David Harris looks at how Australia is trying to solve the retirement income conundrum
Australian superannuation funds have an interesting problem. Nearly 20 years of compulsory retirement savings has built up massive pension assets but what then? How do retirees get their money back in a way that ensures they will have enough to live on into – possibly – very old age?
The annuity market has barely existed in Australia and retirees have become used to cashing in and self-managing their Super savings. That's not quite working, however, because budgeting for the next 20-30 years with a fixed capital sum takes some working out. Australians do use financial advisers but often because they are trying to juggle a means-tested state benefit with their Super benefit.
As Jeremy Cooper, chairman of Challenger Financial, the largest annuity provider in Australia suggests: "Funds are wrestling with how to give members' money back to them in a way that meets their needs and protects them from the new risk of being retired: inflation, volatility and longevity. It's a difficult transition."
Unlike the UK government, Australia's has taken an interest in the decumulation cycle and decided intervention is needed to protect asset run-off.
An Australian Financial Services Inquiry recommended that "to assist longevity, trustees of super funds could select a comprehensive income product for retirement (CIPR) for their members, effectively pooling risk to ensure income throughout retirement. It would deliver an enduring income stream to give retirees more confidence that they can spend in retirement." They also asked the government to remove obstacles to the innovation of new retirement products. Both recommendations have been accepted.
Growth in flexible annuities is now under way and so is pooling of investment risk. Mercer's Lifetime Plus account has a longevity investment risk solution, which harnesses some of the thinking behind collective defined contribution plans, much heralded in the UK some years ago. It is a gallant effort to relieve some of the nervousness around self-managed investment and drawdown, but it remains to be seen whether the product is niche and difficult to understand for most retirees.
One aspect of Australian Super that does benefit pensioners is that schemes remain committed to offering financial guidance and ‘friendship' to retirees; the concept of state-backed Pension wise is viewed as "quirky and bizarre by some Aussie industry experts".
Paul Watson, group executive, business growth, product and advice at HOSTPLUS (a leading industry master trust serving mainly hospitality workers) identifies that: "Pleasingly, pre-retiree members of occupational-based (industry) funds are by and large focused on income provision in retirement, not the attainment and consumption of a lump sum for other purposes. Increasingly, they see their superannuation funds as the retirement experts and are increasingly looking to them for both quality, strategic, advice and appropriate product solutions to address their requirements and risks."
Former Aussie Prime Minister Paul J. Keating – the Super system reformer –acknowledged that workers need to be rewarded for deferring current consumption through tax incentives. If the UK is to embark on further erosion of pension tax incentives the unintended consequences may just undo some of the gains from auto-enrolment.
As the TOR-authored report Global Comparisons of DC Plan Investment Design for the Defined Contribution Investment Forum (DCIF) suggests: "The next big shift has to be to persuade retirees to be prudent when turning savings into retirement income and take more interest in where their retirement pots are invested: successful drawdown will require retirees to manage a dwindling resource in a complex and volatile environment."
Time will tell how both countries will address the needs of an increasingly ageing population.
David Harris is managing director at Tor Financial Consulting
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