When Mercer modelled the readiness of fund members to retire, it found that less than half – 48 per cent – would reach the threshold of a comfortable retirement income as set by the Association of Superannuation Funds of Australia (ASFA).
The news was worse for women, with just 41 per cent retiring in comfort, while 53 per cent of men reach that stage. The Retirement Readiness Index also identified baby boomers and millennials as the generations most at risk of not entering their post-work years in good shape.
As sobering as this may be, Mercer senior partner David Knox was less than surprised by the results. “We know that a lot of our older members, the baby boomers, have not had super throughout their working career,” he says. “Compulsory super started 25 years ago and it only reached 9 per cent 15 years ago, so one can’t expect most baby boomers to have reached readiness.
“Most of the millennials have not yet progressed into higher income jobs. And the gender disparity is consistent with other data. We know women generally have fewer years in the workforce and we also know that their salaries on average are lower than men’s salaries.”
Voluntary is undervalued
While the report found that those on incomes of more than $100,000 were highly likely to achieve a comfortable retirement income, it also highlighted the virtue of voluntary contributions. In every demographic, voluntary contributions boosted readiness substantially. The kicker? Only 16 per cent of people are electing to tip money into their funds.
For Knox, this low rate of voluntary contributions raises a number of issues. “First, do members have confidence in super with governments continuing to change the rules?” he asks. “There is some logic to people saying, ‘well, maybe I don’t trust super’. Secondly, are people saving outside super in property, shares or even term deposits where the rates of return compared to super funds are pretty abysmal? There might be some of that.
“But, more than both of these, it’s the fact that people are not engaged – people are not thinking about their future. I think it’s fair to say that many people outside the financial services sector or those without financial planners aren’t super aware and are therefore not making voluntary contributions.”
How funds can help
While the index is sobering reading for many members, the detailed attribution analysis also means funds can benchmark and track their progress over time. And there are a number of reasons funds should care about their members’ retirement outcomes.
“If you think about what super’s there for, it’s to provide people with an adequate or comfortable level of retirement income – that’s the business of a super fund,” he says.
“A purely commercial reason for funds to be involved is that when people retire they have a choice as to where they put their money. If the super funds start to engage with members and say, ‘right, your super is not about your lump sum, it’s about your retirement income, leave the money with us because we can then generate an income for you’ – if funds can retain the members when they retire, they will be bigger funds and have more scale.”
Knox hopes the index will provide funds with a metric that boards and chief executives can provide to the members to enhance the customer experience. “The funds will be able to say, ‘only 50 per cent of our members are on track, so how about we have a campaign targeted at that group’,” he says. “It gives the opportunity for more data analysis and more focused campaigns. It’s also a regular health check to say: ‘last year was 50 per cent, this year was 53 per cent. We’re doing better. Why was that?’ The report gives funds the chance to have discussions with a better understanding of everything.”
Get more information on Mercer’s Retirement Readiness Index and learn how it can help your fund and its members.