I heard about the concept of VUCA mentioned on radio the other day. It was used in the context of geo-political instability, but as my passion is helping ordinary Australians understand the almost impenetrable rules of retirement income, VUCA struck a chord.
What is it? According to the Harvard Business Review it’s an acronym which captures the thought, ‘Hey it’s crazy out there’. More specifically, it refers to:
- Volatility,
- Uncertainty,
- Complexity and
- Ambiguity.
Australia’s retirement income system in a nutshell, methinks! Too many changes to the rules, and too many options, poorly explained and then seemingly at odds with each other when decumulation kicks in.
My strong, long-held, belief has been that a lack of financial literacy is the main factor preventing many Australian retirees from overcoming such VUCA and ‘living their dream’. Not too few savings, nor using super as an estate-planning vehicle, nor spending too little, nor spending too much. Rather, an inability to grasp the full breadth of their choices across the five funding pillars (Age Pension, super, private savings, work income and home equity) and the sea of complexity in which they exist.
Is it really as straightforward as this?
Having canvassed some thought leaders in the retirement industry, I’ve now modified my thinking. But more about that later.
I asked two simple questions of four highly respected industry leaders. I chose these commentators because their different areas of activity offer as close to possible a 360-degree view of retirement income needs. Those who responded to these questions are:
- Think tank founder and researcher, David Bell (Conexus Institute)
- Policy expert, now consumer superannuation advocate, Katrina Ellis (Super Consumers Australia)
- Former investment manager now advice solutions founder, Jeremy Duffield (Retirement Essentials)
- Policy expert with specialisation in later life funding needs, Louise Biti (Aged Care Steps)
The questions posed were:
If asked about ways to improve Australia's retirement income system, which two things would you change or initiate? What is a quick win and a longer term or structural reform?
Here’s what they had to say about what’s needed to improve Australia’s’ retirement income system.
David Bell, Executive Director, The Conexus Institute
Quick win:
Super funds need to engage with their members more in the lead-up to retirement, introducing them to the decisions they will face and some information materials that they can engage with. Helping future retirees prepare for big, possibly complex, and, in many cases, confronting decisions can only be beneficial. Some funds do this really well as part of what they call their member journey mapping. Funds could establish, say, engagement prompts at ages such as 50, 55, 60, and 65. Best practice at age 50 could include:
- A retirement income projection with links to a more interactive calculator
- A checklist of things to think about around your retirement planning, including:
- retirement age
- how retirement is financed (how savings are used, type of products, the role of Age Pension etc.)
- further information required, including access to interactive tools
- pathways for further assistance (how the fund can help or access to a financial adviser)
Longer-term or structural reform:
All the data points and anecdotes indicate a large dispersion in progress being made by super funds in developing their retirement capabilities. Some funds have made great progress and others are lagging. Not every super fund should be ‘entitled’ to transition their members into retirement just because they were members during the accumulation phase. Conexus has proposed a retirement licensing regime as a solution, and we continue to work on this idea. Simply, set high capability-based standards that super funds must reach to be a licensed retirement fund, and only allow licensed retirement funds to service Australian retirees. That would greatly accelerate the super industry and ensure better retirement outcomes for all retirees.
Katrina Ellis, Deputy CEO, Super Consumers Australia
Quick win:
Remove Account-Based Pension (ABP) minimums so anyone who is over 60 can start an ABP if they want. Most large funds are keeping members with low balances from moving into the tax-free phase of super by setting a minimum balance required to open an ABP. This is unfair and means that people are stuck in an accumulation account paying 15% tax on their investment earnings. Everyone should be able to access an ABP and enjoy zero taxes on earnings once they hit age 60, regardless of their account balance.
Longer-term or structural reform:
Establish performance-tested Account-Based Pensions and create a comparison tool so people can find good products.
The performance test has been successful at removing bad MySuper products in the accumulation phase. No such test exists for ABPs. Currently retirees are in the dark about the quality of their fund's ABP options and have no way of comparing returns or fees. The Government needs to do more to protect customers from ending up in a dud retirement option.
