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Australia
Melbourne, 24 August 2009

Australians could be financially better off in retirement if the superannuation industry changed their single default strategy and adopted more of a whole-of-life investment outlook for members, according to a report on Australia’s retirement income system to be released by Mercer this week.

Mercer’s call for a shift to whole-of-life investment strategies within superannuation, opposed to investment options with horizons only to retirement age 60 or 65, is backed up by modelling that shows 66 per cent of people’s retirement income will come from post-retirement investment returns, whereas only 6 per cent will come from contributions and 28 per cent from pre-retirement returns.

Peter Promnitz, Mercer’s Region Head for Asia Pacific, said, “Our modelling proves that individuals could have substantially superior investment outcomes at retirement if they adopted a whole-of-life investment approach and adjusted their investment strategy accordingly to their changing life stages and risk appetite.

“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,” he said.

Mercer’s report “Securing Retirement Incomes: Risks and opportunities for Australia’s retirement income system in a post-Henry environment” also urges the Government to stop ‘tinkering around the edges’ of superannuation and use the Henry and Cooper Reviews as vehicles to make decisive and holistic change once and for all. 

“It’s time to bed-down the system. Market volatility and recent negative returns have shaken consumer confidence in superannuation, and along with Government reviews and changes in the most recent Federal budget, have created a “perfect storm” for reform, said Mr Promnitz.

“In particular, recent market volatility has highlighted the shortcomings of the one-size-fits-all approach to default investment strategies and lack of whole-of-life outlook that dominate the Australian superannuation landscape,” he said.

“There is real potential in our current system that super fund trustees will set their default investment strategies with an excessive focus on minimising short-term peer group risk rather than maximising long-term returns.

“Focussing on default options with investment horizons beyond retirement date will ensure members maximise a higher risk appetite in their younger years and older members will have enough to last them well beyond retirement date, and avoid having to make major lifestyle adjustments if short-term market falls severely damage super returns as they approach retirement,” he said.

Most Australians spend their entire working life contributing towards a trustee designed default fund which is not optimised for their investment horizon and risk appetite. But - if someone in their 20’s could gain an additional investment return of 0.5 per cent by choosing a more aggressive investment strategy, it’s plausible they could have more than 25 per cent additional income in retirement.

Longevity risk: Securing income streams to last beyond retirement

Mr Promnitz added that longevity risk, the risk that peoples’ retirement savings will run out before they die, is indeed one of the biggest risks facing our system.

“With Australia’s ageing population, longevity risk is real for low, middle, and high-income earners. Unfortunately though, our superannuation industry hasn’t put the same level of sophistication into creating decumulation products as they have for the accumulation phase.

“We need further development of an annuity market, supported by long-dated Government bonds and where there is sharing of longevity risks between retirees,” Mr Promnitz said.

Mercer recommends a proportion of superannuation benefits above the tax-free threshold (or a similar amount) should be invested in annuities. This proportion should initially be between 25 and 40 per cent of the total accrued benefits above the threshold but an exact figure would need further analysis.

“Australia can not rely on the aged pension alone as a fall back to guard against longevity risk. A greater range of retirement income products need to be developed to ensure all Australians have increased financial security in retirement and taxpayers aren’t left carrying an unsustainable burden as the population ages,” he said.

Stop tinkering with super – it’s time for holistic and bipartisan change

“It’s time to strip the politics out of our retirement income system and in the eye of this perfect storm for reform, not merely tinker with the system, but address the systemic risks holistically to create a system that is flexible but robust enough to survive future market cycles and an ageing population, and that regains Australian’s confidence,” said Mr Promnitz.

Key Recommendations of Mercer’s report:

Superannuation Funds

• Need to consider offering whole-of-life investment strategies to improve member and asset retention beyond retirement date
• Focus on getting younger people into high-growth strategies early to optimise retirement savings
• Look for ways, beyond investment performance, to engage with and build loyalty amongst members
• Develop new retirement products that offer good returns, access to capital, and protection from risks as much as possible
• Provide easy-to-use projections tools, such as web calculators, to help members better understand and prepare for adequate retirement savings
• Ignore a one-size-fits-all approach to member communication and adopt a personalised approach.

Employers

• Communicate with older staff as much as possible about retirement and transition plans to assist with workforce planning
• Improve employee engagement by providing more financial and retirement planning workplace services
• Recognise their investment in superannuation as an employee benefit and be aware of the associated kudos they will achieve if they choose a default fund for employees that engages and educates their workforce.

Individuals

• Need to remember that superannuation is a long-term investment and ensure they have the right investment strategy for their stage of life and risk appetite
• View accumulation of retirement savings as a whole-of-life goal, not just something that occurs in one’s working life.

Register for Mercer’s report at www.mercer.com.au/securingretirement.

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