The riddle of the superannuation system is that the needs of workers saving for retirement are relatively simple while the needs of retirees are incredibly complex. Those saving for retirement want to generate the highest long-term investment returns within certain tolerances for risk. Retirees want to generate the highest lifetime income possible with both certainty and flexibility.
Super fund trustees will soon need to balance these competing objectives thanks to a proposed Retirement Income Covenant. This covenant will codify their requirements and obligations to improve retirement outcomes for members.
The challenge for super fund trustees centres on Comprehensive Income Products for Retirement. Funds must take care in constructing a retirement income strategy, especially one that focusses on the “collective needs of members” as described in the covenant position paper.
To read more about the challenges facing trustees as they begin to grapple with the proposed Retirement Income Covenant, see this article by Milliman’s Jeff Gebler and Adam Shao.
Superannuation is one of the most valuable products working Australians own. Yet it’s one of the products they care least about.
Forcing people to buy a product when the value can’t be unlocked for many years is not a good starting point for engagement. Attempting to persuade members to save more super by using broad-based one-size-fits-all targets has failed.
But research suggests that when members are able to see their future selves in vivid and realistic detail, they are more willing to make choices today that may benefit them in the future. Super funds can play a role in connecting the two.
In this article, Milliman’s Jeff Gebler says that the super industry’s dominant comfortable retirement savings target is not indicative of who its members are or who they will become. He says that funds can help members see themselves in meaningful, positive terms, thus sparking genuine engagement and better long-term decisions.
More than half of Australian retirees are spending less than the Age Pension each year, raising significant questions about current retirement policy and super fund strategies, according to new research. The research suggests mandatory and voluntary measures to boost super funds may not be enough to produce improved retirement lifestyles without a deeper understanding of the motivations driving retiree behaviour. Milliman’s Jeff Gebler offers perspective in this article.
The ASFA Retirement Standard states that an average Australian couple requires about A$640,000 in their superannuation fund at retirement (or AUD 545,000 for a single person) to live comfortably. According to Milliman’s Jeff Gebler and Wade Matterson, “The personalised nature of each superannuation member’s retirement journey means a one-size-fits-all approach simply cannot deliver the necessary information, products, and risk management strategies required to achieve everyone’s desired outcomes.”
In the article “Why the industry’s ‘comfortable retirement’ measures are wrong,” Gebler and Matterson discuss the need for enhanced benchmarks based on available data and communication strategies to deliver better financial outcomes that individuals can live with comfortably.
As Australia’s Baby Boomer generation continues to retire, the country’s superannuation system enters a drawdown stage. While super funds have focused on accumulation, new legislation will make it clear that their purpose is to provide retirees with income. Under that premise, Milliman’s Jeff Gebler explains why a new retirement consultant “with a new skill-set focused on the implications of drawdown” is needed.
The following excerpt highlights the necessary skill-set.
The modern retirement consultant will need to add and co-ordinate a broad mix of skills to meet the increasingly complex needs of the superannuation industry, including:
Funds have an increasing need for actuarial skills which can help them model member behaviour, changes in legislation and the impact of the Age Pension, risk management strategies, and post-retirement product design.
The business world is now awash with information thanks to advances in technology and affordability. The data scientist can analyse and turn this ‘big data’ into practical insights in areas such as membership, investments and risk.
Funds and asset consultants have tended to focus on long-term returns generated during the accumulation phase. However, changing demographics and legislation suggest funds should increasingly focus on the risks of drawdown such as volatility and potential capital losses. With this comes an expanding list of relevant asset classes, many of which (such as derivatives) are traditionally beyond the expertise or depth of existing asset consultants.
Behavioural finance and communications
Funds need to design their products and services taking into account the behavioural tendencies of older investors. For example, financial literacy scores naturally decline by about one percentage point each year after age 60 while older investors are more prone to ‘loss aversion’ than younger investors.
Older investors are highly engaged with their super, including through digital channels. Automated-advice provider Decimal recently released research showing that older investors were the most active users of its enterprise financial advice service.