Recognising the central role of the Age Pension

Jeremy Duffield writes that there’s a big shift underway in super fund thinking about the role of the Age Pension. 

Once largely overlooked by the industry, the Age Pension is now being recognised as a critical component of Retirement Income Strategies following the introduction of the Retirement Income Covenant.  And funds are increasingly seeing the challenges members have understanding and getting the Pension. It’s a major pain point for members and they want help.

Most recently, Alexis George, CEO AMP, said their research showed that 40% of people over 50 didn’t know whether they’d be eligible for the Age Pension.  Yet, it’s the most important source of retirement income for older Australians representing more than half the income in retirement for more than half of older Australians, with 80% of people eligible by age 80.

And Link Advice’s 2022 research, conducted with Retirement Essentials, showed that 50% of people found the Age Pension difficult to apply for and that 80% of people would have liked help.  Who did they nominate as the preferred place to seek help? Their super fund.

It turns out the member pain is not just the stress and administrative challenge of applying for the Age Pension… for many there’s financial loss, too.  After five years of helping people apply for the Age Pension, Retirement Essentials can provide stacks of anecdotes about people delaying their Age Pension application and losing tens of thousands of dollars.  There is no backpay on a late application.

The anecdotes are confirmed by the Link Advice and Retirement Essentials research.  Only 44% of Age Pensioners said they applied on time…and 32% said they applied more than one  year late…and 16% were more than three years late.

Reasons for members’ delay are many.  From lack of understanding to aversion to administration and dealing with Centrelink. Some people think they’re not eligible because they’re still working part time or their partner is still working.  Others didn’t know what to do…or couldn’t get past the complexity of means testing and the myriad forms involved.  Some felt guilty about applying.

Whatever the reason, the cost to the member is staggering.  Applying late may be one of the most expensive mistakes commonly made by super fund members.  We recently had a client who admitted to applying three years late and missing out on $75,000 of benefits. Based on the 56% applying late, we’d estimate the leakage totals into the billions annually across the industry.

For funds, the Age Pension matters because it’s a key part of members’ retirement income strategy and they need help.  But also because there are real dollars and cents benefits to providing that help.  First, encouraging members to avoid delays reduces leakage for the super fund.  If the member doesn’t get the money from Centrelink to pay their retirement expenses, the next source is most likely the super fund.  Second, engaging members and offering help with the Age Pension improves retention.  Most importantly members are better off. Most funds recognise that providing assistance to members at this critical transition time of life is the secret to retention into retirement.

The Age Pension also matters to funds because it’s the essential ingredient to concocting suitable retirement strategies and advice for retiring members.  Our “only in Australia” means testing regime creates all kinds of complexity for forecasting and optimising retirement incomes.  It means that retirement planning has to be done on a household basis – since the Age Pension is calculated with partner included – despite the fact that super funds rarely have household data. (Our data shows 63% are in a couple relationship.) It means that you need to know whether someone owns their home (77% in our 200,000+ sample).

And the wisdom of so many financial decisions revolves around the impact on the Age Pension, thus driving the recommendations of both fund advice and retirement product teams.  How should I invest, given a large portion of my retirement income will come from a government guaranteed inflation annuity?  Should I pay off my mortgage?  Should I take up an annuity structured as an Innovative Retirement Income Stream? Should I transfer super monies to my younger partner?  There are ways to improve Age Pension benefits…and ways to reduce them.  Members, and their advisers, need to be aware.

APRA and ASIC recently gave funds a wrap over the knuckles in their review of the Retirement Income Covenant for not having adequate data to define retirement cohorts well enough.  Asking the questions regarding Age Pension eligibility fills most of those data gaps.  Funds need to know what the older cohorts look like and the Age Pension gives a great window.

We’re seeing a real shift in thinking and in action from super funds.  It’s a great result of the Retirement Income Covenant.  Funds are going beyond being only product providers and thinking of the services members need in retirement.  Help with the Age Pension is at the front of that queue.

Jeremy Duffield is Director, SuperEd/Retirement Essentials