April 2011

View - April 2011

Benefit projections — Why no news is not always good news

Given the federal government has stopped short of requiring annual benefit projections under MySuper, the possibility of a mandatory regime being introduced seems to have stalled.

While we thought the government’s response to Cooper would have addressed benefit projections, it appears the impetus is now more likely to be delivered through the Future of Financial Advice (FoFA) reforms. It is hard to see benefit projections becoming mandatory in the near term, but FoFA could make it easier for funds to seize the opportunity and voluntarily provide them for their members.

John Burnett, Senior Consultant at Towers Watson, worked with ASIC on the development of several online calculators and projection tools for its recently launched MoneySmart website. John has consistently advocated providing an annual paper-based projection to members. He sees this as a valuable signpost that will help to direct members to more sophisticated online calculators and to obtaining financial advice on whether their retirement savings are adequate.

Without this, John believes that a significant number of fund members may never receive any information about their projected retirement income while they are working and still able to take steps to change the outcome. John explains why annual benefit projections are an important step forward and outlines the opportunities for funds to take the initiative in this area.

Why annual benefit projections are important

Towers Watson continues to be a strong advocate of paper-based projections being provided to members, as part of an integrated approach to reach a wider audience. This is demonstrated in
Figure 01.

Figure 01. Engaging a wider audience

The first signpost, an annual paper-based projection, will reach the widest audience and is most often missing at present. It is likely to be the best way to engage with members to encourage them to visit online calculators and obtain more personalised and tailored information. In turn, this is likely to lead to more members seeking financial planning advice to help them determine what remedial action they should consider taking.

Each of these ways of providing information about projected retirement income has some different features shown below in Table 01, which mean they work better in combination than in isolation.

Table 01. Accessing information about your projected retirement income

Option	Features
Annual paper-based projection	Widest coverage of members and makes the projection accessible. Not all personal information is factored into projection. Some projection assumptions will be standardised. Not interactive – user cannot re-do the projection to tailor it more unless there is a related online calculator.
Online calculators	Low usage currently – often powerful tool in hands of financially literate but the challenge is to attract and cater for a broader audience. User is able to input some extra personal information that fund may not know – making projection more relevant. Default assumptions used in projection can be varied. More interactive – allowing user to model the impact of making changes on projection results.
Financial planning advice	Low usage also a concern – the extra cost involved will deter some members. Projection is likely to take into account an even wider range of personal information – may extend beyond super to other assets. Assumptions used in projection can be varied in consultation with planner. Most interactive – scope to not only model the impact of making changes on projection results but to also receive assistance from the planner in implementing any changes agreed.

ASIC has recently reported survey results suggesting that 60 to 80 per cent of adult Australians have never used a financial adviser . Of those who have seen a financial adviser, not all will have received a full projection of their likely level of retirement income or, if they have, it may have been received at an advanced age and possibly too late to take enough remedial action to boost retirement income sufficiently. Through the proposed FoFA reforms announced last year, the government is aiming to encourage more people to seek financial advice at a price that is not out of reach.

With online calculators becoming more widespread and usually provided free of direct charge to members, part of the solution is to encourage members to make use of them. However, research conducted by ANZ suggests that online retirement calculators are still not being widely used. When that research was conducted in mid 2008 only 10 per cent of those surveyed visited internet sites with calculators to find out how much was needed in retirement . This percentage was higher at younger ages (ages 25 to 44) and could also be expected to increase in future years as more members become aware of and are more comfortable with these online calculators.

Unless your fund has very different characteristics to those surveyed above, it is likely that at least two out of every three of your members have never received information about their projected retirement income. Issuing a paper-based benefit projection annually will address this major information gap.

Our preference continues to be that annual paper-based projections eventually become a mandatory requirement for all funds. But as that may not happen in the near term, there is an opportunity for your fund to take the initiative as we explain on page 4.

Understanding the policy background

There has been considerable activity since 2005 by the government, ASIC and others in the area of benefit projections and online calculators. However, this must still be seen as a ‘work in progress’ as some proposals are yet to be finalised.

ASIC has indicated that providers of paper-based projections would currently need to hold an AFS licence and comply with the personal advice requirements of the licensing regime, including providing a Statement of Advice. To provide some relief from these requirements, some Class Orders have been implemented and others have been proposed as outlined in the timeline in Table 02 below.

Government response to the Cooper Review recommendations

In June 2010, the Cooper panel recommended that a feature of its proposed MySuper product would be the mandatory provision of annual forecasts about likely retirement benefits. This was one of a range of measures to help members engage more with their superannuation. The panel endorsed the policy ideas in ASIC’s CP122 on superannuation forecasts subject to further refinement and consultation.

In its ‘Stronger Super’ response in December 2010, the government did not support this recommendation. Instead it will ask ASIC to continue development of retirement forecasts that can be used by trustees, having regard to the FoFA reforms. This is likely to be voluntary.

The annual provision of a paper-based projection statement will add an extra layer to the fund’s cost structure. In most cases the extra cost should be relatively small, particularly in larger funds. While the government has not indicated its reasons, a possible reason is that at the time of supporting MySuper as a low fees alternative, the government chose not to add another layer of cost and complexity by including annual paper-based projections. However this is still feasible in the future – if introduced within MySuper products it will set a benchmark of providing annual paper-based projections that most other funds would be likely to follow.

