Australia’s superannuation system has been recognised as one of the best pension systems in the world, largely due to the introduction of compulsory contributions in 1992. According to the latest APRA data, Australians since have amassed approximately A$2.5 trillion in retirement savings. However, the rapidly growing number of baby boomers heading into retirement combined with longer life expectancies, has pushed the system into a critical tipping point. According to DST’s Sam Higgie, this presents an enormous opportunity for superannuation funds and life insurers. The big question is: are they ready?
DST is a global technology, administration services and consulting firm, headquartered in Kansas City. The company is focused on two broad segments: financial services and health care (US only).
In Australia, DST provides technology solutions focused on enabling financial services companies improve their operational capability and performance. DST’s capabilities reach across five broad capabilities: Digital solutions, Intelligent operations, Data and analytics, Risk and compliance, and Strategy and consulting.
DST has operated in the Australian market for more than 20 years and has around 20 clients across superannuation, retail wealth, insurance and asset management.
Sam, why is the retirement opportunity so significant?
It all comes down to demographics and choice.
We have this huge wave of baby boomers – those born between 1946 and 1965 – entering retirement. They’ve spent the past 22 years saving for their retirement, and having reached it, they’re faced with a real lack of choice when it comes to financial products that can help them to live off those savings. And they’re living longer and are much more active than previous generations, so their savings have to stretch a lot further. There is also the question of market volatility and how well retirees’ savings can recover from market corrections.
Many have a lack of confidence, or capability, or even interest in managing their money at that stage.
This combination of factors provides a real opportunity for the industry to create products and services that make it easy for people to fund their retirement.
How do you think retirement products are developing in the current environment? Do they meet longevity risk concerns?
There has been very little focus to date on developing post-retirement products, let alone products that can provide an income for life. There are of course a few notable exceptions, but by-and-large, the industry has been very slow to respond to this growing need.
The focus to date has been on creating products that provide a lump sum on retirement, rather than products that provide an income stream. This has primarily been driven by low interest rates, which makes these income stream products less attractive commercially.
What is out there is largely disjointed and complex, and for some may require the advice of a financial planner or adviser, which is out of reach for many.
The industry also hasn’t looked at more holistic solutions. For example, there’s an obvious link between post-retirement financial products and advice, and aged care. Many Financial Advisers are not qualified to deal with aged care, so retirement goals are generally void of aged care considerations. And then there’s estate planning, which is separate again. There’s a real opportunity for the industry to bring all of this together to make it easier for people to plan for retirement.
"I think we’re going to see a revolution over the next decade."
The debate around the Federal Government’s MyRetirement framework continues. Without certainty around what may be mandated, why should funds move now to develop retirement products?
There is no reason why funds can’t move now. The intent of the proposed MyRetirement framework is to make the transition into retirement smoother, provide more choice in retirement products, and essentially improve the standard of living in retirement. Funds can and should be taking this approach to supporting their members in retirement anyway, and acting now can give them a competitive advantage.
Is the retirement opportunity just about money?
Ultimately, no: the opportunity extends beyond just the financial element of retirement to playing an active role in helping improve the quality of life for retirees. Retirement today looks a lot different than it did 20 years ago. Retirees are more active, many continue work in some capacity during retirement, and they’re more tech-savvy. And their needs change throughout retirement: what they need at 65 years is very different to when they’re 85.
There’s a real opportunity for the financial service providers to be the first port of call for retirees by creating partnerships with complementary service providers (such as aged and health care) and providing information, advice and products that improve retirees’ quality of life.
How do you see things evolving over the next 10 years?
I think we’re going to see a revolution over the next decade. As I’ve said, to date the industry has really focussed on getting people to retirement: building their savings and then transitioning them to retirement.
One area that I believe will change over the next 10 years, is the transition-to-retirement phase. Today it is a very cumbersome process that requires the intervention of a financial planner. I think in the future we’re going to see that become more automated.
We’ve seen a life stages approach to accumulation products coming out of MySuper. I believe we’ll see that happen in the retirement space as well. The needs and expectations of someone who has just entered retirement are quite different to someone who is about to enter an assisted living facility so we’ll see a shift from single solution products to multi solutions.
With demographic changes, we’ll see greater reliance on superannuation over the aged pension, and I believe we’ll also see an increase in the preservation age to encourage people to stay in the workforce for longer.
What I really hope we see is better financial education for all life stages, but particularly around retirement. We need to do more as an industry to provide members with education and advice to help them better prepare for, and sustain a good quality of life in, retirement. Technology will be key to that, enabling information and transactions to be shared between providers to give a more complete and accurate view of each members’ financial position.
Tomorrow’s retirees are increasingly tech savvy, how can superannuation funds and product providers cater to these skills?
Providers are going to have to engage with retirees across a variety of channels – mobile, face-to-face, over the phone – but also through the information they provide them.
Right now, we operate in a very heavily regulated environment that can inhibit innovation. I do feel that will change and we’re starting to see that now, with the Government releasing a number of white papers of late on FinTech.
Inevitably there will also be some disrupters – whether it’s incumbent funds leveraging new technology or new tech-led market entrants. Australia’s superannuation system has set a global standard, so we need to be at the forefront of that innovation.
What do you like about working in this space?
Retirement represents a complex and challenging opportunity, and one that is underdone in Australia at present. We need to get this right for future generations, and we’ve got the rest of the world looking at us. I believe this is a really exciting time to be working in financial services.
To learn more, download DST’s latest white paper, Ready for Anything