Comprehensive Income Product for Retirement (CIPR) and Retirement Income Covenant
A key recommendation of the Financial System Inquiry (Murray Report) made a decade ago in 2014 was that superannuation funds should provide access to Comprehensive Income Products for Retirement (CIPR's) for members in retirement. This is a long, awkward acronym for a product that would provide members with a regular and stable income stream through retirement at low cost and provide reasonable flexibility. "Flexibility" in this context means some access to capital at the member's request.
The Government supported the construction of CIPR's, and saw them as a way of better managing a situation in which retirees are generally opting for account based pensions and "self insuring" against longevity risk, sometimes by living more frugally than required. There is also some appreciation that, although the system and circumstances retirees face can be extraordinarily complex, many will nevertheless not seek appropriate professional advice - and consequently a simpler product choice would be very beneficial.
In the May 2018 Budget, the Government announced that it would introduce a "retirement income covenant" that would require super funds to offer their members CIPR products - these are called MyRetirement products by the Government, which simply adds to the confusion. Whilst this was clearly a "good idea", with broad support, there was no clear cut understanding regarding the structure of such a product.
One industry commentator at the time lamented the need to provide such a product, saying there was no point in developing a product that would, "only be used by 10% to 15% of the population". Whatever the merits or otherwise of a CIPR the comment was misguided then, and it certainly remains the case - with the Government only recently seeming to accept that the superannuation industries slow rate of innovation around retirement products is problematic.
Retirement Income Covenant
The Retirement Income Covenant (RIC) passed through Parliament on 10 Feb 2022, and came into force on 1 July 2022, requiring that super trustees develop a retirement income strategy for their members. The RIC is "principles-based" and contains no requirement to offer any particular product, and the expectation was that a strategy would be deliverable to members over time. We believe the approach has not been prescriptive enough and should have required the development of products that better address longevity risk - rather than allowing substantial super funds, such as AustralianSuper, to simply rely on a re-casting of existing products and services.
It is unacceptable for some very large super funds with significant resources to simply continue doing what comes easiest - accepting and investing super contributions - while ignoring the fact that a growing proportion of members begin to commence retirement and need simpler, more supportive products, apart from account based pensions subject to minimum drawdown requirements.
Where are we are we now?
Addressing longevity risk is important - at the present time the only parts the community that benefit from longevity protection are individuals on indexed pensions - and, apart from pensioners, that is largely restricted to a small cabal of public servants and older politicians. As we have mentioned for many years, the direct impact of having people self-insure longevity risk is simply that they will not spend as much during their retirement years for fear of not being able to pay for aged care accommodation, specialist healthcare and other significant costs. This clearly provides no assistance to the economy, and simply means that super funds end up as tax free inheritances rather than supporting an enjoyable retirement.
Individuals currently wanting to address longevity risk, really only have two options - and these usually aren't adopted in isolation, but in concert with account based pensions. And remember, technically speaking and for our purposes, annuities can only be provided by an Insurance company and pensions by a superannuation fund.
Annuities
As we mention elsewhere, they need to be lifetime, indexed annuities if they are to truly address longevity risk
Lifetime pensions
These are products which a number of superannuation funds have developed, to their credit, which have many of the characteristics of an annuity - that's to say that they provide a lifetime income - and promise better performance in investment terms, but at the cost of no guarantee regarding rates of return. These include;
- QSuper's Lifetime Pension (also available from Australian Retirement Trust (ART) following their merger)
- UniSupers's Commercial Rate Indexed Pension (CRIP) and Defined Benefit Indexed Pension
The problem with both these options is that there is quite a degree of complexity involved in understanding the cogent differences between annuities and lifetime pensions, between the individual lifetime pensions and, most importantly - what represents the best fit in an individual situation. There is a mass of product information available, but little or no access to experienced financial advice regarding the most appropriate options or comparative information. Complexity, a lack of advice and a low profile mean these products are not making the impact they should and allowing other super funds to take the "slow road" on product development.
Presently, at the end of 2024, there are 15 organisations that currently provide a lifetime income option for retirees - but with the exception of UniSuper and Australian Retirement Trust (ART) they are all in concert with an insurer, overwhelmingly Challenger, and have not developed a stand alone product. How this acceptable after all the discussion and time above is bewildering and suggests a degree of intransigence, disinterest and perhaps a worrying lack of capability.
Superannuation funds also need to fill the gap in terms of providing advice to members, but more needs to be done in terms of ensuring access to good quality, good value financial planning advice. There also needs to be an acceptance by retirees that advice is a necessary and worthwhile cost - with fundamental improvements made in financial education. For super funds to provide 2 or 3 hour seminars to members approaching or on the precipice of retirement is simply an inadequate response to their duty of care to members entering retirement.
If you would like to arrange professional advice in relation to the above matters, please complete the Inquiry form below providing details and you will be contacted accordingly. You will receive a fee quotation in advance of any advice or services being provided.