While Australia has built an impressive defined contribution system, the task of converting those contributions into sustainable retirement incomes remains a challenge.

First published in Financial Standard, 30 September 2021

We all know that accumulation is the easier part of the pension cycle. Everyone has the same goal — to make and save as much money as possible. But the decumulation phase – helping super fund members to retire – is a different story altogether.

Recently, the superannuation industry has embarked on a fundamental shift.

Aware that the retirement covenant takes effect next July, the nation’s super funds, industry funds, and public sector funds have increased their focus on the provision of retirement income products.

Yet, the design and creation of retirement solutions depends on whether the business case for these products holds up. Is it efficient for funds with heterogeneous members to spend money on retirement solutions? Currently, everyone wants in.

There’s a problem with all this, of course. It must come back to the business case because super funds use members’ money to develop these products. Trustees need to ensure that they’re deploying the resources efficiently.

Most people in the retirement business understand that sustainability is integral to getting the retirement part of the pension cycle right.

Yet, it is by no means clear that all funds can create sustainable solutions by themselves. In the past, we have seen solutions come to market that require scale and have proven not to be sustainable.

Now, lots of the major and even medium-sized super funds are working on this problem.

There is no doubting the appeal of creating retirement products to meet the demographic wave, and at a time when the economic viability of some super funds could be impaired by new legislation that has the potential to curb fund inflows and fee income.

Need for scale

Super Funds should examine whether it is worth spending millions of dollars on product development. The last thing they want to do is to come up with a product just because they can.

The need for scale is widely acknowledged. Otherwise, funds can create the type of product they want their members to have only to find there are not enough members for risk pooling and cross-subsidisation to work.

Many products may in fact struggle to achieve scale, while others face becoming obsolete due to mergers and improved solutions. In essence, the likelihood of legacy products is high. Given such products will likely involve policies or are pooled solutions, unwinds are likely to be difficult and the cost of legacy management high.

The big super funds are likely to keep scale on their side, but even then, it’s not to say there isn’t a challenge.

You’ve got to remember that the system is only hitting maturity now – the number of new retirees each year is still fairly small in the context of building scalable retirement solutions. And the current group of retirees, perhaps already wedded to their existing products, may not be as willing to embrace change.

The business case aspect is not just about the number of members required for the products to work.

Many funds are sitting on a lot of capital, but they don’t have the balance sheet to take on longevity risk. They either have to push that risk back to their members or transfer it to an insurance company.

Super funds need to have the right approach to risk reduction when most benefits in superannuation are measured on a return basis, segmentation, and cross-subsidisation.


What’s needed is a more radical solution – a new way of doing things. It is our industry’s responsibility to come up with something better.

So how do we make that happen?

Firstly, there is enormous merit in funds teaming up with partners who are experts at managing longevity risk. Funds are already working together in areas where they aren’t competing and with retirement, there is even more opportunity for collaboration in terms of managing longevity risk.

We are seeing quite a few smaller super funds that have recognised that designing and creating retirement products is a massive undertaking and that joining forces with specialist providers will ensure the best outcome for members.

Of course, the top super fund executives can try something ambitious. But, even they must be noticing with global peers, a clear trend towards building and strengthening strategic alliances with other financial institutions to add know-how and the all important balance sheet strength.

For instance, it’s reassuring for trustees to see their fund partner with a marquee life insurance business that specializes in risk, has a massive balance sheet, a global platform, and is an iconic brand.

Transferring pension scheme risk to an insurance company is well-established practice in other markets. Allianz is already a leading retirement solutions provider in many markets, managing circa A$3 trillion of defined benefit, defined contribution, and retail savings across life insurance and asset management. The insurer has a 30 percent share of Germany’s institutional retirement segment, and it dominates the fast-growing indexed annuities segment in the US.

I think we’re going to see an increasing number of Aussie super funds look at longevity risk more closely and decide to team up with an insurer.

Retirement is complicated. And for all the talk within the industry about the need to come up with good retirement income products, we aren’t there yet. But positive change is certainly on the horizon.