After a long period of calm, sustainable growth and a blossoming love affair with superannuation, Australians are for the first time in many years feeling uncertain about their future with superannuation. Market volatility and negative returns have shaken consumer confidence and a raft of changes in the last Federal Budget has diminished superannuation appeal in the eyes of many.

The government, the industry and the public are united in the belief that it’s time for change and superannuation is now the focus of government review.

While review is necessary, the current focus on issues such as fees and taxation, which, albeit important indicate we might be giving super a cosmetic makeover rather than addressing the deep, underlying issues that will ensure a robust system and adequate retirement income for generations to come.

One of the key issues that needs to be addressed is the adequacy of superannuation, that is will it produce enough income to last retirees for the remainder of their lives once they’ve finished working?

In the case of many Australians superannuation contributions are not being worked hard enough, because they’re in the wrong investment option. Most Australians spend their entire working life contributing towards their trustee designed default fund which is not optimised for their risk appetite or investment horizon, these funds might place excessive focus on minimising short-term peer group risk rather than maximising long-term returns.

We need a rethink on the design of default investment schemes to last a whole of life, and we need funds to be empowered to make the proactive decision to transition members into the most appropriate stage within these new schemes, thus making it easier for individuals to achieve a better outcome within super but without taking away the opportunity for individual responsibility or choice.

For young members choosing the right investment strategy could mean a significant difference in retirement: 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.

At the other end of the spectrum, superannuation members nearing retirement do need a different investment approach but this doesn’t necessarily mean they require a conservative investment fund. On average, Australians will live another twenty years beyond retirement which is still a relatively long term investment horizon.

But due to inertia, a lack of education, or to put it bluntly, possibly sheer laziness, encouraging Australians to actively switch their investment option will not be enough.

To ensure investment returns are being maximised for all Australians we need to dispel the notion that retirement savings is an issue only for one’s working life, but consider it from a whole of life perspective.

While individuals will need to start taking some income from superannuation when they retire, these funds must continue to ‘work’ and produce returns for perhaps another twenty years.

Furthermore, it is during these years that the bulk of an individual’s retirement income is produced, our modelling 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.
 
In Mercer’s “Securing Retirement Incomes: Risks and opportunities for Australia’s retirement income system in a post-Henry environment” we are calling for funds to adopt a whole-of-life target date approaches for their default investment strategies. By this we mean investment target or maturity dates should be focused not on retirement dates but instead beyond retirement - designed to produce returns for the whole of life.

To take it one step further, these target date default strategies could permit seamless transition from the accumulation phase of retirement planning into the retirement income phase, where the superannuation fund is used to supply an income while the money remaining in the pot continues to produce investment returns.

Our current default fund design is in danger of failing working Australians, leaving them short-changed in retirement. If Australia’s retirement income system is to continue to be upheld as one of the leading systems in the world, then the industry needs to adopt a whole of life perspective, and show that super is a partner for life, not just working life.