Alan Kohler interview on fixing MySuper retirement

Retirement Incomes Review – Eureka Report, Alan Kohler, 6 December 2020

The review of retirement incomes headed by Michael Callaghan was fine as far as it went, and will probably do the job of providing the Government with some cover for cancelling the legislated increase in the super guarantee charge (SGC), currently due to go from 9.5% of salary to 10% next year and then to 12% over a few more years.

It also promotes reverse mortgages or other home equity release options so the other major asset for most people – the family home – can also be used for retirement income, which is also fine.

But it doesn’t really address the two big problems with the system (as I see it):

1. Low returns of many super funds
2. The messy transition to retirement

On the first matter, I spoke this week to a bloke named Douglas Bucknell who runs a business called Tailored Superannuation Solutions, who is trying to get super funds to tailor their asset allocations for individual members.

The basic problem, which I have been on about for a while, is that most people get defaulted into a random super fund with a “balanced” portfolio, which would be wrong if they were young as most people starting out in a superannuation happen to be, and might have high fees or low. The MySuper default system, in my view, is hopeless, although happily this doesn’t affect the readers of Eureka Report.

Douglas has been doing studies on the subject and concludes that if younger members were put into “all growth” investment options, as they should be, instead of balanced, their retirement outcome would be 30-35% higher. A third higher! That would solve a lot of the problems with super identified in the Callaghan review.

Here is part of my discussion with Douglas Bucknell.

Bucknell: “At the moment, typically they put everybody in the same default investment option called the balanced option or an age only life-cycling option. If a financial planner did that, put every client in the same investment option for life, we’d all know they’re not doing the right thing. So we all know that that is highly inefficient. We know that tailoring or personalising plans, whether that’s an electricity plan, a utility plan, actually can improve outcomes. There’s the problem, the problem is at the moment, the method used for default members is highly inefficient.”

I would add that most people who are not in the default option, and actually make a choice, don’t know what they’re doing and generally herded into balanced funds as well, no matter how old they are.

Why does all this happen? Douglas again: “Funds at the moment are judged on the fund’s own performance, 4.5 per cent versus 4.6, not on whether Johnny’s projected retirement balance has gone from $350,000 to $400,000. So, if funds are being judged on 4.5 versus 4.6 per cent, the best thing they can do is put everybody in the same investment option because it makes them bigger. They get benefits of scale. That’s how they’re eking out those additional returns. But in actual fact, they’re not being measured on what the legislation and what the purpose of super is.  

(Inserted by TSS – The MySuper Outcomes Tool, shown in the graph below, depicts how member retirement outcomes can be measured over the various investment horizons members have until retirement.

The tool takes one of the 90 MySuper Funds (the base fund) and tests what the average projected retirement balance is for each age bracket (the black line). It then compares that to what any of the other MySuper funds or the industry average (overlay fund) would have produced in projected retirement balances for those members instead (the red line). The dotted green line shows (via member-by-member amalgamation) the average of what tailoring or personalising would have achieved. Sequencing risk, from age 55 onward is also indicated.

This free trail tool was released in early 2020, following the 2019 APRA Capability Review finding that APRA should have a tool ‘focused on member outcomes’. That is clearly still a work in progress at APRA, but will be far more important following the Budget changes that press the burdened of evidence that trustees are acting members best financial retirement interests back onto trustees. There has to be a method for APRA and funds to measure this member outcome.

In this example, 5-year returns from the 2019 APRA heat map are shown although drop down boxes allow for 10-year APRA target returns to be used instead and for retirement income to be shown instead of retirement balance.)

Alan: But you raise an important point, which is the tailoring superannuation would be very expensive, wouldn’t it? 

Look, Alan, it’s not expensive. The process are already all there. Trustees or about 40-50% of trustees use what’s called age-based life-cycling instead of one size fits all. They move members at age 30, for example, from the 100 per cent equity option to the aggressive option, and there is a bulk switch file that occurs. What we’re talking about is doing exactly the same, using the same process, the same investment options, the legislation and regulations, in particular, regulation 9.47 allows for this to happen – Parliament’s passed that a number of years ago. In short, it’s not particularly expensive and in fact, it can pay for itself. If I go into a little bit more detail, Alan, at the moment, the all-up cost for every 1 per cent real return achieved for funds is 30 basis points. 

Alan: How do you get to that? 

APRA produces quarterly data and if we look at the real returns for the MySuper options on average and we divide them by the real cost, then every 1 per cent real return costs 30 basis points. Tailoring is going to cost a lot less than 30 basis points, it’s going to improve outcomes by a third and therefore that 30 basis points might come down to 20 basis points across the industry. It’s actually an efficiency measure and on a bang for your fee buck paid, it makes things cheaper. 

Alan: You mean as a proportion of the return, because the return’s higher? 

Yes, as a proportion of the return or in my language, as a proportion of the projected retirement balance or the outcomes that the member receives.  

I think the second problem mentioned above – that the transition to retirement is mess, complicated and dangerous – also comes down to the way super funds are measured.

That is, they are measured on investment performance and lump sum outcome at the end, not on the retirement income of the member.

You might think that’s splitting hairs, but if it’s all about the sum of money at the end that leaves unsolved the problem of how to turn that money into income.

Most Eureka Report readers would be fine with it – you generally know what you’re doing, and we are helping. 

But most people don’t know what they’re doing, and take it to a financial adviser, which is more of a “pig in a poke” than the super funds.

The Callaghan review talks about the three pillars of the retirement income system: age pension, compulsory super and voluntary savings – and also adds a fourth, which is the home.

They should be better integrated, in my view, not kept as separate things. 

The age pension is effectively a lifetime annuity funded by tax; compulsory super is a kind of tax that funds a lump of money at retirement that has to be turned into some kind of annuity by the retiree.

Most people don’t buy an annuity from Challenger or someone, and I’m not suggesting everyone should, but I just point out that investing for income is the same as buying an annuity, it’s just not formalised.

You end up with two separate income streams, one from the government and one private, each funded by some sort of tax, except that one of them is milked for fees by the investment industry and the other one is politicised and varied according to which party happens to be in power.

Alan: Hopeless. 

The Callaghan review says “The Australian retirement income system is effective, sound and its costs are broadly sustainable.”

Alan: I beg to differ.