As we take stock of the retirement industry, and where we find ourselves as 2021 comes to a close, it’s clear that the long-term outlook for retirees has changed over the past couple of years. Not only has Covid threatened the health of our seniors, but it has also made the value of the family home in providing lifelong housing and a haven more deeply felt.
Combine that with low term deposit incomes, portfolio volatility, and a broad consensus around a lower growth long-term future, and it has made planning for retirement a real challenge. Now, as never before, it is clear that fear undermines retirement outcomes and that confidence is the main ingredient in a good, long life.
Retirees need trustworthy, easy to use, integrated education and solutions that delivers both faith in their savings and safe, easy means to release them.
The Household Capital Your Life Choices survey shows that 85% of retiree respondents are unaware of the three pillars of retirement funding (the age pension, compulsory superannuation and voluntary savings) and only 23% of respondents were aware of the Pension Loan Scheme.
It also showed, even with a relatively digitally-literate respondent group, that 58% of respondents were unsure when asked if they understood the funding options available to them.
Household Capital recently hosted the 2021 Three Pillars Forum, bringing together industry experts from Australia and around the world. Despite disparate professional backgrounds, the panellists agreed that uniting the three pillars of retirement funding was essential for the consumer, the economy and the retirement industry.
The underspending Australian retiree
CoreLogic figures show the Australian property market smashing new records, with a total residential asset value exceeding $9 trillion. On a conservative estimate, Australian retirees are holding residential property assets of more than $1 trillion dollars.
Senator Anne Ruston, Minister for Families and Social Services, has highlighted the plight of asset rich, cash poor Australian retirees, saying:
“We want our senior Australians to enjoy the best quality of life during their retirement and one of the key factors in achieving this is financial independence. To improve the welfare of our older Australians, these three pillars must work together and be fit for purpose. With housing prices increasing significantly in recent years, we are seeing many of our senior Australians paper millionaires with limited ability to access the benefits of their appreciating assets.”
Retirees do not have a full picture of their assets and ability to access their wealth and this is a major contributing factor to their hesitancy to spend. We should celebrate and take confidence in the fact that Australians are the wealthiest median retirees in the world. Instead, the 2020 Retirement Income Review noted widespread underspending and lack of confidence in retirement.
Ben Hillier, General Manager Retirement Solutions at AMP, uses a powerful analogy to describe the information available to retirees:
“[We are] putting someone into a lifeboat, when they're expecting to go on a retirement cruise. They're perhaps thinking that it's going to be the cruise of a lifetime. We whack them in a lifeboat, load them up with lots of provisions and push them off and say, ‘There you go, enjoy your retirement.’”
“They say, ‘Well, how long do I need to make these provisions last?’. ‘Well, you figure it out!’. ‘How much do I consume?’ Well, it's entirely up to them. We're putting all the risk onto the retirees. Which is just far too much to expect for people who aren't finance professionals.”
The Australian economy, a trillion dollars boost
In the UK and Canada, the market for reverse mortgages and home equity release is more advanced than in Australia and gives us a reasonable expectation of how our market may develop.
James Hickey, Partner at Deloitte, said at the Forum:
“At the moment, the market has really only penetrated around 1-1.5% of the potential addressable market. Even if it went up to the area where the UK and the US are, with around 5% or more of the retirees using the product, then you could see a three to fivefold increase in the current market sizes of $3 billion to $10 billion to $15 billion, if it got to the same level of uptake amongst retirees.”
Putting that money into retirees’ wallets has immediate benefits for the local economy. Per Capita CEO Emma Dawson said:
“Housing is a productive asset in that it provides shelter, but it's not moving through the economy. So if that money is released, we know that older people will tend to spend it in their local communities. So particularly in suburban and regional areas, if there's excess disposable income for older people, they'll spend it at a local café, local shops, taking the kids to the cinema, that then creates jobs in the economy, and it does reduce the inequality of labour and of wages as well.”
Legal & General CEO Andrew Kail has seen the benefits of releasing home equity in the UK, saying of its Australian potential:
“To the point about the relationship between parents, grandparents, and children, the societal impact and the benefit of sharing this wealth and creating liquidity out of an asset stock could have huge implications for communities, families, and society. It could make a really big difference.”
Understanding wealth and how to access it
Australia has a real opportunity to meet the needs of an ageing population because we have good healthcare and longevity, a good pension that's sustainable and means tested, with good housing and a good superannuation system.
This opportunity is not there yet for baby boomers and older generations. First, we have to provide information and advice to create awareness of wealth in the minds of Australians. Then we have to deliver confidence in and access to that wealth in the wallets of our senior citizens.
Superannuation funds have built lifelong relationships with Australians during their accumulation phase and are in prime position to deliver trusted holistic advice covering the full spectrum of the retiree’s assets. Current regulations make this much harder than it should be and we see that super funds are nervous to risk regulatory fines or disapproval.
Stephen Reilly, COO of HESTA says:
“Everyone is trying to do the best they can for members who are looking at retirement, and who are scared to death about just how long they’re going to live. One of the big challenges for us is that we know a lot, but we don't know everything. It's a bit like that old fable of people feeling different parts of an elephant; you feel the trunk, you feel the tail, you feel those great big legs and you imagine different things. The easy part for us is going to be the tech part, where we start to pull those bits of data together. The hard part is going to be working together so that we can deliver really good advice, good help to members so that people can go into retirement a little more confident and a little less scared.”
It’s time for the industry to unite and to support new legislation that allows super funds to become the trusted source of retirement advice for all three pillars of retirement income.
Josh Funder is CEO and Managing Director of Household Capital. Josh is an advocate for positive ageing and co-founder and former chairman of Per Capita.