Elayne Grace

Superannuation funds will soon get more ‘hands on’ with helping members convert their super into retirement income once the new Retirement Income Covenant (RIC) takes effect, according to a paper issued today by the Actuaries Institute.

The paper, from senior actuaries Jim Hennington and Andrew Boal, is designed to help the superannuation industry to navigate the Covenant, which puts the onus on super funds to develop a strategy for members who are retired or close to retirement.

In their Dialogue Paper^[1], A Framework to Maximise Retirement Income, the authors have developed a framework to help meet what they see as a gap in clarity for superannuation trustees.

Difficulties arise for fund members in the group they call middle Australia – retirees who want a lifestyle more than that provided by the Age Pension, with extra spending during the healthier years of early retirement, but who do not want their super and investment income to run out before they die.

“When you retire, your salary or wage stops. From that point on, you need to fund your lifestyle using your own savings plus any Age Pension income that you might become entitled to,” said Hennington.

“For very wealthy people, this might be easy. For those on lower incomes, it can also be straightforward – if they are managing on the income provided by the Age Pension. But for many people in between, which we refer to here as middle Australia, the maths to get this right is really difficult.”

“Applying this over what could be a 30-year time frame in retirement is complicated and requires new thinking. Trustees will have to be more hands-on and not leave the lifespan risk issues to members,” he said.

The paper outlines metrics that can be used by trustees to determine period of retirement end date, safe retirement income, expected retirement income and retirement income risk. It shows how drawdown strategies based on the period of retirement ending at a fixed age do not maximise members’ retirement incomes.

“This starts to raise the question: How can superannuation funds measure retirement income when we do not know how long that income needs to last?”

Under changes to superannuation legislation enacted in February 2022, trustees must put in place a retirement income strategy and publish a summary by 1 July 2022.

The strategy must outline how they will help members who are retired or nearing retirement, balancing three main objectives:

• maximise their expected retirement income
• manage expected risks to the sustainability and stability of their expected retirement income, and
• have flexible access to expected funds during retirement.

Hennington said “the RIC puts the onus on the super fund to help members balance their risk versus having higher expected income. Many retirees may be willing to take some investment risk and/or longevity risk to increase their retirement income.”

The paper argues that trustees could use a CPI-indexed lifetime income stream product (annuity), similar to UK pension fund projections, as a benchmark for risk versus reward decisions. These products represent a ‘safe’ option available for members to convert super into income that lasts for life.1 The pooling of longevity risk that occurs with lifetime income streams and annuities, can enable a higher than otherwise annual income to be delivered for each member for their lifetime.

The Government’s earlier Financial System Inquiry and Retirement Income Review observed retirees can combine new types of products to generate up to 30% more income. For example, an investment-linked lifetime income stream could simultaneously:

• deliver higher expected income, and
• do this without any increase in the risk of outliving their savings.

When a superannuation trustee decides how much risk ‘middle Australia’ members can be exposed to in retirement, they should consider the impact of those risks and, in particular, understand how much downside would cause a detrimental effect on the retiree’s standard of living.

Elayne Grace, Actuaries Institute Chief Executive, said: “having a robust and effective retirement income system is crucial for the wellbeing of all Australians.”

“The passage of changes to super legislation, to give effect to the retirement income covenant, was a significant milestone in providing retirees with a reliable, secure and adequate income, with the aim of enabling retirees to live with dignity in retirement.”

“Actuaries play a hugely significant role in providing guidance on models to deliver this outcome,” Ms Grace said.

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[1] https://actuaries.logicaldoc.cloud/download-ticket?ticketId=397f9c45-b94b-4499-a075-0377088e9df8

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Elayne Grace

Retirement income for Australians, which rests on the three pillars of compulsory superannuation, a publicly-funded Age Pension, and voluntary savings, must undergo significant reform to be simpler, more efficient, and equitable, a year-long policy review from the Actuaries Institute said.

The Institute’s recommendations are set out in a just-released policy document, Securing Adequate Retirement Incomes for an Ageing Australia.

More than 200 actuaries provided feedback and advice, with a core group of 40 from three high-level public policy working groups, making specific recommendations. It is the Institute’s most comprehensive public policy review of retirement savings.

