligation to engage at retirement

The RIC offers an opportunity to establish a framework that caters for various types of retiree according to how they prefer to engage with choosing a retirement solution. This could be achieved through placing an obligation on fund trustees to engage with members at retirement to establish their preferred mode for choosing a suitable retirement solution and giving effect to their choice. These obligations might be included alongside those to develop retirement income strategies. Doing so should ensure that funds not only develop retirement solutions, but also that retirees can engage with the process in the way they feel most comfortable.


Dr Geoff Warren is an Associate Professor at the Australian National University's College of Business and Economics and sits on a number of advisory boards. David Bell is Executive Director of The Conexus Institute, a not-for-profit research institution focused on improving retirement outcomes for Australians. This article does not constitute financial advice.

Further detail can be found in this opinion piece.


August 01, 2021

Frederick John Randall says :"The top 20% of taxpayers pay 69% of all income tax collected. Many pensioners draw more than they ever paid." David Bell counters with: The Retirement Income Review..... shows that overall the system is reasonably equitable, but the top 20% of income earners receive greater benefit than everyone else. The top 1% receive close to double the benefits as the top 70%." I disagree with "reasonably equitable" It is highly biased against the major contributors and towards the non-contributors! And so they should receive better treatment having almost entirely paid for and "carried the rest of the people" with their much higher taxation for their entire working life. But that is not enough it seems. They have to continue to "strive" and justify their financial success even though they are tired and old and just want to enjoy the remainder of their lives!

As for a Covenant: "Covenant, a binding promise of far-reaching importance in the relations between individuals, groups, and nations. It has social, legal, religious, and other aspects." Where at any point has an agreement been reached ? This is a decree: "Decree; an official order that has the force of law."

This decree having the appearance of being delivered from on high especially assembled to reach a pre-ordained conclusion. Hardly an agreement, more like just another imposition designed to "codify the requirements and obligations of superannuation trustees to improve the retirement outcomes for individuals”. 

Ian Archibald
August 01, 2021

The articles on super and private investment proposed enforced draw downs do comment on the cost of entering a retirement/care centre. From my reading a retiree needs $4k to more than a $ million to enter one of these establishments. With the proposed draw down plans how do we fund these moves. Currently the provider claims a hefty percentage on departure. Is the government asking us to end up living on the streets ?
You comment would be appreciated.

August 01, 2021

Dave Roberts you've hit the nail on the head.
(Like most commentary I read on this subject), the RIC looks like a solution in search of a problem.
The "experts" criticize a system that defaults all those unsuspecting "ignorant" Aussies into an account-based pension (balanced fund). Well it just so happens, based on my reading of the scoreboard, that those ignorant Aussies are doing pretty well.
The experts then invoke mumbo jumbo such as sequencing risk to justify their convoluted solutions. Sure its a risk - if you happened to put all your savings into risky assets at the top of the market. The analysis never seems to point out how quickly the typical balanced option has recovered after a major crisis.
I'd like to see hard evidence, using historical data, that demonstrates how the vast bulk of Aussies (I'm guessing over 90%) would have been better off if they had access to a more "sophisticated" system, involving much higher costs, with even greater proliferation of complex (and often useless) retirement "solutions".

August 01, 2021

Di’s comment:
“ I'd like to see hard evidence, using historical data, that demonstrates how the vast bulk of Aussies (I'm guessing over 90%) would have been better off if they had access to a more "sophisticated" system, involving much higher costs, with even greater proliferation of complex (and often useless) retirement "solutions".“
is surely ‘comment of the week’; c’mon Graham!

July 29, 2021

A trustee of a super fund is not in the business of providing personal advice. Expecting them to provide guidance on complex and idiosyncratic issues around welfare entitlements, health (life expectancy), dependants, drawn down requirements and access to capital, health is going to fall hopelessly short of worlds best practice. The politically motivated reforms pre and post Royal Commission has meant personal scaled advice is not attainable irrespective of what all the renters involved in the industry pretend.

David Bell
July 30, 2021

I agree that the provision of advice and guidance is one of the most difficult challenges when it comes to scalable delivery of better retirement solutions. I’m sure there will be more done at a policy level to try to address this issue (e.g. 2022 Review of the Quality of Financial Advice). Let’s hope for good outcomes.

