International Women’s Day and the focus on equality in superannuation outcomes continues to gain momentum. Congratulations to all involved, notably Women in Super. The progress emphasises this is no time to take a step back on women’s rights to retirement savings.
According to the Women in Super website, women in Australia retire with 47% less superannuation than men. Reasons explaining such a large gap include:
- A gender pay gap of about 19%.
- Women’s fragmented patterns of paid work associated with having children.
- Greater likelihood of women working in part-time and casual positions, and the associated lower level of pay.
- Women undertake the majority of unpaid housework, caring and parenting.
To date, the focus has been on developing policies to reduce the large gender-based super gap. If successful in achieving policy change, it will then take decades for these changes to season and realise their full, intended impact.
In the meantime, it is important for the retirement outcome of women that any new regulatory rules are not further detrimental to the retirement outcomes of women. Unfortunately, we face such a situation right now.
Reversion of pension benefits might be lost
At present, Treasury’s first cut of the CIPR (Comprehensive Income Product for Retirement, read more here) guidelines details highly-prescriptive product rules which emphasise income and place zero value on retirement features such as bequests including reversionary benefits. A reversionary benefit is where a pension ‘reverts’ to an eligible spouse or de facto partner when a member dies after retirement. Products with reversionary benefits are not precluded from CIPR, but these features cost money and hence reduce incomes. Our analysis suggests it is nearly impossible to meet the CIPR minimum requirements with a product which provides a reversionary benefit.
Currently, most pension assets sit in account-based pensions. When most people switch out of super, they roll into an account-based pension. As long as a beneficiary is nominated, a reversionary benefit feature will exist.
We know that about 65% of Australians retire with a partner. Currently, whether we like it or not, the benefits of superannuation largely flow to women through their male partners. This is at risk through the current framing of CIPR if they do not relax the stance on reversionary benefits. This is a massive issue for future retirement savings of women.
Establishing retirement preferences
The industry may be heading down the path of addressing the post-retirement challenge via prescriptive solutions, such as new products. We believe the better approach is to first establish preferences for retirement, and then use these to assess the best of a range of possible solutions.
Treasury has ventured down the prescriptive route with the first cut of CIPR. We undertook a significant amount of reverse engineering to discover the preferences that are implied by the CIPR design rules. We feel many superannuation trustees will be uncomfortable assuming these implied preferences on behalf of their members (for instance, the zero-value placed on reversionary benefits). This clearly creates a difficult situation of conflict for trustees of super funds between acting on behalf of their members’ best interest while being required to follow law.
What can be done?
The Government has announced its desire for a covenant requiring superannuation fund trustees to design appropriate retirement income solutions to their members. Minister Kelly O’Dwyer has appointed an Advisory Group to assist with this and review the design characteristics of CIPR (read more here).
The potential loss of reversionary benefits in retirement and the impact on women in retirement is too important to dismiss. Treasury and the Advisory Group members must be made aware of this.
Estelle Liu is a Quantitative Analyst in the Retirement Outcome team at Mine Super. David Bell is Chief Investment Officer at Mine Super, and a PhD candidate at UNSW. The views expressed in this article are their own and may differ from those at Mine Super.