CIPRs are coming and that’s exciting
Comprehensive Income Products for Retirement, or CIPRs, are almost a reality and there is much excitement around what this means for superannuation and retirement outcomes.
It appears that CIPRs (Comprehensive Income Products for Retirement) will soon eventuate. The Government has finally released its response to the Financial System Inquiry (FSI). Among many recommendations across different segments of the finance industry, the Government supported the FSI’s recommendation for CIPRs to be created by all institutional super funds for their non-defined benefit default members. This is a really good thing – a sound recommendation, sensibly endorsed by the Government. If the regulators (in terms of developing policy) and industry (in terms of design and implementation) get this right, then the vast majority of Australians should experience a better financial retirement outcome.
Bring it on!
I can’t remember ever being so excited about a new piece of policy! Any super industry professional who is begrudging this change should self-reflect and consider a career change. Compared to other changes of the last decade or two, this one will have the greatest positive impact on the retirement outcomes of average Australians. The Wallis Inquiry (also a financial system inquiry) focused on regulation, competition and disclosure, and the outcome was arguably a collection of disclosure documents and a multitude of products that the average Australian doesn’t understand, especially given our low national levels of financial literacy (see Do clients understand what advisers are saying?). The Cooper (Super System) Review created MySuper products which generated some efficiency gains but also, in my view, sowed the seeds of an unhelpful focus on fees to the possible detriment of net returns to members.
While much of the emphasis has been on efficiency during accumulation, the post-retirement solution has been left unaddressed. Here it is important to acknowledge history: Cooper’s vision for MySuper was as a whole-of-life product: “MySuper products must include one type of income stream product, either through the fund or in conjunction with another provider, so that members can remain in the fund and regard MySuper as a whole of life product”. However this was not supported by the Labor Government at the time, potentially because MySuper already represented significant change. Murray’s vision for CIPR is broader than Cooper’s. It is a clean sheet of paper to research, innovate and create a default retirement solution for default members. At a minimum it focuses the industry on retirement outcomes in the presence of investment risk and uncertain lifetimes, and super funds will now be required to consider mortality outcomes.
The design of future retirement solutions
Currently the industry relies predominantly on account-based pensions and an age pension system which guarantees a level of income close to ASFA’s definition of Modest Retirement Outcome. Who knows what future retirement solutions will look like? While not writing off the account-based pension, we may see greater use of both life products and mortality-pooling solutions. A post-retirement solution could incorporate basic financial advice. The best CIPRs will include multiple components blended together.
I have concerns that the concept of CIPR and even Murray’s proposed (and endorsed by Government) objective of superannuation (“To provide income in retirement to substitute or supplement the Age Pension”) are not fully formed. Perhaps it has been deliberately left this way as a concept which is then thrown to the industry and regulators to work through and devise the best solution.
It is the process which will drive numerous beneficial outcomes. I believe that at the heart it needs a retirement outcome engine. This could be mandated and reviewed by APRA: for instance, it could be a requirement that every super fund must have an internal engine capable of modelling the distribution of retirement outcomes of their default members. The development of such an engine will ensure appropriately designed products, form the basis for trustee education, and could be used as the framework for member education and engagement.
Implications across the finance industry
The implementation of CIPR will have many flow-on effects across the industry. Those who think this is an issue solely for institutional super funds risk missing opportunities and facing threats. Consider the following possibilities:
- Actuaries will be in much greater demand across the industry, particularly within super funds. It is surprising how few actuaries are employed by super funds. We could now be entering ‘the age of the actuary’ as their skills in risk, mortality and modelling become more highly valued.
- Fund managers have the opportunity to design products and services that assist super funds implement successful CIPRs. Meanwhile some of their products and services may prove less relevant in a CIPR environment.
- Annuity products are likely to be more actively assessed and used by super funds as a component of their CIPR. Is the current market structure of the annuity industry in Australia in appropriate shape to support the potential demand? Effectively we have one dominant player, Challenger Life, and a couple of other large groups playing a small part. Is this deep enough to ensure price competition and the opportunity to diversify exposure? Perhaps we will see other new entrants or super funds negotiating solutions directly with offshore life companies.
- Asset consultants could play a pivotal role or could lose out, depending on how they have shaped their business. Some asset consultants, those with an actuarial practice (especially if the practice has a strong interaction with the investment practice) are well-placed to perform an integral role in assisting super funds to design their CIPRs. Those whose retirement practices are embryonic and based on simple solutions which do not account for mortality risk are at risk of losing business.
- Financial advice may be more heavily scrutinised. Most financial planning software fails to consider the range of mortality outcomes; financial plans are developed for a certain age (albeit some buffer can be built in). It would feel like a strange system if default funds have the systems and explicitly manage for mortality risk while financial planners do not.
Exciting change is upon us! Grasp the opportunity to develop better retirement outcomes for the average Australian. It is the biggest change the industry has experienced, and if we do it well, we will improve one of the best pension systems in the world.
About the author
David Bell is Chief Investment Officer at superannuation fund, Mine Wealth + Wellbeing. He is also working towards a PhD at University of NSW.
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