“Having a robust and effective retirement income system is crucial for the wellbeing of all Australians,” said Actuaries Institute, Chief Executive, Elayne Grace. “The objective of the retirement system must be to provide for retirees so that they have a reliable, secure and adequate income, to live with dignity in retirement.

“There are equity and intergenerational fairness issues, including for those excluded from the superannuation guarantee,” Ms Grace said. “Gaps need to be addressed. While the system is sound and broadly sustainable, it is widely recognised that there is scope for further reform to improve outcomes.”

The federal Government is currently consulting on the development of a retirement income covenant, to help retirees effectively plan for retirement. The Actuaries Institute strongly supports this covenant, coupled with a clear objective for the retirement system as a whole.

The Institute drew on Australia’s leading actuaries, working within the Institute’s Superannuation and Investments Practice Committee, the Retirement Incomes Working Group, and the Retirement Strategy Group to develop its set of recommendations.

The policy document considers the level of the superannuation guarantee in the context of overall retirement adequacy; how provision of guidance and advice results in better use of super savings; greater flexibility for the role of the family home in retirement income provision, coupled with its inclusion (above a certain threshold) in the Age Pension means test; preservation of superannuation savings and greater support for renters for whom super and the Age Pension can fall short. It also supports continued development of lifetime retirement income stream products that would offer better outcomes for many retirees.

“The ‘three pillars’ of compulsory superannuation, the Age Pension and voluntary savings mean that individuals are required to make complex choices about how much to save and consume, and how to invest,” Ms Grace said. “We support simplifying Age Pension means testing, improving the interaction between the retirement income and aged care systems, encouraging innovation in retirement products, and developing best practice in the provision of financial advice and guidance.

“We would also like to see structural changes such as the removal of disincentives for older Australians who want to continue to work, and greater flexibility for the role of the family home in retirement income provisioning.”

Andrew Boal, Convenor of the Actuaries Institute’s Retirement Strategy Group, said Government changes to its supply and demand side policies would improve system efficiencies in delivering retirement incomes to Australian retirees for the rest of their and their partner’s lives. These include:

• a covenant, already slated, which requires super funds to have a retirement strategy and solutions that are appropriate for different member cohorts
• incentives that encourage retirees to take part of their super as a lifetime income stream and disincentives for those who want to leave large bequests from super, and
• accessible and affordable financial advice and guidance at the point of retirement.

Mr Boal said one of the Government’s most controversial policies – the level of the compulsory superannuation guarantee, currently set at 10% of earnings – involves a set of complex tradeoffs. Community support is the key to future changes.

“The level should not be so low that Australians can’t accumulate enough retirement savings, this is against the objectives of the superannuation guarantee and comes at a cost to future generations of taxpayers,” Mr Boal said. “But broken work patterns, involuntary retirement, home ownership, mortgages and debt at retirement, longevity improvements and health needs are also factors,” he said. He added that improving equity within the retirement income system, including addressing concerns for specific groups that are adversely affected by aspects of the design of the system, is a key plank of the Institute’s recommendations.

“There is a large gap in outcomes for those who do and those who don’t own their own home at retirement,” he said.

“There should be greater assistance for retirees who rent. The system favours homeowners; for example, the principal residence is wholly exempt from the Age Pension asset test.”

One recommendation involves consideration that a portion of the value of the home be included in the asset test, while noting that there are significant variations in home values across Australia. The Institute also warned against the growing number of retirees who use part of their super to pay off a home loan, or other large debts.

“The adequacy of the system is now being undermined by the relative ease for older Australians to obtain a mortgage with a long outstanding term”, the report states. “Superannuation benefits are intended to be used for retirement living rather than secure mortgages.”

Low savings balances for women, who typically retire with super balances that are at least 40% lower than men, must also be addressed.

Gig workers, and other self-employed workers who may miss out on super entirely, should be considered; super should be paid on paid parental leave; and super must be properly considered in divorce settlements. Equity would also be improved if workers received the SG they are entitled to at the same time their wages are paid. Overtime should be included when calculating the SG rate.

Ms Grace said the Actuaries Institute’s Public Policy Statement highlights key areas for reform. She said the Institute, as a professional body, holds the public interest or common good as a key principle when developing policy.

“Actuaries have a deep and long-standing expertise in superannuation and retirement incomes,” Ms Grace said. “We recognise having the right policies in place is crucial for the retirement system and for intergenerational equity. These are the issues we think need priority for reform.”

