NAB’s five-step retirement plan

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The Australian superannuation industry has been traditionally almost entirely focused on accumulation, but as the market and baby boomers mature, strategies need to be developed to deal with the changing industry.

On Tuesday, Sydney will hold the 2014 post retirement and ageing forum, which will focus on these issues through a plethora of speakers, panelists, case studies and discussion groups.

Ahead of the forum, NAB (general manager Andrew Barnett is a panelist) has released the five steps it uses to design and implement effective post-retirement strategies:

 1. Develop client engagement strategies and programs
NAB’s client engagement extends from our new ‘Save Retirement’ campaign to the Superfit calculator. We’ve also piloted a Retirement Advice Education Program with the University of Technology, Sydney. NAB’s banking products help individuals buy properties and invest in cash products. There is $1.1 trillion in investment properties, much of which will be used to fund retirement. We offer a corporate bond service so individuals can invest directly in corporate bonds. We offer managed funds that use dynamic asset allocation, equity buy-write strategies, or fixed income investments, each providing a smoother rise for retirees. Finally, we recently launched income and capital guaranteed allocated pensions, where we remove market and longevity risks altogether, while still providing an investment in growth assets.
2. Build cross-industry relationships
Many of the concepts that worked well in the bull market for accumulators don’t work quite so well for the post-50 year old segment. When you’re selling assets to provide an income, the game changes. Diversification may not mitigate risk, and maybe it never did, as correlations increase during turbulent periods. Strategies that use cash or rotation to fixed income as we age to lower risk actually increase the risk of running out of money because there’s an opportunity cost of not accessing the equity risk premium. Moreover, the industry’s income projections largely ignore risk, and use a single investment return to project thirty or more years of wealth. We hope for the best and plan for the best. Ultimately, we need to help people build plans that are resilient, that have more certain outcomes. The first step would involve providing scenarios in our communications and guidance. The second step would involve developing products that better manage the risks of retirement. The third step would recognise the extraordinary power of nudge strategies and smart defaults, and use these to promote uptake.  
3. Understand market challenges
The single biggest challenge in providing solutions in retirement is not product, it’s in knowledge and decisions. The challenges are a function of financial literacy and biases. Ideally we would be able to expect everyone to be financially literate and even a totally rational, ‘homo economicus’ as Thaler puts it in his book “Nudge”. Many of us – perhaps most – fail this test.  A related challenge, which was always in residence but comes to the fore with retirement, is the money illusion. Individuals do a terrible job at estimating how much income can be withdrawn by a given amount of capital. For example, in the MLC/Investment Trends Retirement Income survey, respondents wanted a minimum of 8.2% income, guaranteed, for life, to invest in a longevity product. Equally, they thought they could withdraw about 10% of their original principal, every year, for the duration of their retirement, without running out of money. In stark contrast, FINSIA released a paper in March which finds that – based on historical back testing which incorporates sequence of returns risk and investment risk – the “safe withdrawal rate” is 2.9%.
4. Provide regulatory stability
The superannuation system for retirement provides, by definition, the framework within which decisions are made by individuals that span upwards of 70 years. If you don’t have confidence that the regulatory settings are reliable then you’ll reasonably look at alternatives. The primary alternative is property: we have the highest net wealth in the world, and two thirds of this is in property.
5. Deliver on promises
One thing that has not yet – but could – impair consumer confidence would be a failure on our behalf to deliver against our messages to consumers that are perceived as promises. Already many investors think a balanced fund is capital stable. Now we’re introducing solutions such as lifecycle funds, which will even more so play to individuals’ “unrealistic optimism” (Thaler again). This is already well documented in the U.S. following the failure of target date (lifecycle) funds, which lost up to 40% through the GFC for even the most conservative funds. Subsequent consumer testing done as part of the Joint Congressional hearings found that, because the funds were marketed as providing certainty for retirement, individuals thought they would provide certainty for retirement.


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