Australia's retirement savings system. DAVID ... Australia has a world-class retirement savings system, however ... work
post retirement
The perfect longevity storm
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Research shows that it is likely retirees will outlive their savings by more than five years on average, but innovative post-retirement solutions have long been the missing link in Australia’s retirement savings system. David Anderson outlines the perfect storm we are facing.
A
ustralia has a world-class retirement savings system, however, postretirement solutions have been the Achilles heel of our system for too long. As the Financial System Inquiry Interim Report stated in July this year: “The retirement phase of superannuation is underdeveloped and does not meet the risk management needs of many retirees.” The Report called the lack of effective longevity risk management in particular a major weakness of Australia’s retirement income system. For years, the industry has grappled with how to offer members simple, affordable and flexible longevity risk protection. The industry appears to be tackling the post-retirement conundrum with a renewed sense of energy. We are now seeing innovation, but progress has been slow.
The scrutiny of members, the media and the government has remained primarily on the accumulation phase; on contributions, how they’re taxed or invested, the impact of fees, and how we can grow our super balances. These are all important aspects of a retirement savings system, but the focus had to expand to meet the ultimate goal of members: an adequate and sustainable income stream in retirement. We are now faced with a perfect longevity storm and the post-retirement weakness in our system has the potential to become our strength as an industry and country if we can manage the storm and bring innovation to the market. Longevity risk is a problem in Australia that demands urgency, and those who think it is one that cannot be solved, need to think again. According to Mercer research, at 65, Superfunds November 2014
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Only
36%
of Australians retired because they had enough savings
28% of working Aussies believe they will have enough savings to retire when they want
males will have a 42 per cent chance, and females will have a 55 per cent chance of living beyond 90 factoring in future advances in medicine and improvement to life expectancy. Similarly, the research states that the average 65-year old retiree, with $400,000 of super at retirement, is likely to run out of money earlier. In fact, it is likely retirees will outlast their savings by more than five years on average. For 25 per cent of the population expected to live beyond the ‘average’, this gap in retirement funding pushes out to 11 years. Demographic shift is one of the most significant issues that will shape Australia’s future. It will impact our workforce, productivity, business environment and economy. For individuals, it will increasingly influence our wealth, health, the quality of our
83% 55% 93%
65%
48%
Frequent travel was by far the biggest dream amongst both retirees (93%) and pre-retirees (83%). Improving health and fitness (65%), buying a new car (55%) and providing support for family (48%) become most important factors after retirement.
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working life and our retirement lifestyle. Put simply, there will be more older people living for longer with a smaller taxpayer base to fund public pensions, health care and aged care. Lacking in longevity defence In July this year, Mercer commissioned research into the expectations versus reality of retirement for Australians aged 50-80 years. The results revealed nearly half of all working Australians aged 50-80 are seriously concerned about longevity risk and most people don’t have a formal strategy to combat it. Only 36 per cent of Australians retired because they had enough savings and less than one third (28 per cent) of working Aussies aged 50-80 believe they will have enough savings to retire when they want. Women (47 per cent) are more worried about the state of their finances in later life than men (34 per cent). Of those currently retired, 66 per cent said they would simply be careful with how they used their savings and only spend on necessities to help combat long-term risks. The research also revealed Australians are not as in control of when, why and how they retire as they may like, with redundancy or illness forcing 40 per cent of people into retirement before they were financially ready. Despite most of us believing we will work and save for our retirement well into our 60s, the reality is that uncontrollable triggers can derail the best laid plans for retirement. As a nation, we’re becoming pessimistic about our prospects in the lead up to retirement with pre-retirees doubting they’ll have the golden years they previously dreamed about. Pre-retirees were less positive in their attitude towards affording the lifestyle they desire, with retirees feeling more able to afford their dreams, highlighting the significant level of uncertainty among pre-retirees. • Of those retired, 68 per cent can afford to travel on a regular basis or take frequent holidays, compared to only 28 per cent of those approaching retirement. • Frequent travel was by far the biggest dream amongst both retirees (93 per
post retirement
The perfect storm This perfect storm has arisen from: »» Increasing life expectancies: 50 per cent of retiring white-collar male workers are likely to live to 88 years and 20 per cent are expected to live to 94, well above the average life expectancy of 84.1 for men (data based on Mercer’s pensioner mortality investigation [PMI] for the decade to 30 June, 2012). Fifty per cent of female white-collar workers are likely to live to 91 years; 20 per cent are likely to live to 96; and another 5 per cent will live beyond 100 – well above the average life expectancy of 87 for females. »» A shifting legislative framework: the Financial System Inquiry and Treasury’s review of retirement income stream regulation could alter the tax playing field and significantly impact product innovation. »» Reduced rate of increase to the Age Pension: If proposed changes are enacted, it will result in a considerable reduction over time in the real value of the safety net. »» Changing dynamics of the super industry: benefit payments will outstrip contributions in the next 10-15 years and this has already commenced in some funds – super funds will increasingly compete against banks and other institutions for contribution dollars and to retain the funds of retired members as they draw down on super.
cent) and pre-retirees (83 per cent). • Improving health and fitness (65 per cent), buying a new car (55 per cent) and providing support for family (48 per cent) become most important factors after retirement. The current landscape Setting aside defined benefit pension funds, there are currently three broad options for retirement income: take a lump sum and spend/hoard it as you wish; a pension product that places all the investment risk on the member; or a guaranteed annuity product that passes on risk to the provider, but at a high cost to the individual. A growing wealth of research on post-retirement issues is helping to broaden our understanding of the challenges individuals will face (whether they realise it or not) in drawing down their savings throughout retirement. The debate is ongoing, however, one thing is clear: it is increasingly evident
that post-retirement product design requires consideration of a more complex set of factors than exists in the accumulation phase. The industry cannot afford to search for a silver-bullet post-retirement solution; a mix of products or strategies will most likely be required by most retirees. A single product is normally not the best solution. Benefiting from the sum of us Traditionally, post-retirement solutions have been considered along a spectrum from pure investment-based products through to guarantee-based products (annuities for example), however the line is increasingly blurred. The emergence of products that sit somewhere in between both ends of the spectrum has been a key focus of recent innovations in the post-retirement space. Ultimately, funding Australians’ retirement is a challenge for all Australians. It’s encouraging to see the Financial System Inquiry’s focus on retirement
White-collar workers killing average life expectancy
One in four will live around four years longer than the average, which means they underestimate their life expectancy by up to seven years – a long time with potentially very limited income.
income and the Treasury’s review of retirement income stream regulation. There is clearly a commitment to improving the legislative framework to encourage innovation. Mercer believes there is also a genuine dedication within the super industry to create better outcomes for members and awareness of longevity risk amongst Australians is increasing – and the industry potentially has a unique combination to beat the storm. David Anderson is managing director and pacific market leader at Mercer.
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