Read the Public Policy Statement, Securing Adequate Retirement Incomes for an Ageing Australia.
Read the supporting document.

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Josh Funder

Household Capital’s 2020 Third Pillar Forum launched yesterday as an online experience. The online forum includes a live panel discussion and interviews with 27 experts from around the world.

The Forum’s live national panel debate was hosted by Ali Moore in the Melbourne studio with Andrew Boal, CEO of Rice Warner and Joshua Funder, CEO of Household Capital. Senator the Hon Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology, along with Aware Super CEO Deanne Stewart and Milliman’s Amara Haqqani joined from the Aware Super Sydney office. Peter Harris, former Chairman of the Productivity Commission and author Jean Kitson joined respectively from Queensland and New South Wales.

The robust conversation covered the three pillars of retirement funding: the government pension, superannuation and voluntary savings including home equity. The panel also addressed wider topical concerns around aged care, the significant disparity between the sexes in retirement wealth, the need for education and engagement, as well as focussing into specific action points such as proposed increases to the standard employer contribution of 9.5 percent, or including the home in the asset test.

Senator Hume said, “The concept of the third pillar is actually really important, the importance of that third pillar in providing for retirement has been really overlooked I think in the policy conversation about retirement so far. And a third pillar, or voluntary savings, is incredibly important to the retirement security of Australians. For many, as we know, the family home is possibly the most significant form of voluntary savings that retirees have historically had, because retirees have historically had a very high level of home ownership compared to other countries, in Australia. However, the family home is not actually considered a part of a person’s retirement income.”

Dr Joshua Funder, Chief Executive Officer of Household Capital said, “Home isn’t just a source of funding, it’s not just a house. It’s your identity, it’s your family, it’s your community, it’s housing, and it’s a source of funding.” Advocating for the need for change, Funder said, “Older Australians are some of the wealthiest in the world, they live longer than ever and yet they are worried.”

Key topics

The key topics discussed by the lively panel included the three pillars, aged care, women in old aged poverty, education and engagement.

The three pillars

The live panel provided a unique opportunity to cohesively focus on all the three pillars of retirement funding: the age care pension, superannuation and home equity.

The funding amount is significant. “There’s a trillion dollars in home equity owned by Australian retirees – using this responsibly for long-term funding can improve retirement,” said Funder.

Senator Jane Hume said, “Ultimately what we need to be thinking about is the interaction of all three pillars of the system: the aged pension, superannuation and the third pillar, and how they work together to deliver for Australians in retirement.”

Deanne Stewart, CEO, Aware Super said, “Threading the needle between pillars one, two and three needs good quality and affordable advice. This results in confidence and good mental health in retirement.”

Aged care

Aged care is a major concern of every Australian, with the Royal Commission and COVID bringing it sharply into focus and later aged care being of particular importance.

Jean Kitson, author of Let’s Talk About Mum and Dad said, “I found there was a lot of fear about aging and aged care and especially the capacity to pay for your care. I think that fear, it also comes out of that narrative, that older Australians are a burden. That has been a terrible narrative and it sets up a conflict between older Australians and people who are making financial policy and economists. That puts everyone in a defensive mode.

“My parents are pensioners and they manage, they don’t imagine. They have lives, not lifestyles.”

Andrew Boal, CEO, Rice Warner pointed to the escalating costs in later life. “We’re living longer but only about half of that is healthy. After age 82, nearly 50 percent have health issues,” he said. “The cost of health care after age 85 is about five times higher than the cost of healthcare for a 35 year old. And then you’ve got aged care. Am I going to need it? To what extent? I don’t know. So I’m going to have to reserve a whole lot of capital just for those things just in case.”

Women in old aged poverty

The levels of poverty of women in retirement were of concern to all members of the panel.

Deanne Stewart, CEO of Aware Super  said, “Two thirds of our members are female. We see a real disparity between males and females. Females are retiring on 57 percent of their male counterparts. One in three women get to retirement without superannuation.”

Kitson empathised, “It’s women on their own, mostly women on their own, on one pension and renting. They’re the ones in a lot of strife and who really struggle.”

