We’ve said it before – the challenges Australian retirees face as they increasingly outlive their life expectations are leading to retirees running out of money later in their retirements.
Dr Anthony Asher, a leading Australian actuary, Associate Professor at UNSW and former executive at South African life insurers that responsibly provided lifetime annuities, recently released a paper calling on superannuation funds to offer their members retirement products that more efficiently manage longevity risk to result in higher standards of living for retirees in retirement.
Life expectancy in Australia has reached record highs, stretching the retirement years, and increasing the risk of retirees outliving their Account Based Pension retirement income.
But why is this happening and why haven’t the super funds addressed this growing concern?
Superannuation fund members are currently limited by the lack of suitable income stream products when planning for retirement. Asher’s paper, Developing the Retirement Income Framework, further suggests funds could provide low-cost financial advice to offset this, even raising the question whether trustees should be at risk if they fail to make these options available to members.
According to Dr. Asher, most retirees’ needs fall into five general requirements from their savings:
- A high income,
- An income that lasts (including for a spouse),
- A stable income,
- Access to cash, and
- A desire to leave a bequest.
Personal circumstance, financial literacy and preference will play a part in members assigning different weights of importance to these requirements, and Dr. Asher calls for trustees to offer a range of products to meet each of these five needs.
Asher’s paper confirms the significant financial and emotional benefits of lifetime income streams with a possible 15-30% increase in retirement income by using an appropriate allocation to suitable lifetime income streams. These views endorse the findings of the 2014 Financial System Inquiry.
Since amendments to the legislation in 2017 the superannuation industry has been able to extend this increase in retirement income via new retirement products – yet in 2020 there is still limited access to products that provide income for life that roughly keeps pace with inflation. Retirees’ (current) lack of understanding of options at retirement, deters many Australians from considering an income stream alternative. This is why appropriate, independent financial advice is so imperative.
David Orford, Managing Director of Optimum Pensions, and longtime advocate for superannuation funds extending their retirement product offerings, agrees that “although lifetime pensions (or annuities) have become far more efficient and effective in Australia, few retirees currently purchase them although almost everyone needs them.”
Both actuaries agree that retirees will benefit from retirement product innovation in Australia. Retirees will also be able to benefit from access to growth assets and longevity protection for a lifetime income, ultimately resulting in a better bottom line for the Government and the country as a whole.
Superannuation funds are charged with managing the retirement outcomes of millions of Australians and carry a duty to act in their members’ best interests. There is no doubt that offering retirement products that more efficiently and effectively manage longevity risk will result in higher standards of living and happiness in retirement and better align the superannuation system with its objective to deliver financial security and dignity in retirement to all Australians. So, what are they waiting for?
Anthony Asher’s complete dialogue Developing the Retirement Income Framework can be found here.