Safe Hands?
The government’s decision to boost the superannuation guarantee to 12% has been lauded a big win for Australians by the financial services industry’s key associations.
The fact that it went against the recommendations of Ken Henry’s Tax Review, and that it could potentially have an adverse impact on salary negotiations, particularly for employees within small business, is beside the point.
We’ll all be forced to save more and should therefore be rewarded with a more comfortable lifestyle in retirement – no one can argue with that.
But let’s not forget the implications of this windfall for Australia’s superannuation funds, which have just been guaranteed a massive annual increase to their coffers and therein a significantly greater responsibility for our retirement savings.
In 15 years’ time, the post-retirement market will represent more than a third of the total superannuation assets in the Australian market.
Super funds are still grappling with how best to service this fast-growing and lucrative sector – and the need for a near-term solution just got even greater.
AustralianSuper is one of the early movers in the continuing evolution of post-retirement solutions, launching an allocated pension for members in 2008 and now considering rolling it out to the broader market.
The fund’s chief executive Ian Silk told delegates at a recent Melbourne conference organised by publishing house Conexus Financial, that large funds would play an active role in product development.
In fact, they have little choice but to do so if they are to compete with retail funds and the private sector – the likes of AXA North and ING Money For Life – in this space.
For industry super funds, the key challenge is preventing members from exiting the fund at retirement – at the point when their balances are largest.
The head of the Australian Institute of Superannuation Trustees, Fiona Reynolds, suggested it might be appropriate for super funds to issue annuities to members in future.
Super funds’ distribution capabilities are limited in comparison to banks and financial planning firms, but with now even bigger guaranteed flows being directed into super, it would be remiss of the private sector to ignore the potential to partner with funds in offering retirement solutions.
US-based asset consultant Milliman proposed a three tiered model whereby smaller funds white label or outsource to an administrator, medium-sized funds offer longevity protection strategies in partnership with the private sector and large funds manufacture products internally.
Whatever the approach, it’s critically important that the super funds get this right. Our retirements depend on it.
David Williams says:
People worry about accumulating “enough” money – but are still fundamentally ignorant about how long it has to last.
Using the Life Tables gives unrealistically low data (the Government Actuary actually says not to use these for individuals). Adding in the well-documented impacts of surroundings, health, attitude, parents (gene pool) and eating means a majority of people will live considerably longer than the “official” average for their age group.
This typically means their longevity risk (ie the cost of living longer than they expect) is undoubtedly greater than their current investment risk (the risk that they might lose capital through market effects).
At least people can get a better idea of their potential longevity (and reasons) from the free website at http://www.mylongevity.com.au .
Super funds should pay more attention to this aspect of their relationship with their members if they want to keep them after they cease to be earners.