Changing decades of retirement income thinking

Over the past 20 years the Australian superannuation system has become the envy of the world with workers accumulating more than $3 trillion in superannuation savings and assets underwritten by the superannuation guarantee (SG) but the challenge ahead is to put in place a regime to allow a smooth transition to decumulation.

For much of the past decade surveys of superannuation fund members have revealed ongoing concerns about having enough money to fund a comfortable retirement and, more recently, Treasury analysis has pointed to those concerns translating into retirees husbanding their savings so tightly that they die holding large superannuation balances.

To address this, the Federal Government has put in place a range of measures to encourage people to plan ahead for their retirement years including placing requirements of superannuation funds to better address the decumulation phase via the Retirement Income Covenant.

The magnitude of the challenge has been underscored by a recent Australian Securities and Investments Commission (ASIC) submission which stated the number of member accounts and the value of benefits in the retirement (i.e. decumulation) phase is growing steadily.

“According to APRA data, between 2015 and 2022, the number of member accounts in the retirement phase increased to more than 1.3 million, with an average growth rate of 2.4% per year. Over the same period, member benefits within the retirement phase increased from $247 billion to $478 billion, growing at a rate of almost 10% per year on average on average.”

But the reality confronting Governments and the financial services sector is that the challenge of getting the decumulation settings right is not just one of policy it is one of changing entrenched psychology in circumstances where retirement income planning has revolved around strategies based on account-based pensions and accessing the Age Pension.

Just how hard it is to shift that mindset has been underscored by recent submissions to the current Senate Economics Committee inquiry into Improving Consumer Experiences, Choice and Outcomes in Australia’s Retirement System where even the nation’s financial services regulators, the Australian Prudential Regulation Authority (APRA) and ASIC have pointed to the entrenched nature of current thinking.

The propensity of retirees and their advisers to go for an account-based pension/Age Pension default is underscored by APRA’s analysis that “while there are longevity products offered in the Australian market by life insurers, the take up has been low”.

“According to APRA’s statistical publication, for the 2023 financial year, around 600,000 member accounts took out lump sum payments and around 200,000 member accounts opened a pension account upon retirement or reaching age 65 (noting a member can take a lump sum and open a pension account). Lifetime annuities are included in the pension accounts and make up less than one per cent of the total member accounts.”

Allianz Retire+’s Head of Technical Services, Justine Marquet is acutely conscious of the need to change mindsets around retirement incomes and to move beyond the entrenched account-based pension/Age Pension formula.

She points to data confirming that fewer than 18% of people aged over 65 are on a part pension and what that means.

“Using that data, we derived that roughly:

“Yet to date most lifetime income product solutions (since the new rules in 2019) have been designed around providing a social security Age Pension uplift, i.e. a 40% reduction in the Assets means test to age 85 (subject to a minimum of 5 years) and a 30% reduction thereafter. But that design limits the investor’s access to capital in line with the legislated Capital Access Schedule (CAS),” she said.

Marquet said there was a need to change the discussion around retirement because people need to have the certainty that comes with having more foundational income they can rely on.

She said a part of that equation was bringing forward the conversation around retirement incomes before people panicked about retirement incomes adequacy.

“Having a more resilient portfolio is key because fluctuating income and uncertainty around what is going to happen in retirement is a major source of concern,” she said.

Content Partnership sponsored by Allianz Retire+