A guide to comprehensive income products for retirement

By Killian Plastow

July 17 2017
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The Australian government is currently undertaking a consultation on comprehensive income products for retirement, but what is the purpose of these products and why are they important?

old senior couple reading newspaper comprehensive income products retirement guide

The introduction of comprehensive income products for retirement, typically written as ‘CIPRs’ (and sometimes pronounced ‘sippers’) were one of the recommendations made by the Financial System Inquiry in a bid to improve outcomes for Australian retirees.

The Financial System Inquiry’s report said superannuation trustees should be required to “pre-select a comprehensive income product for members’ retirement” to ensure retirees received their super benefits in the most practical and manageable way possible.

“The product would commence on the member’s instruction, or the member may choose to take their benefits in another way. Impediments to product development should be removed,” the Financial System Inquiry’s report said.

The government agreed with this recommendation in their official response to the report, saying CIPRs “could improve outcomes for retirees, including through increased private retirement incomes, increased choice and better protection against longevity and other risks.”

Mitigating longevity risk - the risk that a retiree outlives their savings – is one of the primary benefits of implementing CIPRs, and according to super fund consultancy firm Rice Warner, can be done through pooling of mortality in the same way the current super system benefits from pooling other resources.

“Members participate in investment pools while they accumulate their benefits and in insurance pools for group life cover,” the firm said.

“Many believe that mortality pools in retirement will also be beneficial. The government regards CIPRs as a mechanism for improving risk management of retirees via pooling of mortality.”

However, Rice Warner cautioned that current solutions to do this “bundle mortality pooling with investments which remove some or all of the equity-risk premium”, effectively hampering part of the Australian super system which arguably has more benefit to members than the value of mortality pooling.

The government’s initial discussion paper (the first document released to allow other industry figures to look at current plans and make a contribution before any laws or regulations are introduced) said the introduction of CIPRs could provide members with 15 to 30 per cent more income than an account-based pension with minimum drawdowns.

Rice Warner, however, cautioned that the analysis used by the Australian Government Actuary to get to these figures overlooked a number of important facets, such as the age pension, means testing, the value of residual capital in account-based pensions, and the fact such a pension could be drawn down above the minimum rate and still last a number of years.

“When we take the age pension and the benefits of a diversified investment portfolio - and its extra returns courtesy of the equity-risk premium - into account there is very little income uplift,” Rice Warner said.

“The age pension acts to increase the attractiveness of the account-based pension relative to the CIPRs and the potential uplift in income is modest at best.”

The firm said CIPR users would have to consider more than just income as well, and will need to consider “trade-off between income and access to capital for emergency use and for bequests” that could come with these products.

At the moment, the proposed system would see CIPRs implemented on a voluntary basis – they would not be part of the default retirement strategies and trustees would not be required to offer them to members – but Rice Warner said this system was unlikely to fix the problems outlined in the Financial System Inquiry’s initial report.

“Under this structure, we are not confident that many members will be attracted to CIPRs, and the SMSF segment will not have any coverage,” the firm said.

“Whilst some retirees will see benefits from the features of CIPRs for some of their retirement needs, we do not believe that voluntary purchase or opt-out CIPRs will be successful at addressing the systemic issues raised in the paper - thus, we are sceptical that CIPRs will be a success on a voluntary basis.”

The solution to this? Rice Warner proposed that a portion of retirement savings be allocated to a CIPR to ensure retirees had access to money later in life, for example those with balances between $250,000 and $1 million could be required to put 15 per cent of their savings into a CIPR, with the option to place in more if they so choose.

“We believe that this would have the following benefits; it would ensure the growth of a non-selected mortality pool of sufficient size, it would allow for a more appropriate long-term investment strategy supportive of long-term returns, and it would reduce the flow of assets to voluntary and involuntary bequests,” the firm said.

“The performance of these pools would provide a solid base from which to attract voluntary purchases (although the pricing would still need to reflect the nature of the purchase), and the combination of a standard account-based pension with the mortality pooled CIPR would provide the flexibility for access to assets that retirees desire as well as greater flexibility of asset allocation.”

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