Stewart explained the reasons behind the lower fund balances. “About one third of it is the career breaks. Taking time out, maternity leave, looking after elderly parents. About two thirds of it is due to wage differences. Women tend to work more part time, and that gender pay gap. Underneath that data is not just about women, but those with very low income. And those that are more casualized or part-time, or in the gig economy.”

Funder spoke to the broader issue of supporting all older Australians, including women, to have a dignified old age. “Many Australians, particularly single retired Australians, particularly single female retired Australians have only one pillar and it’s the pension and where those Australians are in the private rental market, they’re amongst the poorest and most vulnerable of Australians. So, that’s not a question about three pillars, that’s a question about helping those people live with dignity throughout their lives. We all need to come together and agree on a whole range of help that’s needed to make sure those aged Australians aren’t vulnerable, poor and can live with dignity.”

Education and engagement

The panel all spoke to the importance of education and engagement to increase knowledge and confidence. This becomes increasingly challenging as customers age.

“What we really want is people to be more engaged in their superannuation and more engaged, including their superannuation as part of their personal balance sheet,” said Senator Hume.

Amara Haqqani, Director, Milliman asked, “What processes and policies can we put in place to encourage engagement between people and their retirement funding? We need to be better at providing education to retirees.”

Haqqani spoke to the need to be education rather than product focussed. “We talk about guidance, financial guidance, financial counseling. It all comes back to getting the basics right to get people confident. Once you’ve got them understanding their own retirement needs, then you can start looking at products.”

Financial technology may play an important role in making mass information accessible. “We can use technology to help ‘middle Australia’ navigate an appropriate retirement strategy,” said Boal.

Harris spoke strongly for the need for independent expert advice. “We need a form of navigator here, and it has to be a trusted navigator. It’s a person who provides better information in your particular circumstances. We don’t really develop such people for the purposes of aging.”

The benefits will be seen across society. “We need to get retirees confident in their finances and their lifestyle. That will encourage consumption which is good for everyone” said Funder.

Online in 2020

The inaugural Third Pillar Forum was hosted in Melbourne in October 2019.

Dr Joshua Funder, Chief Executive Officer of Household Capital, said, “We were strongly committed to ensuring that the 2020 Third Pillar Forum went ahead. Now more than ever it is essential that the government and the industry seeks solutions that allow older Australians to live safely and securely in their old age.”

As a fintech Household Capital, had been delivering 100 percent digital customer service to older Australians since before lockdown so while the move online was new, it was a natural development.

Funder continues, “We have continued to grow throughout the pandemic, providing support, information and funding for our customers through an online customer experience and through video and telephone support. Delivering the forum online fits with our commitment to provide great content, drive the conversation and build a movement to deliver all three pillars of retirement wealth to older Australians. This year’s format enabled us to invite all our customers as well as industry experts who could join live and ask questions of the panel. Household Capital looks forward to hosting industry events in a more normal future, but following the successful response to this year’s online broadcast element, will continue to ensure widespread access to our content and national conversation.”

The 2020 event was attended by Household Capital customers, industry leaders and media. As well as the live panel, the Third Pillar Forum includes interviews and content from experts and advocates from Australia and around the world.

Join the conversation

Household Capital is committed to keeping this topic alive throughout the year. Join the conversation on Twitter #thirdpillarforum. Watch the live panel discussion as well as to view 27 videos from world leading experts.

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Andrew Boal

Improved access to affordable financial information, guidance and advice should be one feature of the looming review of Australia’s retirement income system, the Actuaries Institute said.

A new regulatory regime governing financial advice should ensure that people can access low cost guidance to help them to make better decisions about how they manage their savings, allowing them to improve how they live in retirement, said Andrew Boal, Convenor of the Actuaries Institute’s Retirement Strategy Group. Mr Boal is also a member of the Institute’s Public Policy Committee.

“We need a regulatory framework that allows for affordable access to information and guidance for the majority of retirees,” Mr Boal said. “That advice could cost as little as $200-$300,” he said. “It could be single issue scaled advice, or a modified version of intra-fund advice.

“While the retirement experience is generally quite heterogeneous, there are still a lot of people in quite large cohorts who have very similar circumstances with similar needs in retirement. We should be able to come up with a system to give people the guidance they need at an affordable price.”

Mr Boal said more complicated personal advice can cost thousands of dollars. “Only retirees in the top 5-10 per cent of savers typically have the level of complexity to justify expensive personal advice,” he said.

