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‘Unrealistic expectations’: Retirement products don’t address volatility

unrealistic expectation, volatility

While a requirement that super funds offer comprehensive income products is an “inspired idea”, there’s a question around how these products navigate volatility, a robo-adviser has said.

Treasury has proposed the introduction of a retirement income framework to ensure funds have strategies and products to match members’ retirement income needs. These include a requirement for funds to offer annuity-style, comprehensive income products for retirement (CIPRs), which protect against the risk of outliving savings by pooling this risk.

In its submission to Treasury, robo-adviser SuperEd said it generally welcomed the proposal but had concerns around how well these products could navigate volatility in investment markets.

Treasury has responded effectively to the comments in submissions to the previous paper that retirees are a diverse group and 'one-size-fits-all' approaches are unlikely to match retiree needs,” chairman Jeremy Duffield said.

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“The proposal recommends what we believe are workable and sensible default retirement income solutions, under the rubric of CIPRs. We thought the framing of the CIPR as a flagship retirement income product that the fund can offer to its members as a standard for comparison was an inspired idea.

"However, we are concerned that the narrow bands recommended by Treasury are unrealistic expectations because they do not adequately appreciate the volatility of investment markets through changing economic regimes likely to be encountered in a retirement spanning 20-40 years."

The Treasury position paper said the expected income from a CIPR should be efficient and constant, defining this as a product with an income remaining within a narrow +/-2.5 per cent ban from the real or nominal income in the first year.

SuperEd argued a more likely expectation is +/-3 per cent a year in real income with very substantial changes over the 40 years in retirement.

More generally, we are concerned about whether realistic expectations are being created for CIPRs, particularly in the current low interest rate/expected return environment, which makes providing high sustainable retirement incomes very challenging,” Mr Duffield concluded.

‘Unrealistic expectations’: Retirement products don’t address volatility
unrealistic expectation, volatility
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