The Australian government has backed the development of retirement income products in its official response to the Financial System Inquiry (FSI) published last week.
Among the 44 recommendations put forward by the FSI – also known as the Murray Inquiry after its chair, ex Commonwealth Bank chief, David Murray – was the requirement for superannuation funds to “pre-select a comprehensive income product for members’ retirement”.
The Australian government agreed to support the introduction of pre-packed retirement income solutions for super fund members.
“Trustees’ pre-selection of such products will help guide members at retirement,” the government response says. “Comprehensive income products for retirement could improve outcomes for retirees, including through increased private retirement incomes, increased choice and better protection against longevity and other risks.”
In a 2014 report Australian research house Rice Warner estimated the percentage of total super assets feeding into pensions would jump from the 2013 level of 30.4 per cent to almost 44 per cent by 2043.
Australian super assets currently sit at about A$2 trillion but were expected to peak at about $5 trillion in 30 years, the Rice Warner research shows.
While the Australian super system has been criticised as a ‘lump sum culture’, the Colonial First State Income Stream Index (also based on Rice Warner research) found that about $80 of $100 of retirement payouts went to fund pensions rather than one-off payments.
New Zealand authorities and KiwiSaver providers would be watching the Australian retirement income developments closely.
Research by New Zealand Income Group, the Ralph Stewart-founded vehicle looking to launch a guaranteed retirement income product this year, found maturing KiwiSaver funds should rise from about $2.2 billion this year to over $36.5 billion in 2028. KiwiSaver has no equivalent of the Australian super ‘account-based’ pension arrangements, where members can stream tax-free retirement income.
In the FSI response, the Australian government also supported other FSI recommendations to “improve the performance of the superannuation system”
“The system is fragmented, costly, complex and suffers from a lack of member engagement,” the government response says. “Increased member engagement could improve member outcomes broadly, including putting downward pressure on fees and improving after-fee returns.”
Despite backing most of the other FSI recommendations in the December 2014 final report – including an already-underway reform of the country’s financial advice industry – the Australian government held fire on some of the Murray-recommended life insurance reforms.
“…we intend to take a different approach to that recommended by the Inquiry for retail life insurance,” the response says.
The government agreed to implement industry-designed insurance reforms announced by Treasury this June – that include capping upfront and ongoing commissions at 60 per cent and 20 per cent respectively in a phased process – but baulked at the Murray suggestion to move to level commissions.
“A Government review in 2018 will consider whether the new industry arrangements for life insurance advice have better aligned the interests of firms and consumers,” the FSI response says. “If the review suggests further reform, consideration would be given to the Inquiry’s recommendation for a level commission structure or further extending the existing Future of Financial Advice provisions on conflicted remuneration to life insurance advice.”
It is understood the NZ Financial Services Council (FSC) was waiting on the Australian FSI response before publishing its report on the local life insurance industry.
The NZ report – authored by Melville Jessup Weaver (MJW) modeled on the earlier Australian Trowbridge study that prompted reforms across the Tasman – was expected to recommend similar reforms to commission structures.
Peter Neilson, FSC NZ chief, told Investment News NZ he could not comment on the MJW report. According to sources, the report would be circulated for FSC directors’ feedback this week