His comments come ahead of the Federal Government’s retirement income review, which is expected to be handed to the Treasurer later this month.

Other issues that should be canvassed include improved retirement strategies and products, taking into account how they work together, especially the way taper rates and asset test impact spending and access to the Age Pension. Longevity risk products, and whether they help retirees manage risk; the potential to better manage sequencing risk, and better targeted assistance for retirees who need it the most, such as single renters, should also be reviewed.

Mr Boal said in a Dialogue paper released by the Actuaries Institute that while Australia has one of the best systems in the world for accumulating savings for retirement, Australians continue to struggle with a retirement ‘spending system’. While the current system is still relatively immature, over the next 20 years more than 60% of superannuation balances at retirement will reach $250,000 or more, and over the next 40 years, 40% will hit $500,000 in today’s dollars.

The retirement income review should provide the Federal Government with the relevant information to help improve the cohesion of the system, so that all components work together to more efficiently deliver fair and equitable outcomes.

“The system needs to be efficient so that the cost to taxpayers meets its core objectives; it must be affordable and sustainable, and produce adequate outcomes that still allow some flexibility to meet an individual’s needs, and be simple enough so that retirees can optimise their position without having to spend a lot of money on advice,” Mr Boal said.

The Actuaries Institute broadly supports compulsory superannuation as a means to providing decent standards of living for retirees. Superannuation has also provided a significant buffer for many people currently suffering hardship as a result of COVID-19.

Mr Boal also said he expects further industry consolidation, resulting in fewer funds, and continued downward pressure on fees. The industry has already undergone a noticeable reduction in investment fees, and operational fees will gradually fall as well, which is a good outcome for members. However, he added that there will also be pressure on funds to spend more money on financial information and guidance to help members make better decisions that affect their retirement, especially as balances grow.

“The industry does need to spend a lot more time and money on the future provision of information and guidance, as well as the future retirement income products, which might mean that some of those fees might not fall by as much,” he said.

The Actuaries Institute looks forward to the Government’s response to the review and any policy options it considers. The Institute, and actuaries, advise the private sector and governments, both here and offshore, on public policy outcomes across a broad range of sectors from retirement to health, insurance and banking, climate and social policy outcomes.

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Andrew Boal

A large portion of Australia’s middle-income earners are encouraged to spend their retirement nest egg or lose access to more disposable income from the Age Pension as the current means test rules are adversely applied to their assets.

In a Dialogue paper^[1] prepared for the Actuaries Institute, Andrew Boal states that a ‘taper trap’ encourages some retirees to spend their savings quickly, and risk living on the Age Pension alone. Mr Boal is a member of the Actuaries Institute’s Public Policy Council Committee and was previously Chair of the Institute’s Retirement Strategy Group. He is chief executive at actuarial firm Rice Warner.

The taper rate is applied as part of Australia’s asset test. However, without suitable retirement income products that provide protection against longevity risk, if retirees do spend their savings quickly, they risk running out of money.

In the Dialogue paper, Spending in Retirement, Mr Boal also says all Australians, but especially a ‘middle group’ of Australians with between $300,000 and $800,000 in retirement savings, need:

• encouragement to acquire longevity protection to give them confidence to spend more in retirement, to live a better life; •a more equitable taper rate that does not unduly encourage retirees to spend their savings too quickly; and
• low cost access to financial information and advice to help them make better decisions because the retirement landscape is complex, and the average retiree is unable to navigate good outcomes.

The taper rate acts to restrict a retiree’s access to Age Pension payments based on the level of their assets through retirement.

Prior to 2017, the taper rate was set at $39. But from 1 January 2017, a retiree’s annual pension was cut by $78 for every $1000 of assets held above the relevant thresholds.

The Dialogue paper states that “a higher taper rate does encourage retirees to spend their savings as quickly as possible until they become eligible for the full Age Pension”. It says few do, but the retirement system as a whole, including perverse outcomes driven by elements of the asset test, needs review.

“Given the interconnectedness of the system, it is important that all the relevant levers are considered in conjunction with each other, including how it impacts on the efficiency and effectiveness of any other changes, such as increasing the superannuation guarantee to 12%,” the paper states.

The federal Government is currently conducting a Retirement Income Review, with findings due to be delivered by midyear.

