Picture a scene. A doctor is about to give you some very bad news. You have a life-threatening disease which only afflicts 5 per cent of people and will require a major operation. It’s not only a shock but the statistics are cold comfort when it’s your future that’s at risk.
That’s the type of bedside manner many super funds are bringing to their retiring members: unfortunately you don’t have enough money to fund your retirement but we have an excellent, award-winning post-retirement product.
Rather, the industry should be providing advice to members in the preceding 10-15 years as their retirement issues begin to crystallize instead of fixating on default, product-led solutions.
Investors face four major risks in retirement: longevity, inflation, lack of flexibility and volatility. It takes long-term engagement and real commitment to meet such multi-faceted challenges by age 65 – a process underpinned by years of quality advice.
Changing member behaviour isn’t easy when objectives and risks are competing but an early and open dialogue can help to build long-term trust. Starting the conversation earlier leaves members with a wider range of options, such as boosting their super contributions in the decades leading to retirement. It is also likely to help frame the discussion and result in higher rates of retention as members consider their options in retirement.
Tolerance versus capacity
Discussions need to take into account the difference between members’ tolerance for risk as opposed to their capacity for risk. Good advice can narrow the gap between the two by presenting a range of outcomes based on the choices an investor makes today as well as help identify alternative strategies and approaches capable of dealing with, and managing, future uncertainty.
Super funds need to accept that members view the accumulation phase and pension phase as one journey, even if the industry has separated them because of their different tax requirements.
Systematic risk – the chance that a major market downturn will drag down all asset classes – is a good example of a danger, which needs to be managed well before retirement. Another global financial crisis has the potential to wipe out many investors as their portfolios approach their peak size just before retirement.
Unfortunately, the default accumulation product that a large proportion of the industry has chosen to manage risk leaves much to be desired.
Lifecycle funds, which lower their allocation to growth assets as a member approaches retirement, account for a fast-growing proportion of the $1.9 trillion super industry. An investor making the transition to retirement is then told that the average 65-year old Australian is expected to live for close to another 20 years.
An immediate disconnect is created because funding such a lengthy retirement requires a higher allocation to growth assets than a typical lifecycle fund’s end point. It is counter-intuitive and inconsistent advice and has the potential to disrupt years of trust and consign funds as a product provider rather than a trusted partner.
While the industry is naturally focused on products, partly due to the Financial System Inquiry’s recommendation that default comprehensive income products for retirement (CIPRs) be used to bolster retirement incomes, the challenges of retirement remain highly individual.
It requires advice which also takes into account objectives, risks and changes to public policy, well before retirement.
Super funds which talk to their members as they are, rather than how they wish they were, will be the ones to take centre place in a post-retirement world.
This article was first published in Professional Planner.