AUSTRALIA - Australians could be better off in retirement if the superannuation industry adopts a whole-of-life investment outlook, according to Mercer.
In its report Securing Retirement Incomes: Risks and opportunities for Australia's retirement income system in a post-Henry Environment, the consultants call for a shift away from investment options with horizons only to retirement age 60 or 65, towards whole-of-life investment strategies.
Mercer region head for Asia Pacific Peter Promnitz said that focussing on default options with investment horizons beyond retirement date will ensure members maximise a higher risk appetite in their younger years, while older members will have enough to last them beyond retirement date.
The report showed that most Australians spend their working life contributing towards a trustee designed default fund, which is not optimised for their investment horizon and risk appetite.
However, it said if someone in their 20s could gain an additional investment return of 0.5% by selecting a more aggressive investment strategy, they could have more than 25% additional income in retirement.
Mercer's modelling shows 66% of people's retirement income will come from post-retirement investment returns, whereas only 6% will come from contributions and 28% from pre-retirement returns.
Promnitz added: "Adopting a different investment time horizon could be the difference between being able to afford a week-end away versus an overseas trip in retirement - or it could even impact when some people are able to retire."
The report also urges the government to stop ‘tinkering around the edges' of superannuation and address the systemic risks holistically, in order to create a system that is flexible but also robust enough to survive future market cycles and increasing longevity.
Promnitz said that Australia's superannuation industry has not put the same level of sophistication into creating decumulation products as it has for the accumulation phase.
He added: "We need further development of an annuity market, supported by long-dated Government bonds and where there is sharing of longevity risks between retirees."
The report follows a recent review of the Australian Government civilian and military superannuation scheme's pensions by chief executive of UK insurer Friends Provident Trevor Matthews.
The report concluded that these pensions should continue to be indexed by the consumer price index (Global Pensions, August 21, 2009).
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