What Schroeder wants is a more comprehensive solution that addresses the simple question most retirees have: Can I afford to retire? And how can you have the best possible retirement date?
“I think most of the other models are basically designed around selling financial products to someone instead of thinking about what is going on in that person’s mind,” he told Chanticleer. “We are not retiree-centric.”
Mr Schroeder is proposing a revolution rather than an evolution in how Australia thinks and manages retirement income.
He wants the supersector and the government to consolidate the main sources of income for retirees: superannuation, superannuation and, in some cases, family stocks, so that the superfund can offer members a single retirement income payment that combines the income from these sources.
We need to move from a world class savings system to a world class spending system.
— Paul Schroeder, CEO, Australian Super
It might work like this. As members approach retirement, the Fund helps them examine their superbalance, senior pension eligibility, and other assets such as their family home to consider their retirement needs and goals.
Based on the member’s circumstances and preferences (e.g., how much of the super balance they wish to withdraw, at what rate, etc.), the super fund can handle all the back-end work on behalf of the member (including handling the often painful process of applying for a retirement pension) and administer a single retirement income payment.
Schroeder says the goal here should be to improve a moment that is terrifyingly complicated for too many people.
“I want people to feel more confident in their retirement, and especially to give them the confidence to spend more money. We need to move from a world-class savings system to a world-class spending system.”
Schroeder’s very deliberate choice of words. Just as no one wants to see retirees living unnecessarily frugally out of fear of running out of money or worrying about the size of their legacy, Schroeder argues, the state needs to use up its retirement savings to keep the rapidly aging economy from hitting a wall of deflation.
a more integrated model
Mr. Schroeder recognizes the practical and philosophical challenges inherent in his plan.
Perhaps most obvious is the level of coordination required between the supersector and numerous government departments. In response, Mr Schroeder pointed out that the division already works closely with the Australian Taxation Office and has strong industry “plumbing” to enable quick and easy payments between funds.
“The overlap already exists. But in this digitized AI world, why haven’t we transformed the idea of a savings system here and an old-age pension system there into a more integrated model?”
Another practical challenge is financial advice legislation that currently prevents funds from straying beyond general advice. Orthsuper fully supports lawyer Michelle Levy’s recommendations to make it easier for superfunds and other institutions to provide advice, but Schroeder’s plan could work substantively under the current system.
Giving retirees information about retirement options and superbalanced drawdown options and letting them “choose their own adventure,” he said, isn’t good advice. In fact, Superfunds already provide calculators and tools to help members solve this problem.
Schroeder says most funds, including his own, are probably too cautious about giving advice in the post-Royal Commission frenzy world, and too concerned about outliers in supersystems that have very large superbalances and need expert advice.
At AusSuper, most fund members have balances between $300,000 for singles with homes and $1.2 million for couples with homes, and these groups can be further divided into broader groups, as recommended by ASIC and APRA. It might also be possible to use a default drawdown rate (e.g. his 6.5 percent, which is Super’s long-term rate of return) to ensure that the member’s capital is not actually depleted.
“Most people only need two or three options when it comes to global simplicity and quality.
‘unfinished business’
The biggest concern about his proposed plan is how it will be paid for and, most importantly, who will pay for it. The resources needed to provide a single retirement income raise questions about superfund capital, as younger members effectively subsidize the deployment of more services for older members.
“We don’t want to create something that in itself is deemed unfair to our members, or unsustainable for those who aren’t in retirement,” he says.
Fundamentally, these younger members need to convince themselves that they too will ultimately benefit from an improved retirement system. Alternatively, some kind of user-pay system would have to be put in place, but Schroeder is cautious about that. When AusSuper experimented with the post-retirement user-pay model, it found that this creates a barrier that many people just can’t get past.
The big philosophical question Mr. Chanticleer hangs over the Aussuper plan is whether critics of the pension sector, especially political conservatives, will see it as akin to some sort of retirement payover.
The Retirement Income Code was introduced by the coalition to force members to better prepare for the defunding phase, but what Mr Schroeder is suggesting is a shift that even he estimates is an idea one-third the size of the super introduction itself.
He stressed that this does not mean that the fund will take over members’ money, whether from Superbalance, senior pensions or other sources of funding. He said the choice must always remain with members and focus on improving retirement processes that industry regulators have determined are not appropriate.
But now that the wave of retirees has been crushed, Schroeder agrees with Daniel Press, saying the industry can’t ignore retirees for another decade.
Schroeder acknowledges that it may take several election cycles for his big plans to come to fruition, but he says time is ticking for retirees facing a critical time in their lives, and for a country facing an economic slowdown if they do not receive adequate retirement benefits.
“The spending stage is the unfinished business of the supermarket.”
