Limited functionality available
The long awaited Retirement Income Review, often referred to as the Callaghan Report, was recently released by Treasury. The report is comprehensive and addresses the issues faced by our current retirement system as successive governments have amended the system on the fringes, while not examining the bigger picture. As there are no recommendations in the report, the roadmap for future government policy is unclear.
The report asserted that “more efficient use of savings in retirement can have a bigger impact on improving retirement income than increasing the super guarantee.” It is unclear if the majority of the workforce would actually make additional savings, or just assume that the current level of the Super Guarantee (SG), combined with the Age Pension, would be adequate for them. Actuarial projections have shown that for a large percentage of Australians, a SG level of 12% will provide a better retirement outcome.
The suggested 65-75% replacement rate from the review may appear adequate however it does not take into account the ever increasing costs of aged care and the fact that an increasing proportion of retirees will, at some stage prior to death, need to rely on the aged care system and the increased associated medical costs which may not be fully, or even partially, covered by private health insurance.
The review concluded that retirees are dying with even more in their super balance than when they began retirement. The reason retirees die with the bulk of their wealth intact is in part due to the uncertainty they face in retirement. Today a female retiree at age 65 can expect, on average, to live for approximately another 23 years while a male retiree at age 65 can expect to live approximately 20 years more. However, these are only averages, and thanks to medical advances and improved living standards, an increasing number of retirees will live to age 100 or beyond.
This uncertainty in life expectancy, together with the uncertainties of inflation, low interest rates and market downturns, mean that most retirees, quite understandably, will err on the conservative side when it comes to spending their savings. Many are not intentionally trying to under-spend in order to leave inheritances but rather are trying to ensure their retirement savings will last through to death. For many, relying solely on the age pension in their final years will not be enough and might otherwise mean they would need to rely on the support of family, which cannot be guaranteed. Gen Ys and Millennials in particular will expect a much higher standard of living in retirement than, for instance, the first wave of post-war Baby Boomers and are far less likely to own their own homes.
While there is much commentary about factors such as the relative benefits of home ownership versus additional SG contributions, for many Australians it is having timely advice relating to their personal circumstances that will make the difference to their long-term financial wellbeing.
The report highlights the complexity of the system, but also suggests that it should not be ‘unnecessarily complex’. The reality for most Australians, is that adequate comprehension of this system is beyond them. There are two ways to tackle this challenge and we must progress both. The first is to simplify. The second and immediate opportunity is to make it easier to access help at an individual level. As the home ownership/SG dilemma suggests, this assistance should incorporate decisions inside and outside superannuation. The report notes that there has been insufficient attention on assisting people to optimise their retirement incomes through the efficient use of their savings. When individuals are engaging with financial services professionals, it is important that we do not promote legislative and industry-led complications (e.g. superannuation only vs holistic conversations) that frustrate and hinder.
There is no doubt that Australia has a robust retirement income system. However, there is an obligation to ensure that we all have access to the right education and guidance. It may help to begin to educate Australians at a young age on financial literacy and our national retirement system. Recent events have shown it is useful to have access to help when you get into trouble. Who will be the lifesaver when we are caught in the financial rip? It must be easy to access simple help that takes into account personal financial circumstances. We should make it easy for those who are asked to provide help to do so. This will be not only the financial adviser community, but also in many circumstances superannuation funds. We currently have a diminishing number of advisers. Narrowing the focus of super funds to just delivering net returns removes more help from the system.
With an array of recent announcements impacting the industry along with responses to the Hayne Royal Commission introduced earlier this month, everyone is seeking policy certainty from the Government. The report acknowledged that “Decisions to alter policy involve judgements and trade-offs. It is ultimately up to the Australian community — through the Government — to decide on the settings for the retirement income system.” Our superannuation system is already world-leading in providing employees with strong average real returns over an extended period and the review confirmed that the Australian retirement income system is effective, sound and its costs are broadly sustainable. The report has established an excellent foundation to improve the “understanding of its operation and the outcomes it is delivering for Australians.”
Russell is a partner of Consulting and the national leader of Superannuation Consulting and Advisory Services. Russell provides advisory services to superannuation clients and associated entities such as administrators, insurers and investment managers. He specialises in strategy consulting to these funds as well as providing advice on governance, compliance, product development and design. He also has experience in advising defined contribution funds in the Asia Pacific region.
Tim is a Partner in Deloitte's Investment & Wealth Advisory practice – a team that helps financial services businesses operationalise strategy across the value chain. With more than 25 years of experience in financial services including industry and advisory roles, Tim provides consulting services to some of the world’s leading superannuation funds, asset and wealth managers. His focus is to help these businesses optimise their operating models to meet customer service and distribution objectives.