Nonetheless I’m confident that super funds can improve on what they are currently providing for their retirees. This could be the products offered, the tools and resources to help members reach an appropriate solution (mix of products), better use of products such as account-based pensions, and overall provision of useful retirement information. The Retirement Income Covenant is a logical step – it formalises responsibilities of fund trustees.

Frederick John Randall
July 29, 2021

The whole system is back to front. It punishes those who went without to fund their retirement and rewards those who blew their disposable income during their working life. As a self-funded retiree I am frequently asked to pay for some service when it would be free if I had an aged pension card.
You don't see the Government telling aged pensioners what they must do with their money. Aged pensioners don't have the costs of financial advisers, accountants, auditors and the like and they sleep easy knowing they don't have to worry about the share market, value of the Australian dollar, property prices, etc..
The top 20% of taxpayers pay 69% of all income tax collected. Many pensioners draw more than they ever paid. A self-funded retiree couple with their capital in a term deposit would have had to save more than $4million to achieve the same income as a couple on the aged pension.

July 29, 2021

Frederick, you've conveniently neglected to mention the big tax breaks on contributions for those on higher salaries, the lower tax on accumulation earnings and the zero tax on 'pension' phase earnings. Or maybe you're not aware of these things, having left it to your financial advisers, accountants and auditors. And it must be hard having to worry about the share market compared with those who only have to worry about paying the rent for somewhere to live.

David Bell
July 30, 2021

Further to Graeme’s well-made points, the Retirement Income Review did explore the concept of equity in detail. It did this by considering the aggregate of concessions and Age Pension. Chart 7 in the Retirement Income Review ( shows that overall the system is reasonably equitable, but the top 20% of income earners receive greater benefit than everyone else. The top 1% receive close to double the benefits as the top 70%.

Frederick John Randall
July 30, 2021

As I wasn't one of those an a higher income I didn't receive those big tax breaks and I don't have a financial adviser (although I did initially). All I see is former colleagues who were on a similar salary who drove flash cars and had overseas holidays whilst I was saving, now putting their hand out for a pension.
Can I point out that the lower tax on accumulation earnings and the zero tax on pension phase earnings were available to those now on the pension, but who chose an alternative path.!
The reason that many superannuants from a working class background live frugally in retirement is the unknown cost of aged care. More than a million for me and my wife with much returned to the estate after we die.
I have seen a graph that shows the idea that superannuants die with 90% of their retirement savings is only true if you discard all those who used up all they saved.

David Bell
July 29, 2021

Hi Dave,

Thanks for your question – it is an important one. Much of the research, particularly the Retirement Income Review, suggests that the solution your friends are in is likely not providing the best possible retirement. If the solution managed risk a bit better and recommended a drawdown plan, rather than followed minimum drawdown rates, your friends could be spending more in retirement, with confidence.

Further, I’m sure all your friends aren’t the same – so why the same solution for each of your friends. To date most super funds have done very little work to explore better solutions which are tailored to individual circumstances. To do this will require a small menu of products, maybe (in addition to the account-based pension) a product which better manages longevity risk than the account-based pension.

The Retirement Income Covenant will compel funds to think much more about all these issues.

Cheers, David

July 29, 2021

I suspect one reason many people end up with similar offerings is the risk for advisers of deviating from the prescribed portfolio mix too much (and risk being sued for bad advice). Plus as we all know no-one knows what the future holds and the time tested balanced portfolio is hard to go past without some really good knowledge/reasons.

David Bell
July 30, 2021

Steve – you make some good points. My suspicion is that Dave’s friends may not be getting formal advice from their funds but might be mis-interpreting a fund’s standard retirement offering (account-based pension, balanced option, with many people drawing down at minimum drawdown level) as fund-provided advice. But can funds deliver better solutions for their members? This is the responsibility a Retirement Income Covenant will put on trustees.

Dave Roberts
July 29, 2021

Why do there need to be multiple product choices. Looking at the majority of my friends in retirement they have already accepted Fund advice and taken a “Balanced” option Those better off financially use a financial adviser which should be an unnecessary expense.
It would be far better financially and psychologically for the majority of Australians who have either little financial knowledge or interests to be given a one size fits all option.
For the 10% of Australians who do have the knowledge and interest then let them use a variety of solutions.


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