Look to SMSFs to build longevity products

Australian Prudential Regulation Authority (APRA) superannuation funds could look to self-managed super funds on how to build longevity products into their retirement portfolio, according to Rice Warner. 

The research house said most APRA funds still ran simple account-based pensions where risks were borne by members and that SMSFs were structured “sensibly” to allow retirees to manage their finances appropriately.  

In an analysis it said despite their small size, SMSF advantages included administration including fund and tax structure, financial advice, and investments, especially when funds had been set up for couples. 

It said that APRA funds did not usually have partners in the same fund and accounts could not be linked due to outdated administration platforms, and shifting from MySuper into retirement products was tedious with “cumbersome paperwork”.  

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On advice, APRA funds had intra-fund advice that did not capture enough information to do more than recommend moving out of accumulation into pension phase.  

“Some APRA funds provide comprehensive financial advice, but they struggle to offer this cost-effectively, and at a price which members will pay.  It was no surprise to see QSuper withdraw from this service recently,” Rice Warner said. 

“The problem facing funds is the cost of delivery of this service and the heavy compliance risks.  These costs usually exceed any revenue from the service which means they are subsidised by other members.   

“Despite that, members still baulk at paying for the advice even when it is delivered at lower than full cost.  This is an industry-wide problem which reflects poorly on the legislative and compliance regime for financial advice.” 

It noted that even when a full pre-retirement plan was prepared for a couple, the member was simply moved into an account-based pension, but the partner was often left in their current fund’s retirement product. 

Rice Warner said holding super assets of a couple within the same fund materially improved the ability to facilitate the delivery of better financial advice.  

As most APRA funds had a single diversified balanced fund shaped around MySuper, it was not optimal for retirement where people needed several accounts for different purposes. 

“Once again, this is easier to structure for a couple with all their pension assets held in one place.  It is also easier to manage the tax situation,” the analysis said. 

“It is well-known that moving from accumulation to pension phase is not considered to be a capital gains tax event, so deferred tax liabilities are released on retirement.  Some APRA funds now pay a pension transfer bonus to partly compensate their members, but it is not as efficient as an SMSF.” 

Rice Warner said if a highly fragmented segment could deliver something efficient, “it should not be beyond the ability of those managing hundreds of thousands of members and tens of billions of assets”.