Need to know
- More than one million Australians have their super in retirement products
- Unlike accumulation super products that build up your retirement income while you're working, there is no quality test for these products
- Super Consumers Australia says retirees need some assurance that their retirement income products are performing well
There are two distinct phases in superannuation: the accumulation phase, where you're working and building up your future retirement income and the retirement phase, where you spend down your hard-earned super.
Rainmaker Information has calculated that people pay more fees to their super fund in retirement than they do in the accumulation phase. But despite how much you pay for these products, they're not quality tested like accumulation super products are.
Super Consumers Australia says it's time to test these retirement income products and give people the confidence that their fund is doing a good job with the vital task of managing their income in retirement.
Testing super products has helped Australians
In 2021, the regulator began testing MySuper products, the default super products most Australians are in. The test analyses products on their long-term performance and fees in comparison to a benchmark. This performance test was extended to more products in 2023.
Since the government introduced testing, many underperforming funds have merged or exited the system. Analysis by Super Consumers Australia also found that funds who failed the test had reduced their fees by more than 20% on average.
"The performance test has forced funds to lift their game and has had a real impact on the retirement income of many Australians," says Super Consumers Australia policy manager Rebekah Sarkoezy.
"It's time to extend these benefits into the vital retirement phase and give Australians peace of mind that their fund is doing a good job managing their super in retirement."
Towards testing retirement income products
Super Consumers Australia has been calling for the government to introduce testing of retirement products.
Recently, there has been more discussion of the idea within the industry.
In August 2023, the chair of the regulator, Australian Prudential Regulatory Authority (APRA), John Lonsdale, said it was possible to test these products.
"When we think about what we've managed to do in the accumulation phase – we've got the performance test, we've got the heat maps – we don't think it's that big a step now to do it in the retirement phase," he said.
There's a need for "a strong purpose-built regulatory framework" for these products
In their submission to Treasury, independent think tank, the Grattan Institute, has also noted that retirement income products aren't regulated as heavily as accumulation super products, "despite being more complicated and the stakes for the member being higher". The institute also said there's a need for "a strong purpose-built regulatory framework" for these products.
In December 2023, the government began consulting on super in retirement. The discussion paper noted "there may also be opportunities to ensure (retirement income) products perform well, through comparison and testing … These can all support a competitive market, which can help keep products priced well and improve quality".
A gap in the system
As of March 2023, there were more than 1.3 million member accounts and almost $400 billion in retirement income products. A recent government report found that life expectancy for retirees is expected to grow in the coming years, and confirmed that super will become the main source of income for many future retirees.It follows, then, that high fees for these retirement products can significantly erode the super balance of retirees and mean they have less to spend.
But despite the size and importance of this part of the system, there's little guidance for retirees to work out how well their retirement product is performing.
A retiree trying to determine how their super is performing in retirement could look at their fund's Member Outcomes Assessment. Each fund is required to self-assess on areas like performance and fees to create this document. However, previous Super Consumers Australia research found these documents can be self-serving and use flawed metrics.
There are no clear consequences for funds that underperform in the retirement phase
Unlike in the accumulation phase, where a fund that fails the performance test twice is banned from taking on new members, there are no clear consequences for funds that underperform in the retirement phase.
A need for transparency
The regulator has the power to hold ad hoc and behind-the-scenes conversations with funds whose products are not performing well, but Super Consumers Australia says there's a need for transparent and objective testing of retirement income products.
"It's time for the government to start moving towards testing these products," says Sarkoezy. "We're worried the lack of scrutiny could be costing retirees millions each year. Without transparency and accountability in this vital sector, it's hard for retired Australians to have confidence their fund is doing a good job managing their retirement income."
Geoff Warren, associate professor at Australian National University and research director at Conexus Institute, says that the government should develop some assessment of retirement products.
"The issue is what type of assessment is right for retirement (products)," he says.
"It's important to hold funds accountable for their member outcomes … I don't think anybody in the industry disputes that there should be some sort of assessment of whether funds are successful in working towards delivering for their members."
A research paper by Warren and David Bell says that the task of testing longevity products (these are designed to provide income however long a person lives) is more complicated than testing relatively straightforward retirement products like account-based pensions.
But it makes the point that introducing this testing is worthwhile: "Waiting for the perfect framework that doesn't exist will only result in never creating any structures of assessment. A start is required."
Independent guidance to help retirees
When CHOICE asked more than 10,000 Australians about planning for life after work, more than 41% of pre-retirees surveyed said they found the process "very" or "extremely" complicated. Further, many survey respondents said that they wanted independent advice.
Recent research by Super Consumers Australia found that only 21% of people would trust advice from their super fund. Many survey respondents were unfamiliar with key aspects of the system; for example only 40% definitely knew that most Australians over 60 don't pay tax on earnings in the drawdown phase.
Almost half of pre-retirees said they find planning for life after work complicated.
While the government recently announced changes which will see super funds be able to offer a broader range of retirement advice,
Sarkoezy says funds giving more advice is not a complete solution and the government needs to introduce a free and independent guidance service to help retirees find products that suit their needs. This service could be based on the UK's Money and Pensions Service (MAPS) and would be more accessible to those with less money in their super. People using this service have given it good feedback.
Warren also believes a free advice service giving guidance on some of the simpler aspects of retirement products would be helpful. "With retirement, there's never going to be a perfect solution, but we can do much better than where we are currently … (advice) on basic matters like drawdown strategies and whether some longevity insurance is needed could be of value," says Warren.
Sarkoezy says making these changes would help retirees enjoy a better quality of life once they finish working.
"A quality filter and some free, independent information and support would go a long way towards helping Australians make the most of their retirement."
Stock images: Getty, unless otherwise stated.