Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 485

Engaging retirees on the journey to manage retirement risks

At the recent AFR Super & Wealth Summit, the Assistant Treasurer and Minister for Financial Services used his opening address to say how important it was that superannuation had a defined objective, similar to other initiatives such as Medicare. “We can’t get everything settled for the long term unless we have an understanding of what we are trying to do”, he said.

Following the opening address, a number of speakers during the Summit suggested that the objective for superannuation should reference the following three items – retirement income, all Australians and dignity. For example:

“To provide income in retirement that helps all Australians to live with dignity, by supplementing or substituting the Age Pension.”

It is interesting, this is entirely consistent with the sole purpose test and the guidance provided in Superannuation Circular No. III.A.4 issued by APRA in February 2001. In particular, section 3 of that Circular states that:

“The sole purpose requirements contained in section 62 of SIS (the “sole purpose test”) limit the provision of superannuation benefits by regulated superannuation funds to a range of prescribed or approved retirement or retirement related circumstances. The test is the legislative expression of the retirement income objective which is the key rationale for superannuation savings.”

One thing is clear: retirement has become a central part of the conversation about the future of superannuation and member needs. Over the next 20 years we will have more post-retirement members with more superannuation savings than ever before. There are just over 3 million Australians currently aged 55-64 and approaching retirement in the next decade. In 2021, around 65% of retirees had less than $250,000 in super ‘at retirement’ but this is expected to quickly reduce to about 30% over the next 10 years. By 2031, almost 50% of retirees will have more than $500,000 in super.

Research has shown that superannuation fund members start to engage more with their super when they reach age 50 and/or their account balance reaches $250,000 (even more so when it reaches $500,000). So, the time has come, with demographics turning in our favour, to engage more people with their retirement.

To help, there have been two very important developments with effect from 1 July 2022.

First, the Retirement Income Covenant (RIC) came into effect on 1 July, which requires every superannuation fund to have a retirement income strategy for the benefit of members who are retired or who are approaching retirement. The retirement income strategy must address how the trustee will assist those beneficiaries to achieve and balance the following three retirement objectives:

  • Maximise expected retirement income
  • Managing expected risks to the sustainability and stability of expected retirement income
  • Having flexible access to expected funds during retirement

Trade-offs will need to be made to balance the competing objectives (for more information on the trade-offs).

As part of their retirement income strategies, superannuation funds are looking at different cohorts that might have similar objectives to potentially offer them different retirement product combinations, including an Account Based Pension (ABP), a longevity protection layer and of course the government Age Pension (for more information on cohorting).

Importantly, for retirees who are (or will become) eligible for at least a part Age Pension, there is a 40% exemption from the means tests for certain longevity protection products that can provide an immediate uplift in the Age Pension payments.

Second, new relief for superannuation calculators and retirement estimates set out in ASIC (Superannuation Calculators and Retirement Estimates) Instrument 2022/603 also took effect on 1 July 2022. However, ASIC has provided a transition period of six months, during which providers of superannuation forecasts may rely upon either the existing relief or the new relief. Only the new relief will be available from 1 January 2023. For more information on the new ASIC relief, we will shortly be publishing a separate blog, including details about the Flexible Interactive Retirement Estimate API that the team here at Deloitte has built to efficiently assist trustees who wish to better engage their members approaching retirement using retirement income estimates and calculators.

The new retirement estimates will provide a great start on the engagement journey for members who are approaching retirement, providing a much-needed wake-up call with meaningful insights about what retirement could look like. Once “awareness” has been raised, the superannuation fund will then be in a better position to provide further information about retirement, its risks and how to deal with them. As members get closer to retirement, more education materials and financial calculators can be used to help guide members to better outcomes. Ultimately, in some cases, members who are about to retire may seek some form of advice to help them to confirm their preferred retirement strategies and to implement them.

While that may sound simple, it’s obviously not. Retirement is complex and personal, and everyone’s personal circumstances are different. That’s why we have built a range of calculators and tools to assist members to understand how the various components of our retirement income system might interact. While it is tempting for product providers to think about how best to distribute their retirement product, we think that a better approach is to solve the retirement problem from a customer’s perspective – that is, we have a financial literacy problem, not a product scarcity problem.

How much superannuation do I expect to have at retirement? What my spending needs are likely to be, and what additional spending ‘wants’ would be nice? What product strategy is most likely to meet my needs and help me to manage my retirement risks? What drawdown strategy will meet my spending needs at various stages of retirement?

There is plenty of research to show that one of the scariest things about retirement is the fear of running out of money, but on the positive side, retirees are willing to use technology to help them plan for a better retirement.

Five customer insights will shape future offerings

That is where the next generation of retirement calculators come in. Calculators that clearly show variations in how long your money is expected to last under poor, average or strong market conditions. Those that allow you to compare outcomes under a variety of investment portfolios, from conservative to high growth. And are integrated with different longevity protection products to show not only how much Age Pension uplift you can expect, but also how different retirement products might be blended to produce different expected spending patterns during retirement. After all, this is what a retiree is most interested in.

 

Andrew Boal and Steve Freeborn are both Partners, Actuarial Consulting and Anthony Saliba is a Director, Actuarial Consulting at Deloitte Australia. This article is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance.

 

RELATED ARTICLES

How to give retirees the confidence to spend

Retirement spending: set the bar lower

The psychological shift from saving to spending in retirement

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Planning

What will be your legacy?

As we get older, many of us start to think about how we’ll be remembered by those left behind. This looks at why that may not be the best strategy to ensure that you live life well and leave loved ones in good stead.

Economy

It's the cost of government, stupid

Australia's bloated government sector is every bit as responsible for our economic worries as the cost of living crisis. Grand schemes like the 'Future Made in Australia' only look set to make it worse.

SMSF strategies

A guide to valuing SMSF assets correctly

SMSF trustees are required to value all fund assets, including property, at market value when preparing the fund's financial statements each year. Here are some key tips to ensure that you get it right.

Economics

Australia is lucky the British were the first 'intruders'

British colonisation's Common Law system contributed to economic prosperity, in contrast to Latin America's lower wealth under Civil Law. It influenced capitalism's success in former British colonies, like Australia.

Economics

A significant shift in the jobs market

The expansion of the 'care sector' represents the most profound structural change to Australia's job market since the mining boom. This analyses how it's come about and the impact it will have on the economy.

Shares

Searching for value in tech stocks

Just because a stock is cheap doesn't necessarily make it good value. This uses case studies in the tech sector to help identify when stocks trading on 30x earnings may be inexpensive and when others on 10x may be value traps.

Investing

Are more informed investors prone to making poorer decisions?

Finance Professor Michael Finke recently discussed the double-edged sword of taking an interest in your investments, three predictors of panic selling, and why nurses tend to be better investors than doctors.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.