The opportunity for projections available under the proposed FoFA reforms

These proposed reforms will extend the scope for retirement projections to be given as intra-fund advice. As well as projecting the existing superannuation interest, it should be possible to include some allowance for the age pension in the projection under these proposals. We fully support the inclusion of the age pension as part of a paper-based projection.

By way of background, in July 2009 ASIC introduced an alternative way for trustees and their authorised representatives to give personal advice about the member’s existing superannuation interest in their fund. This gave some relief from the full requirements when giving personal advice and was achieved through ASIC’s Class Order 09/210 on intra-fund superannuation advice. This still requires the trustee to hold an AFSL that includes the provision of personal advice.

Where the conditions under this Class Order are met, it represents an avenue for providing annual benefit projections to members. However this is currently limited to the member’s existing superannuation interest and could not include the age pension for example.

The FoFA reforms announced in April 2010 will extend the topics where intra-fund advice can be provided to include such areas as 1) transition to retirement, 2) intra-pension advice, 3) nomination of beneficiaries, 4) superannuation and Centrelink payments and 5) retirement planning generally. Further details on these proposed reforms are not yet available.

The approach to benefit projections being considered by ASIC in CP122

ASIC has indicated publicly that it does not wish to have more than one Class Order covering paper-based projections. This would have occurred if it continued with the proposed CP122 Class Order while Class Order 09/210 on intra-fund advice is also in operation. In the light of the Government’s recent comments, it seems more likely that ASIC will proceed with broadening Class Order 09/210.

In our view there were many positive features of the CP122 proposals including that many of the default assumptions to be used would be specified in the proposed Class Order. However, one aspect of the CP122 proposals we do not support is excluding the age pension from the projection. To raise awareness about forecast levels of retirement income we have consistently advocated that the paper-based projection show two forecasts of the projected retirement income expected from:

1. The superannuation fund benefit alone; and
2. The superannuation fund benefit combined with the age pension.

Members should also be directed to online calculators to perform more personalised projections including the age pension. It is pleasing to see that the proposed FoFA reforms will extend the topics covered under intra-fund advice to include Centrelink payments such as the age pension.

Table 02. Key events for online calculators and paper-based projections

Key events for online calculators and paper-based projections
December 2005	ASIC Class Order 05/1122 outlines relief for providers of generic calculators if certain conditions are met.
July 2008	ASIC Consultation Paper 101 on superannuation forecasts sought feedback on a range of issues associated with providing paper-based projections. This was taken further in CP122 below.
July 2009	ASIC Class Order 09/210 on intra-fund superannuation advice provides some relief to trustees and their authorised representatives who provide personal advice to fund members about their existing superannuation fund.
October 2009	ASIC Consultation Paper 122 (CP122) on superannuation forecasts outlines proposals to allow funds to provide members with a paper-based benefit projection with their regular benefit statement if certain conditions are met.
April 2010	Future of Financial Advice (FoFA) reforms announced by government including the proposed extension of the topics that can be addressed under intra-fund superannuation advice.
June 2010	Cooper Review final recommendations provided to government including a recommendation that MySuper products should provide mandatory benefit projections similar to the approach proposed in CP122.
December 2010	Government response to the Cooper Review recommendations did not support projections being mandatory under MySuper and asked ASIC to continue to develop retirement forecasts having regard to the FoFA reforms proposed above.

Opportunities for your fund

Now is a good time to consider providing paper-based projections to your members. The evidence suggests that most members are not receiving any information on their projected retirement incomes.

Paper-based projections will help to start an important conversation with your members about their projected retirement income and we offer the following pointers to help plan your approach:

• One-off or annual – while a one-off projection might be better than nothing, we suggest embarking on this as an annual service that you intend to continue. 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 and then start drawing down their retirement income.
• Timing – ASIC had proposed to require the projection to be issued with the annual statement under CP122. However this has not been implemented and so you are able to consider when in the annual cycle is a good time to produce the projection statement and support the member questions that arise.
• Explaining the projection result – we suggest adopting a co-ordinated communication strategy when introducing paper-based projections that includes member seminars, call centre support and signposts to online calculators and financial advice.
• Providing some yardsticks – members will need some yardsticks to help understand whether their projected retirement income is adequate or not. This will need to be delivered through targets on the projection statement and information that explains those targets so members can aim higher or lower if they wish.
• Recognising the weaknesses – the paper-based projection will have some shortcomings because you will not have all the personal information that would improve the projection and so you may have made some across-the-board assumptions as a result. You need to be upfront with members about this and direct them to online calculators and financial planners to refine their projection.
• Support from online calculators – if you are directing members to online calculators, you should consider developing a calculator that dovetails in with your paper-based projection. It should adopt similar terminology but allow members to add even more personal information so that the online 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 paper-based projection and the next steps available to members.
• Feedback from your members – depending on your membership, 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.

You will also need to decide on how you will comply with the regulatory requirements when you issue paper-based projections to your members. While there are a number of ways of providing projections, some opportunities exist to provide this as intra-fund advice under ASIC Class Order 09/210 if you meet the requirements involved. We expect these opportunities will broaden further under the proposed FoFA reforms.

The news that many fund members will never have considered their projected retirement income is not good news. Online calculators and financial planners are unlikely to solve this gap alone. Annual paper-based projections can reach all of your members and provide a signpost to these other services.

April 2011 Issue