Two out of every three members of super funds may never receive any information about their projected retirement income while they are still working and able to take steps to change the outcome.
Although super funds are increasingly making online calculators available to their members and also providing them with access to lower-cost financial advice, both important services for super fund members, they don't reach everyone.
The member must first be sufficiently engaged with their super to use either of these useful retirement planning services.
So how can funds get their members to engage? An annual benefit projection sent to all fund members showing their projected income in retirement is the missing link.
This will provide a valuable signpost to help direct members to more sophisticated online calculators and to obtaining financial advice to help them determine whether their retirement savings are on track.
Towers Watson has identified the need for a more integrated approach to engaging members and improving retirement outcomes:
- Signpost 1 - The annual projection can reach the widest audience by being included with the fund's regular communication to its members. The projection could be paper based or delivered electronically and is likely to be the best way to engage with members to encourage them to take the second step.
- Signpost 2 - By visiting an online calculator, members will input further details and obtain more personalised and tailored results. Where necessary, members will be encouraged to take a third step.
- Signpost 3 - Seeking financial planning advice will help members to determine any remedial action they should consider taking.
The annual projection is the first signpost and it's this first step that is most often missing at present.
What would the annual projection show? There are many alternatives here, but, as a minimum, Towers Watson suggests showing three things: the projected lump sum at retirement, the retirement income this is expected to generate and the combined retirement income, including the age pension.
These three amounts should be shown in today's dollars so members can relate the amounts to current conditions.
Ultimately, Towers Watson would like annual projections to become mandatory for all super fund members.
For now though it doesn't look likely they will be required as part of a MySuper product and so the possibility of a mandatory regime being introduced seems to have stalled.
The impetus will therefore need to come from funds themselves and this process is underway with some already introducing annual projections.
Opportunities for funds
Annual projections will help funds start an important conversation with members about their projected retirement income. Some of the key elements and issues to consider are:
- One-off or annual - While a one-off projection might be better than nothing, we recommend embarking on this as an annual service. Projections are never 'set and forget' as they are a forecast, not a precise answer. Projections should be reviewed on a regular basis as members draw nearer to retirement.
- Providing some yardsticks - Members will need yardsticks to help understand whether their projected retirement income is adequate or not. This can be delivered by showing targets on the projection statement and information that explains the meaning of those targets so members can aim higher or lower if they wish.
- Support from online calculators - If funds direct members to online calculators, they should consider developing a calculator that dovetails with the annual projection. It should adopt similar terminology, but allow members to add additional personal information so that the resulting projection is more tailored.
- Financial planning and call centres - It is also important to ensure any supporting financial planning providers and call centres are well briefed on the annual projection and the next steps available to members.
- Feedback from fund members -We suggest keeping the projection simple in year one. Additional information and results can be added in later years once the initial concepts are understood. Member feedback will also indicate common questions that can be addressed upfront and suggest refinements.
Funds will also need to decide how they will comply with the regulatory requirements of issuing annual projections to members and there are several ways of doing this. These avenues are expected to broaden further under the proposed Future of Financial Advice reforms.
It is not good news that many fund members will never have considered their projected retirement income. Online calculators and financial planners are unlikely to solve this gap alone. Annual projections can help funds reach all of their members and provide a signpost to these other services.
