The Government has recently turned its attention to developing a world-class retirement income system, by supporting the development of Comprehensive Income Products for Retirement (known as CIPR). To begin this process, they released a discussion paper for review, which we have responded to with a submission to the Treasury. In this paper, we share and summarise the key aspects to be considered, as well as Aon Hewitt’s recommendations.
The CIPR framework seeks to address four implied problems, whereby individuals are:
- self-insuring against longevity risk
- facing a lack of diversity and choice in retirement income products
- over-relying on account-based pensions which reduces the superannuation system’s efficiency
- facing complex financial decisions and a lack of guidance.
Important social and psychological dimensions to consider
The discussion about CIPR is based on assumptions that future societies will reflect that of the past, however, we believe that a sensible discussion about life at an older age cannot ignore topics including:
- the meaning of work in life
- the concept of retirement as entitlement
- wealth outside of superannuation
- family wealth and assets versus individual savings
- tax complications and disincentives
- the interaction of the age pension and superannuation (and potential future reforms)
- the different stages of retirement (an active phase, a passive phase and a fragile phase), which triggers different levels of income for each individual. Pre-planning for unfortunate events is necessary and should be considered while an individual is still active and capable of making decisions, perhaps even before retirement occurs.
Aon Hewitt’s recommendations
Aon Hewitt’s recommendations pull together insights from the retirement income structures of other countries – including the pros and cons of these structures – based on our experience and involvement within the global retirement solutions space. We emphasise the following overarching concepts:
- superannuation bequests and lump sum flexibility should be a last resort
- do not limit life annuity product innovation
- encourage formal financial advice throughout life
- adopt flexibility in product designs.
To summarise, Aon Hewitt have recommended that the Government consider the merits of – and conducts a localised study into – Collective Defined Contribution (CDC) schemes, and to broaden the CIPR framework requirements to include whole-of-life products. Our research into CDCs suggests that they display many of the attributes we believe to be necessary for a successful and sustainable retirement system.
Post submission update
Since submissions closed on 21 July 2017, we’ve noticed some positive movement towards collective defined contribution schemes (CDC). We note that other countries, like Japan and the UK have also recently started introducing CDC-like schemes and Canada and the Netherlands already run these schemes quite successfully. The Australian Government has not provided a formal response to submissions yet but has recently established a panel to work on the development of income retirement products. We believe that more work will likely be required to ensure that the regime is flexible enough to meet retirees’ needs. The Australia Government in January 2018 undertook to consult the industry regarding social security means test rules that will apply to lifetime retirement income products, to ensure they are appropriate for the innovative types of retirement income products expected to be developed following the CIPR framework. Having said that, Australian superannuation funds are not likely to introduce new retirement products until the final CIPR requirements have been determined and therefore it may be some years before Australia has an adequate supply of alternative retirement products for retirees to invest their superannuation in.
Start a conversation with us
To find out more about our response to the CIPR and our recommendations, please contact us.