The Australian market for post-retirement income solutions has been underdeveloped for too long. However, a new research paper from Mercer reveals the industry is tackling the post-retirement conundrum with renewed energy as appreciation grows for the fact securing an income in retirement to last a lifetime requires more than simply accumulating wealth in a super fund.
The new paper from Mercer – Post-Retirement Market Trends in Australia – outlines the current landscape and trends in this area; states innovation is occurring, but on a selective basis; and challenges the role of superannuation funds as future providers of solutions to an aging workforce.
Graeme Mather, Leader of Mercer’s Investment Consulting business, Pacific, said, “We believe the industry is energised by the post-retirement challenge, but we’re not convinced there is currently the right mix of solutions in the market, or where there are suitable solutions, that they are being appropriately applied in retiree member investment portfolios”
Ninety four per cent of Australians who access their superannuation savings via an income stream do so via an Account Based Pension (ABP). But Mercer is asking the question of whether these ABPs are actually fit for purpose and really help people convert their superannuation savings into an adequate and sustainable income throughout retirement, which according to Mr Mather is the ultimate goal of super.
“There is a widely held view within the industry that most funds replicate their accumulation investment strategy in their post-retirement options. We wanted to test this view because people have very different objectives and risk appetites during their working life in comparison to their retired life and their retirement income strategy should reflect these differing dynamics” said Mr Mather.
Mercer’s research found 49% of super funds change their default strategic asset allocation from accumulation into pension, which predominantly means reducing the allocation to growth assets. The average exposure to growth assets for default pension options is 57%. When a strategic asset allocation does change, the average growth exposure falls from 67% to 46%.
“There are demographic, fiduciary and commercial arguments for why super funds need to develop more innovative post-retirement solutions. However, above all else, we need solution innovation in the Australian market because we’re all living longer and our money needs to work harder to last for longer”.
“It’s encouraging to see glimpses of innovation in this space but it’s important to remember that to be comprehensive, post-retirement solutions will need to extend beyond investment design to encapsulate a broader set of solutions” said Mr Mather.
Traditionally, post-retirement solutions have existed along a spectrum from pure investment based products through to guarantee based products such as annuities. According to Mercer’s research, the focus of recent post-retirement innovation has been on developing solutions that sit somewhere in the middle of this spectrum that in many cases offer a hybrid of the traditional investment and guarantee based approach.
“When we look under the bonnet of what super funds are offering retirees to help them manage their super throughout their retirement we see a wider range of solutions beginning to emerge as the industry shifts its focus from accumulating wealth to providing an income throughout retirement – to the very end.
“A deeper understanding of the characteristics specific to the post-retirement phase should result in the continued emergence of more bespoke strategies for retirees. The strategy itself is only one, albeit very important, consideration – a regulatory environment that is conducive to further innovation and individuals having access to suitable advice are also crucial pieces of the puzzle,” Mr Mather said.
Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerAU