Superannuation and Investments
Part 1: Mandatory, Standardised Retirement Estimates
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Retirement estimates represent one of the most powerful tools available to superannuation funds for member engagement, yet they remain optional under current regulations. This three-part series makes the case for mandatory retirement estimates across all public offer super funds and explores how standardisation can address the data challenges that currently limit their widespread adoption.
In this series, we examine:
Throughout this series, we argue that the value of providing retirement estimates to all members outweighs the challenges of filling data gaps through reasonable assumptions and standardised approaches.
Retirement estimates are a class of super forecast presented to members of super funds at the option of trustees to show how much their members are expected to have accumulated at retirement and their expected income throughout retirement. The key features of retirement estimates are that they are unsolicited and that they use member data held by the fund and some key assumptions.
Under Australian regulations, a retirement estimate is considered financial product advice. ASIC Instrument 2022/603 grants trustees who issue retirement estimates an important exemption from requiring the need to hold an Australian financial services licence. To rely on this exemption, the super fund needs to satisfy certain conditions that dictate which members can receive a retirement estimate and other requirements around how the retirement estimate should be calculated and communicated to the members.
Retirement estimates are the only type of financial advice that trustees can issue en-masse to their members. This allows super funds to provide important financial guidance to members at scale.
A super fund can use a retirement estimate to provide guidance to members to help them understand how much they might accumulate at the point of retirement and how much annual income they could expect in retirement, together with an estimate of their Age Pension entitlement. A member can use this information to assess whether they are on track to accumulate sufficient income in retirement, which may prompt them to consider their contributions and investment strategy, as well as encourage them to seek further advice if needed.
Another significant advantage is that funds can use retirement estimates to highlight the income that members may expect to receive in retirement. Australian superannuation has historically focused on the lump sum balance that members accumulate, and even in retirement, members tend to consider their super as a ‘nest egg’ with less consideration for the regular income they could receive from their super.
Retirement estimates could play a crucial role in reframing super as a source of income in retirement, by foregrounding the income that members could expect to receive and providing this information on a regular basis long before members reach retirement.
Due to their personalised nature and potential influence, we consider retirement estimates to be one of the most significant pieces of guidance that funds can issue to their members and a valuable member engagement tool for funds.
In this article, we use the term “retirement estimates” principally in the context of static retirement estimates that accompany periodic statements, though many of the same principles apply to interactive retirement estimates.
The Actuaries’ Institute has argued in the past for mandatory standardised projections, which you can find out more (e.g. here ).
There are two definitions of "mandatory” that could be applied to the provision of retirement estimates. A strong definition of mandatory would be for every super account (or at least every member) to be provided with a retirement estimate. A weaker form is for every trustee to provide retirement estimates, but not necessarily to every account/member.
The reason retirement estimates are not mandatory is due to the lack of information super funds have on their members. Dozens of data points and assumptions are required to generate retirement estimates. Super funds lack data beyond the basic account details, and funds are required to make some significant assumptions about the circumstances of a member to produce a retirement estimate. The key information funds don’t know is:
These factors have a significant impact on a member's retirement, especially the potential Age Pension entitlement, and we know that the majority of Australians will access the Age Pension at some point during their retirement. For most, the Age Pension will contribute a significant proportion of their lifetime retirement income. Incorporating the Age Pension allows retirement estimates to approximate a total retirement income for the majority of members.
An estimate without the Age Pension will include a retirement lump sum and an annual income that lump sum can be converted into. However, without considering that income stream as an integrated contribution to total income (including Age Pension), a member will not have a full picture of their expected retirement lifestyle and how it might compare to their current standard of living or an industry benchmark (such as ASFA Comfortable income standard).
We would argue that the value added by a retirement income estimate outweighs the potential downsides of having to fill the gaps. And for most (but not all) members, it is possible to fill the data gaps in reasonable ways. We, therefore, contend it should be mandatory for every public offer super fund to provide retirement estimates.
We are aware there may be operational risks involved with preparing retirement estimates, even as a mandatory ‘box-ticking’ exercise. There is a risk that making this measure mandatory might result in ill-prepared funds delivering sub-optimal retirement estimates to some members. Funds need to get expert help in appropriately calculating and presenting retirement estimates. However, we believe that any retirement estimate that complies with regulations is of greater value than no retirement estimate.
There are several ways to overcome the data shortfalls in retirement estimates in a way that is helpful to individuals. A very expensive way is for funds to collect the information from super fund members. An alternative is to harvest some of the information from other sources, perhaps by engaging the Consumer Data Right. The simplest approach is standardisation. If those gaps are filled in a standard and predictable way, then consumer expectations can be aligned with what funds can provide.
Standardisation can be extended beyond simply filling data gaps in reasonable ways. A major purpose of standardisation in this context is to furnish all recipients with retirement estimates of a minimum quality and content that use a common approach, regardless of which provider they come from. It may then be argued that they will be comparable across providers. However, the degree of standardisation applied will determine how the benefits of comparability are played off against the way in which provider differences can enhance personalisation.
There is a spectrum of standardisation. At one end of the spectrum, every retirement estimate from every provider uses the same data, assumptions, methodology, and presentation, providing a retirement estimate in the same format to all accounts.
For example, we might assume every member receives Superannuation Guarantee (SG) contributions, pays an insurance premium of $500 per annum, a dollar fee of $52 per annum, invests in a balanced portfolio earning a net 6% p.a., retires as a single homeowner at 67 with no other assets, invests in an account-based pension which earns a net 6.5% p.a. in retirement and needs 25 years of retirement income. But this is of little value provided to a member who is partnered and wants the certainty of a conservative investment or a life annuity.
At the other end of the spectrum, there is minimal standardisation. Each provider gives any member they choose a retirement estimate using as much member data as they have, any assumptions, and methodology they choose, and in any presentation format. Clearly, this scenario is wide open to members in similar circumstances receiving widely different estimates that may lead to further confusion.
Somewhere between these two extremes is a range that includes a mix of standardisation and flexibility that allows retirement estimates to incorporate:
We'll explore in detail which specific aspects of retirement estimates should be standardised — from member data and economic assumptions to presentation and member selection criteria. We'll examine the trade-offs between inter-fund comparability and intra-fund consistency and identify where flexibility enhances value for members.
The authors would like to thank Colin Grenfell, who peer-reviewed this series.
