Addressing the adequacy and sustainability of the super system
Deloitte's perspective on the initiatives necessary at a government and individual level to address the mounting issue of longevity risk – including facilitating access to lifetime or deferred annuities.
When our great grandparents retired in the late 1940s, life was a lot simpler, jobs were much more physical and, frankly, the expectations of living a long retirement in good health were not great. If we move forward to today, much has changed.
If we retire at age 65, we will generally be in reasonably good health, thanks to better lifestyles and modern medicine. A woman at this age will live, on average, to age 87, and a man to age 84. This is 50 per cent longer than our great grandparents lived in retirement.
With longevity increasing by approximately one year every 10, we can reasonably expect that our children and grandchildren will live into their 90s.
So while there is good news on the longevity front, what does this mean for our retirement plans? The short answer is that we are not saving enough. This was made worse by the losses incurred during the global financial crisis.
To have saved enough to meet the ’comfortable’ standard as defined by the Association of Superannuation Funds of Australia (ASFA), a 30-year-old male on an average salary, getting the Superannuation Guarantee from his employer, will have had to contribute an extra 5.4 per cent of his salary per annum, and a female an extra 7.5 per cent. Clearly, for many retiring in the foreseeable future, a ’modest’ lifestyle – that is around $415 dollars a week for living expenses, will still be aspirational.
So what can we, and the government, do to address this problem?
Individuals need to take ownership of their superannuation earlier. In addition to making additional contributions where practical, individuals need to look at whether their superannuation arrangements suit their specific needs and, if not, make changes. Fund performance, investment options and insurance cover should all be looked at, on at least an annual basis.
I agree that many Australians are not equipped to do this, either through lack of knowledge or lack of time, and this is where the other major change must occur.
Superannuation funds and their advisers must make straightforward and cost effective financial advice available to all members, in a way that is easy to access. Most queries can be addressed with online statements of advice, with face-to-face advice being accessible for those who need more.
If advice was sought earlier and more often, many superannuants would be in a much better financial position today than they are.
Government also needs to play its role
Lifetime contributions caps
The annual contribution cap would be a good place to start. While, in theory, contributing to the maximum concessional limit will go a long way towards attaining an adequate benefit in retirement, the reality is that most people are not in a position to make additional contributions in the first half of their working life.
We believe the solution lies in a lifetime contribution cap that allows people to ’catch up’ during the latter part of their working life when they are far more likely to have disposable income. The current system does not give individuals any opportunity to make up for those times of no excess income for superannuation contributions.
Facilitate lifetime or deferred annuities.
The problem for retirees with the current system is clear. At retirement they get a lump sum which they need to make last for the rest of their lives. But how long will that be? No one knows. A system that required retirees to purchase a deferred annuity to commence from, say, age 80 (with exemptions for small balances), could allow people, and their advisers, to plan with some degree of certainty.
From a fund’s perspective pre-retirement investment options need to be tailored specifically to each individual’s needs. Even the much-touted life-cycle options only take into account one factor – age. Other investments, spouse’s superannuation, tax situation, retirement needs and the planned retirement date are all largely overlooked. It is no wonder that SMSFs are proving so popular to those close to, or in, the retirement phase of their lives.
The Australian superannuation industry has a long way to go in delivering acceptable levels of retirement incomes. Government needs to create an environment that allows the right solutions to be developed for an increasingly large post-retirement market.
Russell Mason, partner, Deloitte