Jeremy Duffield, co-founder, Retirement Essentials
Quick win:
Most people apply late for the Age Pension...and the Age Pension is much more important than the industry appreciates, given that over 50% of people in retirement get more than 50% of their retirement income from the Age Pension. Many people also fail to apply for the Commonwealth Seniors Health Card (CSHC). So, I'd say something easy for the government to do is to contact people before they reach 67 to let them know that they may become eligible for government benefits, either the Age Pension or the CSHC.
Another very practical thing the government could do is to make ongoing compliance with the Age Pension less onerous. The requirements for keeping Centrelink up to date are impractical. I'm also in agreement with the Grattan Institute on the need for increased Commonwealth Rental Assistance since it's so apparent that older renters, particularly women, are the worst-off segment of the retirement population, with no relief in sight.
Longer-term or structural reform:
Obviously, implementing the Quality of Advice Reforms (Delivering Better Financial Outcomes). We must make quality affordable advice available to the massive wave of retirees. Beyond that, I think a review of the means testing criteria is needed. Taper rates are too tough.
Louise Biti, Founder Aged Care Steps
Quick win:
Support at home and aged care involve complex and important decisions but emerge at an age when clients are often less capable of making these decisions, and family may have conflicting views and priorities. Objective and qualified financial advice can make a difference. It would be great to see the Government include frailty planning and aged care advice as a service that can be paid for out of the Home Care Package budget.
Longer-term or structural reform:
Frailty risk is the forgotten pillar in retirement planning and needs a greater focus throughout all stages of retirement planning. This extends beyond just how to fund a move into aged care. It also involves planning where a person chooses to live as they age, an understanding of how they will live there, the support needed to remain in that home, and strategies for how to fund these choices. This journey often requires swapping the family home for a more appropriate home in a community setting (e.g. retirement village) or residential care. I would like to see a focus on product development to extract equity from the home that innovates away from the traditional loan product.
True innovation means reimagining the products – possibly through a life insurance option that is used to pay the Refundable Accommodation Deposit (RAD), with the RAD returned to the insurance company to minimise the cost of premiums. I am not sure that I have the solution, but it would be good to see some discussion and innovation. This may require some legislative change to allow RADs to be repaid to the insurance company rather than the person’s estate.
My take
And what was my change in thinking? At times of peak VUCA, when it really is ‘crazy out there’, the best way to respond is surely to ‘go hard or go home’. So I’m thinking big when it comes to tackling the many problems associated with the Australian retirement income system. It’s still way too complex and those with the median super savings (or lower) are not likely to try to access a full comprehensive financial plan, so they are essentially DIY retirees.
Quick win:
My ‘quick win’ would be to equip pre-retirees (those aged 55-60) with the resources they need to understand how the ‘bits’ fit together at retirement, through workplace education two years before Preservation Age, and standardised tools (educational slides and calculators) that step them through the basics. These tools would be Government-designed but provided by each and every super fund. I really believe that, after thirty-plus years of mandatory super, it’s well past time for the Government to step up and provide some simple, plain English retirement income guidance that must be shared with everyone in the country as they approach Preservation Age.
Longer-term or structural reform:
Initially I thought – in line with suggestions over time from Dr. David Knox (former Mercer partner and actuary) that we need to scrap the means test for the Age Pension. And maybe no longer exempt homes above the value of $3 million from an assets test. But this is still fiddling around the edges given the bloated bureaucracy of Age Pension assessment and delivery. So I now believe that the best long-term solution is to establish a Universal Age Pension. It will be much cheaper and easier to deliver – no rules apart from age and residency will ensure that! We could then encourage retirees to work as much as they like – without penalties to their entitlement – but require them to pay tax on earnings at current rates. There would be no tax favours to older workers as they would already have a guaranteed base income.
Then there’s a second, bigger task to tackle in winding back concessions on super, but that’s for another article, another day.
It was a fun exercise to ask people with big brains and expertise from decades of experience to redesign the policy settings for the way we fund our later lives. I believe there are some really good ideas in here. But have we missed something? If so, what is it?
Kaye Fallick is Founder of STAYINGconnected website and SuperConnected enews. She has been a commentator on retirement income and ageing demographics since 1999. This article is general information and does not consider the circumstances of any person.