In his classic 1960s article, Marketing Myopia, Harvard Professor Ted Levitt challenged executives by asking them, ‘What business are you in?’ He argued that businesses focusing on products and services, rather than their customers’ specific needs, were on their way to obsolescence. He cited the example of early railroad barons who discovered too late that they were in the transport rather than the rail business, and did not adapt their product to suit. Levitt’s key point is that businesses that respond to their clients’ evolving needs, as they are shaped by demographic and technological change, will be sustainable over the longer term.
The ‘What business are you in?’ question is now especially pertinent to the superannuation industry, as the current debate about the purpose of super demonstrates. When funds focused on accumulation, the answer was straightforward; to generate the best investment returns to maximise retirement savings, but with many members now moving into retirement the answer is not so simple.
Finding new ways to serve members
Strategic thinking is centred around ways to serve ageing members. Is superannuation only about providing a financial outcome and satisfactory incomes in retirement, or should it have a broader scope and help members to have satisfactory retirements overall?
The journey for funds started with developing products that provided income streams and allowed for longevity risk. Critical steps were understanding members' financial profiles, something many funds had never done, and using digital advice products to better identify desired retirement financial outcomes.
Recognising retirees' different needs is challenging. It’s not just about their super balance, risk preference and expected longevity. It also involves their standard of health, wealth outside of super, expectations as to standard of living, and for some, bequests. Retirees are an incredibly diverse group with complex needs.
Health, aged care and home equity
Solutions, however, are not readily available. In the paper Financial issues in retirement: the search for post-retirement products (by Professor Ralston), three key areas outside super but critical in retirement are identified: the costs of health, aged care, and the ability to access wealth stored in housing. Many retirees live in a form of self-imposed poverty due to their fear of outliving their savings, and the need to maintain a precautionary pool to accommodate unexpected health or aged-care costs.
1. Health
Concerns for health care are top of the agenda. While a universal health system ensures a minimum standard of treatment for all citizens, those who want to ensure higher quality health care, a doctor of their own choice and immediate access for elective surgery, have few tools to manage this risk. Consequently, they will err on the side of caution and minimise expenditure, just in case. Innovation to deliver the ideal product - long-term health insurance, a combination of annual health insurance within an annuity structure - is precluded due to universally applied community rating. Greater flexibility by way of lifetime health insurance based on an individual’s risk factors would allow for greater risk protection and peace of mind.
2. Aged care
Regulatory reform in the aged care industry is aimed at providing for a more consumer-driven and competitive industry. The single comprehensive asset/income means test, introduced on 1 July 2014, was designed to provide a strong social safety net for older Australians, while at the same time ensuring that those who can afford to pay do so. In 2014, an aged self-funded retiree needing assistance was faced with paying around $13,800 annually for a Home Care Package, or an average of $330,000 Refundable Accommodation Deposit for a residential place. In the latter case, residents also pay a maximum of $43,000 per year in daily and means tested fees (as at September 2015), plus an additional Extra Service charge for higher-standard accommodation.
These are substantial costs and at present there are few tools to manage these financial risks and be prepared for such contingencies. A deferred annuity market will be of use here, pending the long-awaited rules for such products. Another possible solution is Long Term Care Insurance, a product market that currently does not operate in Australia.
3. Home equity solutions
The most important solution may well be flexible products that allow Australians to access wealth stored in the family home. Given that around 80% of retired Australians own their own homes outright, with an average value of around $600,000, this can be a very useful resource to draw on to supplement income or for unexpected capital expenses.
Currently, there are only around 40,000 reverse mortgages on issue in Australia, with an average loan size of $92,000. With 2.3 million people over 70 and a potential market of almost $1.5 trillion according to the Australian Bureau of Statistics, the current uptake is small beer indeed. It would appear that both the demand for and the supply of this product is limited mostly due to 1) the commercial and reputational disincentives of potential negative equity and difficulties in funding, and 2) government policies which exempt the family home from the pension assets tests. Perhaps this explains why there has been so little innovation in reverse mortgage products.
It’s not only about superannuation
We need better products. In response to this increasingly user pays system, we are seeing the emergence of new products such as HomeSafe’s home equity release and fractional ownership models for property such as from DomaCom or Brickx. New developments in annuities are occurring and more are on the horizon.
Retirees need a central point of guidance and advice on how best to manage not only their super but their total wealth and health in their retirement years. Putting together the right integrated solutions presents a challenge for those operating in the post–retirement area.
Super funds that enjoy long-term trusted relationships with their members are well placed to assist. Quite apart from maximising member benefits, this form of value-add ensures member retention as an increasing proportion move into the retirement phase.
The question for super funds is: “What business are you in?”
Jeremy Duffield is Co-Founder of SuperEd and was Managing Director and Founder of Vanguard Investments Australia, where he retired as Chairman in 2010. Deborah Ralston is Professor of Finance at Monash University and was previously the Executive Director of the Australian Centre for Financial Studies.