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Retirement Planning
Thursday, October 22, 2015 - 14:25
Critical trends converge

Wade Matterson, Principal and Practice Leader at Milliman Australia, said many similarities exist between South Africa and Australia’s retirement fund industry, and that financial institutions and their fiduciaries in both countries could learn much from one another.

Speaking at the recent Sanlam Investments Institutional Insights conference in Johannesburg, Matterson said we are seeing the emergence of a ‘perfect storm’ on a global scale, which refers to the convergence of a number of critical trends. These are having a profound impact on the pension fund industry worldwide:
• The macro-economic environment: Interest rates are at their lowest levels ever recorded, which is critical when talking about the need for members to replace income at retirement
• Demographics: Globally we’re seeing a growing trend of aging populations, which places a lot of stress on government finances with respect to social security needs as populations get older and start to move into and through retirement
• Technology: New technology is not only bringing opportunities but is also creating disruption at a rapid rate. In this sense, technology is seen as an enabler as it provides a huge amount of opportunity for individual investors to break down information and begin to research their own needs instead.

Technology bringing greater engagement

With the advent of new technologies, we’re seeing people becoming a lot more engaged, particularly as they start getting closer to that crucial point when their retirement outcomes really start to matter to them. This in turn has forced institutions to introduce more sophisticated models to help generate sustainable outcomes for their members.
As a result of this, funds are beginning to find new and innovative ways to educate their members, providing them with access to online tools and calculators, all designed to help members better understand what they need to do to achieve the retirement outcomes they would like.
We’ve also seen a significant change in the types of investment strategies and products offered by the financial services industry, particularly following the global financial crisis of 2007 – 2008. This has been in response to a loss of faith in pension funds, and a growing need for retirement fund members to achieve a reliable income stream post retirement. Trustees are under much greater scrutiny than before, and members are asking: do trustees have the skills set they need to address the complex issues we’re facing in the industry?
As a result, investment strategies have altered and begun to show a greater focus on managing downside risk, while funds are beginning to look at offering a broader range of longevity solutions such as annuities, pooled longevity products, variable annuity products, etc. The aim behind this is to build a comprehensive toolkit that members can use to create the retirement outcomes they desire.
In Australia’s case, the focus has been on offering fresher, more aggressive solutions tailored to individual requirements – away from the old “bucket” strategies to “a more granular approach”.
Matterson described Australia’s “superannuation” model of compulsory pension contributions, which mandates that 9.25% of annual salary must be saved, has in the past decade split into three market segments.
The first “super” segment, made up of roughly a third of the Australian workforce, is structured for corporate industry and labour unions. Another third is represented by retail banking solutions. And finally, the fastest-growing segment of the market caters for self-managed portfolios – which allows levels of member choice unheard of in South Africa. Some options even allow individuals to day-trade the shares in their retirement fund baskets.
“This shows a loss of faith in traditional industry structures and their long-term path,” said Matterson. “Many people think they’ll do a better job running their pot by themselves.”
He said the Australian superannuation industry has acted as “disruptor”, bringing many more opportunities to fund members. However, along with all the new products, technology and tools, the need for better governance skills has risen exponentially, said Matterson.

Better fees, differentiated services

Australia’s ‘commoditised’ pensions market is now characterised by intense competition over fees as well as differentiated value-adding advice and services. These extended as far as offering discounts on housing, travel, health and retail products. Even banks have moved quickly to help customers integrate their pension savings with other day-to-day banking facilities – offering easy access to the entire asset management, insurance and wealth preservation process under one roof.
This has led to a fundamental change in the strategic priorities of pension funds in Australia. The quality of financial advice during the retirement planning process has had to improve along with investor education – with advisors providing detailed statements, projected income, “smart default options” and peer benchmarking.
Technology has been the great enabler and has changed consumers’ mind-sets from focusing on the lump-sum ‘pot’ to a conversation about how to address volatility and maintain a stable, recurring income.
“Finance and humanity have come together – to create clear outcomes for individuals to maximise outcomes for members”, concluded Matterson.

Copyright © Insurance Times and Investments® Vol:28.10 1st October, 2015
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