There’s no doubt that retirement is the new black. We’ve now reached the point where super fund accounts have moved beyond accumulation. We’re well into the decumulation phase seemingly suddenly noticing the massive wealth held by the nation’s super funds. As well as how they wield the power that comes with these significant investments.
Of course, quite a few academics and commentators have noted this influence along the way. But we do seem to have experienced an explosion in coverage of what super funds could and should do for the nation. It’s head spinning to say the least. Which begs the question whether we need to stop expecting super to be all things to all people and better apportion the different responsibilities to create a truly impressive, world class retirement income system?
What do we expect from our super?
A lot!
A quick look at some of the talking points about superannuation this year reveals a long list of nation saving activities we somewhat blithely expect super to deliver. To be fair, this ‘bonfire’ has been stoked by the funds themselves with grand responses to the news that they have not been delivering well on the Retirement Income Covenant requirements. Look over here, they seem to be saying, we’ll get those right and then take on even more responsibilities. But unrealistic expectations for the role of super are spread across the population. Australian super funds are being variously asked to:
- invest the funding needed to move seamlessly to alternative energy,
- provide investment to solve the housing crisis,
- ensure members have sufficient wealth for later life,
- support the use of super savings to provide a deposit on first homes
- fund aged care
- undertake extensive financial literacy education for all members
- and now create a 'package' or 'product' which rolls income streams and the Age Pension into one smooth flow of cash
The mind boggles – this is cradle to grave intervention indeed.
Particularly since basic adherence to the Retirement Income Covenant requirements has yet to be delivered by many funds, which means that members of these funds are not informed nor fully cognisant of their options and opportunities as they reach decumulation. This is a critical time and a critical need for such members.
Where does the fault lie?
Contrary to the popular aphorism, this failure is not an orphan. It has, in fact, quite a few fathers and mothers.
Perhaps it’s worth questioning whether Australia has been a victim of its own success? Back in the early 1990s, we were praised by the World Bank for having a world class retirement income system, which was then believed to consist of just three pillars (Age Pension, superannuation and private savings). But as mandatory superannuation was legislated in 1992, we have now had 30 years to anticipate the challenge of mass decumulation. And along the way countless inquiries and reports have confirmed disengagement and a worrying lack of financial literacy. And how have we responded at a national level? We haven’t.
The latest Treasury discussion paper again notes the need for solutions. But instead of jumping to the proposed ‘all-in-together’ product (combining income stream, Age Pension payments, maybe even home equity access), let’s start where we should have 30 plus years ago – by providing basic information for people who remain dazed and confused by the complexity inherent in our retirement income system.
There is also a problem of equity in retirement savings, the haves and have-nots. The playing field of superannuation has been systematically tilted over a decade or two, to the point that the more you have in super, the more your money will grow. Contrast this with the trajectory for those with median amounts in super ($178,808 for 60-65 year old males, $137,051 for same age females). Then there are those with zero super balances – 23% of women – and renting retirees (about 13%) who struggle to cover even basic bills.
So how can we rethink super?
It’s high time that we ceased our fixation with ‘pot of money’ style thinking. Let’s face it, $3.5 trillion in savings is eyewatering. Most of us don’t actually understand what that amount of money even means. When I last wrote about super savings compared with Australia’s GDP it was 2016 and the ratio of super to GDP was 117%. It’s now 150% and rising. But obsessing over how much money we have amassed doesn’t solve the basic challenges super members are now facing.
Let’s start afresh by agreeing that just because this amount is huge, it does not follow that super should be everything to all people. As noted above, there’s a never-ending stream of ideas of how super funds should be invested to help different levels of government in Australia play catch up with infrastructure and energy initiatives that should have been tackled years ago. The role of super fund trustees is not to fill the gap left by governments. It’s to put members’ interests first by investing well and delivering well. Delivering well is not confined to returns on funds but also the delivery of support in both accumulation and decumulation phases. The type of support which is covered by the Retirement Income Covenant, in fact.
Prioritising super’s roles
We still seem to be working out the new definition of what super is and does. Back when it was introduced to the Australian Parliament, then-Treasurer John Dawkins stated:
‘The increased self-provision for retirement will permit a higher standard of living in retirement than if we continued to rely on the age pension alone. The increased self-provision will also enable future Commonwealth governments to improve the retirement conditions for those Australians who were unable to fund adequately their own retirement incomes.’ (superannuation guarantee bill 1992).’
The three-pillar system has since evolved into a five-pillar system of funding retirement, including home equity and work income. This is retirement 2020s style and with so many Australians entering retirement with a mortgage, these extra two pillars are both important.
How could we write a ‘job description’ for super that’s fit for purpose?
Here’s a suggestion, in order of priority:
- Manage members funds well to deliver enhanced wealth for them to enjoy as one of their forms of income in the later years of their lives
- Fully adhere to the requirements of the Retirement Income Covenant by assisting members to better match their needs with the opportunities and rules attached to the move from the accumulation phase to that of decumulation.
- Offer appropriate retirement income products, relevant to superannuation. Do not try to ‘own the world’ or control access to other types of income such as Age Pension entitlements and home equity. Get your own house in order before creating these types of hybrids.
- Offer financial guidance and general advice as legislation allows.
- Consider whether the investment of member funds in different sectors which are favourable for the Australian economy also offers outcomes that are best for members. Or both? Members’ interests clearly must come first.
Who else needs to do some of the heavy lifting?
To be fair to super funds, although they are major players at the trigger point when members retiree, they should not be expected to play catch up with their members’ overall financial literacy.
The Federal Government needs belatedly to get serious about financial literacy. Very serious. Given our world-leading, chest-thumping, eye-glazing $3.5 trillion in super, why does this nation still lack a coherent financial literacy program? Successive governments have squibbed on this for decades and now, suddenly, super funds are meant to fill the gap? Which means that we are asking them all to separately reinvent the wheel? What a waste of time, money and resources. A comprehensive nationally approved financial literacy program could be delivered through workplaces with far greater efficiency.
And then there’s advice
We’ve been around the block a few times on the topic of financial advice. The Haynes Royal Commission which reported in 2019 shone a light on many wrongs. Sadly, the fallout has been a mass exodus of financial planners, to the point that there are insufficient advisers left to deliver support to the 800 or so Australians who retire daily. Full financial plans are too expensive for most Australians anyway. So more attention on the delivery of ‘episodic’ or ‘situational’ advice is key to helping retirees as they encounter the many different ages and stages during their transition to retirement. Short, subject-focussed financial advice at age 58, 60, 65 and 70 would help so many retirees to weigh up options and make informed decisions. But where are we at with this type of offering? Are we still desperately hoping robo-advice will fill the gap?
In short, we have a lot of catching up to do when it comes to the large-scale decumulation phase taking place in Australia right now.
Moving from saving to spending superannuation is not a simple process. Individual retirement income needs are based upon about 8-10 different factors, including
- preferred retirement age
- household expenditure
- super savings
- other savings
- current housing
- employment prospects
- retirement goals
- family needs and
- health issues.
Centrelink entitlement is a highly targeted calculation. Super decumulation needs to be understood as equally complex, but just as doable. As a nation we became complacent while our super coffers were swelling. Now we need to step back and take stock. Not to roll all forms of retirement income into one, but to separate the processes of the five very different pillars of retirement and support retirees to understand each and every piece of the puzzle, in plain language.
Now that’s not too much to ask, is it?
Kaye Fallick is Founder of STAYINGconnected website and SuperConnected enews. She has been a commentator on retirement income and ageing demographics since 1999. This article is general information and does not consider the circumstances of any person.