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The 3 key principles of retirement income

The ways financial regulation and industry evolve to serve the growing number of Australians facing retirement have huge social and economic implications. They make the Government’s consultation paper, “Development of the Framework for Comprehensive Income Products for Retirement” (CIPR) (the Paper), an incredibly important step. We applaud the Paper and the opportunity it provides Australia to have the retirement income discussion. It is this sort of process that has created a system the envy of many countries and I am certain that elements of whatever comes out of this process will also be world-leading and have an impact far beyond our shores.

With all that said, I admit to being annoyed when I started reading the Paper because of the overly negative way account-based pensions were portrayed and what felt like rose-coloured glasses being applied to longevity insurance. Although a lot of relevant detail and context comes out later in the document, I believe the narrative and industry debate has been too heavily skewed towards product-based solutions. There is a lot more groundwork that can be laid to improve retirement outcomes before jumping straight to a product.

I do not profess to have the final solution, but there are three broad principles that need to be embraced as part of this process: mechanics, technology and preferences.


As a research house, we are constantly trying to cut through the noise and marketing to understand what really makes an investment tick. When it comes to retirement incomes, the amount available is determined by four main areas: contributions + investment earnings – fees – taxes (the traditional components of defined contribution or account-based solutions). Adding longevity insurance of some form adds a fifth element, mortality credits.

We believe that the CIPR should be defined as a solution that utilises relevant account based and longevity insurance component products as opposed to a composite product. We support the move to make longevity insurance more readily available. However, it is already a complicated product, and adding to this by incorporating additional elements or features will make it more difficult to compare these products and may prevent the formation of a competitive market. Importantly, while the components of a CIPR may be kept separate, the resultant payout profiles can still be communicated as a combined income stream to members.

The idea that CIPRs will lead to higher levels of retirement income for all Australians, an idea promulgated several times in the Paper, oversimplifies the situation and has the potential to be misinterpreted out of context. Very simply, longevity insurance transfers assets between those who die early to those who die later. This will clearly benefit some and has the potential to add certainty to many more. However, the mortality credits created have some implications relative to a simple account-based pension, including:

  • product cost structures will be higher due to the additional complexity
  • the capital costs associated with longevity products
  • assets are likely to be allocated to lower risk and return investments due to the capital requirements placed on annuity providers, and
  • higher distribution or sales costs due to the additional complexity of the product.

It’s true in a narrow sense that products such as annuities can create additional income for retirees as long as they live, but this does not always equate to more utility for the retiree. Further, for retirees who wish to draw down a low percentage of their assets, have other sources of income, or are not concerned about longevity risk, a similar improvement could also be achieved through asset-based pensions with the assistance of better advice tools.


Advances in technology will see ongoing improvements in the way retirement incomes can be built for Australians. Technology has a key role to play in better forms of communication, more efficient administration platforms, increasingly sophisticated modelling engines and data-gathering techniques. Technology and advice should be the instruments used to pull together different product components into an overall retirement income solution for retirees.

Technology will bring down the cost of providing retirement incomes to more Australians. Technology means that it will become less important to productise solutions to make them commercially viable. These factors must be recognised in the formation of the CIPR framework. The CIPR framework must make it easier for trustees to provide online advice to address individual requirements in retirement. If safe harbour provisions are being considered for a product, they should also exist for expanded intra-fund advice.


The CIPR framework was originally envisioned for members who do not make a choice on retirement – defaulting members. However, even a defaulting member will have preferences. My US colleagues have published research around optimal levels of annuitisation. Two of the biggest drivers are bequest preferences and the desire for certainty in retirement incomes.

From a policy perspective, superannuation is not intended to be used as an estate planning tool. This policy objective is managed through minimum drawdown requirements and the tax treatment of superannuation and pension assets. However, it is incorrect to extrapolate this to a position where no superannuation assets should be left to dependants in any instance. Within these policy settings, some Australians will prefer to live more frugally so that their dependants may live better, while others may prefer more certainty around retirement incomes. People will have different preferences.

The fear of running out of money can be a factor in lowering drawdown rates. In some cases, this can be a justified fear. In other cases, it is more of a behavioural bias. In both instances, the result can be better informed through the utilisation of improved advice tools. If no advice is provided, it is not surprising that members gravitate towards the published minimum drawdown rates. While much progress has been made, I doubt there is anybody who would say the industry has nailed the way in which we help retirees to manage their account-based pensions in retirement.

Using an annuity as part of a default would make more sense if the recommendation could be personalised. Given basic demographic information on each participant, such as age, compensation, savings rate, and balance, coupled with plan-level data on any type of additional pension benefits, would better enable the annuity recommendation to be tailored to that participant. Even if a member hasn’t communicated preferences, the ability to customise the portfolio based on available data is there today and will continue to grow. The cohort-based approach suggested by the Paper may be a good initial step on the road toward individual solutions.

Product options must include advice

In summary, a composite approach to CIPR that pairs digital advice – a low cost, individualised component driven by data and technology – with a mix of transparent ‘best of breed’ product options is the best path toward improving retirement outcomes for Australians. The CIPR framework needs to acknowledge likely future digital capabilities and not just the tools at hand today, and to review the regulations governing the ability of trustees to provide individual recommendations.


Anthony Serhan, CFA, is Morningstar’s Managing Director Research Strategy, Asia-Pacific. Morningstar has made a submission to Treasury on the Paper. This material has been prepared for general use only, without reference to your objectives, financial situation or needs. You should seek your own advice.


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