Retirement estimates are an essential piece of information for superannuation fund members.
When fund members don't have an idea of what their super might be worth when they retire, they are missing out on a key signpost aimed at helping them secure their financial future.
Retirement estimates sit alongside sophisticated online calculators and financial advice as the major ways members can discover if their retirement savings are adequate. Importantly, retirement estimates are the way to reach all your members.
In December last year, ASIC released new guidelines and a class order, paving the way for funds to issue retirement estimates without necessarily holding an Australian financial services licence (AFSL), or issuing a statement of advice and financial services guide. While this is a significant step forward and should result in more funds taking the initiative in this area, it is not the only option for super fund trustees.
Towers Watson has consistently lobbied for retirement estimates to be mandatory. Simply, far too few people receive information about their projected retirement income while they are working and still able to take steps to change the outcome. Some funds already started providing estimates before the corporate regulator made its move and they will need to consider now whether they should adopt ASIC's guidance or continue their existing approach.
In its Regulatory Guide 229, Superannuation Forecasts, ASIC notes retirement estimates provide "an accessible starting point for members to engage with their superannuation in a personalised manner".
The guidance allows trustees relief from AFSL requirements where the retirement estimates meet three main conditions. They must set out all the mandatory content specified in the class order, which includes over a page of explanatory text, be calculated taking into account all of the required variables and default assumptions specified and be provided at the same time as the member's periodic statement - either as part of the statement or as an accompaniment.
In fact, two retirement estimates must be provided, both expressed in today's dollars - the projected lump sum at the age of 65, rounded to the nearest $10,000, and the annual income stream this lump sum is expected to provide from the age of 65 to the age of 90, rounded to the nearest $1000.
Additional scenarios, such as demonstrating the impact of different contribution levels or retirement ages, cannot be provided to members and still qualify for class order relief. Similarly, amounts in other funds or allowance for the age pension cannot be included in the projection.
There are a number of other limitations with the class order approach. For example, it assumes what has occurred over the past 12 months by way of contributions, insurance premiums and fees will continue for every future year to the age of 65. There is no scope to allow for, say, large one-off contributions or unusual work patterns over the past year. It also requires that a 3 per cent per year real return should be applied irrespective of the member's actual investment strategy.
The class order approach also poses a particular dilemma for trustees - a major tenet is that the retirement estimate cannot be provided if it is or could be misleading. ASIC has placed the onus on the trustee to determine whether this is the case. It is puzzling that while seeking to encourage the provision of retirement estimates, the regulator has adopted an approach that still exposes the trustee to considerable uncertainty about whether they are on safe ground.
Some further clarification by ASIC is needed here as it is unlikely the trustee of a large fund will be prepared to assess whether the retirement estimate is or could be misleading for each and every member.
The industry needs to raise awareness about projected levels of retirement income. Towers Watson has consistently advocated that retirement estimates show separately the projected retirement income expected from the superannuation fund benefit alone and when it is combined with the age pension.
Given the class order does not allow for an additional retirement estimate that includes the age pension, it is only when the member chooses to use an online calculator that includes the age pension that they become aware of the significant impact it can have in many cases.
There are some funds that currently issue retirement estimates to members using other approaches. Should these funds maintain their current approach, which offers more flexibility, or fall into line with the class order?
It remains to be seen whether trustees will choose to issue retirement estimates using the new class order approach rather than the others available. A measure of success will be whether the new class order encourages trustees who did not previously issue retirement estimates to do so and whether it can build up to become widespread as a result.
