The Government is consulting on a retirement income disclosure fact sheet – a simplified document with key figures and metrics to help consumers compare products.
“These fact sheets will cut through to the key features that matter when making retirement income decisions,” said Assistant Treasurer Stuart Robert.
“Currently, when people approach retirement they are confronted with complex legal and financial information and long and complex documents. Typically, these documents do not provide clear information on the expected level, variability and duration or retirement income,” he said.
The Government is proposing that existing disclosures be supplemented with “easy to read and understand” documents.
Treasury has released a consultation paper on on how retirement income information could be displayed to help consumers make decisions. Retirement income disclosure is part of the Retirement Income Framework the Government is developing.
The consultation paper says: “Choosing an appropriate retirement income product necessarily requires consideration of trade-offs between income, flexibility and risk management. However, it is rare for these trade-offs to be made explicit in product disclosure documents. In general, PDSs for retirement products rarely include information about levels of expected income or cash flow in dollar terms, the likelihood of money running out under certain withdrawal or drawdown strategies or the likelihood that income would be lower than expected.”
One proposed features of the retirement income fact sheets is for the expected retirement income (net of fees and taxes) to be set out, along with a graph “using average real annual income from a $100,000 investment, over the period from retirement (currently age 67) to age 97”.
Another issue raised is how risk is presented to consumers. It’s noted in the consultation paper that the superannuation industry commonly uses market volatility as a risk measure.
“A product with low volatility is measured as low risk, however, these products are likely to yield low returns over the long term. Consumers that select a low risk investment option, such as cash, are likely to face lower long term returns and have a higher probability of running out of money.”
The paper says that, in isolation, investment volatility is not the best measure of the risk for retirement products. But the challenge is to find a metric that captures both volatility along with longevity and inflation risk. As part of the consultation process, the Australian Government Actuary has released a paper on a Retirement Income Risk Measure.
“Since consumers are known to be more sensitive to downside risk than upside risk (they are loss averse), the risk metric focuses on the likelihood of negative variation from the expected income,” says Treasury in the consultation paper.
It’s proposed that “for all retirement income products, income variation should focus on negative or downside variation measured against expected first year real income”.
“The model measures downside income variations and the size of variations.”
It is also proposed that the fact sheets inform consumers about their access to capital, by listing the maximum amount they could withdraw at any time if they stopped using the product.
Treasury is planning consumer testing of the fact sheets, following the consultation process.
Consultation on the paper is open until 23 March 2019.