The Spending in Retirement paper states that while Australia has one of the best retirement systems in the world for accumulating retirement savings, “we continue to struggle with how to design an efficient retirement spending system”. Part of this is attributable to a lack of clear purpose around what Australia’s retirement system is trying to achieve, the paper states.

“While the system needs to be affordable and fair, it also needs to help Australians spend their money in retirement,” it says. Retirement income policies should be guided by:

• sustainability, including a long-term regulatory outlook focused on providing retirees with a reliable, secure and adequate income flow during retirement;
• flexibility to allow choice;
• equity, including intergenerational fairness;
• efficiency, so that the cost to taxpayers meets the core objective of providing adequate retirement incomes;
• simplicity so that retirees can optimise their position without expensive financial advice; and
• regulation that allows competition and innovation within a framework that also acknowledges the cost of compliance.

While the current system is relatively immature, over the next 20 years more than 60% of superannuation balances at retirement will reach $250,000 or more, and over the next 40 years around 40% will hit $500,000 in today’s dollars.

If a retiree has less than $300,000, they will be entitled to a full Age Pension for most, if not all, of their retirement, which becomes their main source of income. If a retiree has more than $800,000 saved, and also own a home, they are less likely to be eligible for any Age Pension.

But for those caught in the middle, they are likely to be eligible for a part Age Pension for a substantial portion of their retirement and thus be subjected to the means tests. With the taper rates now more than double what they were in 2017, as the super system matures and balances grow, more retirees are expected to lose more of the Age Pension.

Some middle-income retirees will find they are caught in a ‘taper rate trap’. “If the retiree draws down and spends the minimum amount each year, the annual taper rate would need to be close to $39 for the retiree to receive total additional retirement payments higher than the accumulated reduction in the person’s net take home pay,” the paper states.

With the taper rate at $78, the retiree could be as much as $40,000 worse off. In other words, the more they save, the worse off they are.

As balances grow, it becomes even more important for retirees to understand how to maximise their superannuation to improve retirement outcomes, spend appropriate amounts to ensure a good standard of living and safely draw down while being mindful of longevity risks.

The Dialogue also states that there’s greater scope for the development of newer deferred lifetime annuity style products. It says middle-income earners would benefit from encouragement to acquire longevity protection so they can spend with confidence, a fairer taper rate, and low-cost access to financial information, guidance and advice.

Read the paper.

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[1] The Dialogue is a series of thought-leadership papers, written by actuaries and co-authors, which aim to stimulate discussion on important issues. Opinions expressed are those of the authors and not necessarily those of their employers or the Actuaries Institute.

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Nicolette Rubinsztein

The Actuaries Institute Australia is delighted to confirm Reinsurance Group of America, Incorporated (RGA) as the first Platinum Sponsor of the International Congress of Actuaries being held in Sydney, Australia from 3 – 7 April 2022.

RGA, one of the largest global life and health reinsurance companies, has been a longstanding supporter of the International Congress of Actuaries (ICA), having previously sponsored the last three events, held in Berlin (2018), Washington DC (2014) and Cape Town (2010).

Mark Stewart, CEO of RGA Australia said “RGA is proud to support the actuarial profession, in Australia, the Asian region and globally, at its premier four-yearly event, ICA2022. The contributions of the actuarial profession to financial services, insurance, pensions and risk management, are crucial to the long-term success of these businesses and the important roles that they play in society.”

Andrew Boal, Chair of the ICA2022 Organising Committee, has welcomed RGA as a major sponsor, saying “we are very pleased that RGA has led the way supporting this global event to be held in Sydney in 2022, and very much appreciate the active support of an important global reinsurer for this major event of the global actuarial profession.”

ICA2022 is a truly global event for actuaries and industry leaders. Nicolette Rubinsztein, current President the Actuaries Institute of Australia said “the Institute is very pleased to host ICA2022 in conjunction with the International Actuarial Association.

There are many forces at work shaping our future, both globally and in Asia. As actuaries we should learn from each other to better develop our understanding of these forces so we can better manage the risks and opportunities they may present.

I am sure the quality of thinking, the people, debate and conversation will be exceptional, and the Actuaries Institute Australia is very much looking forward to working with RGA to build a great Congress.”

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Andrew Boal

The Actuaries Institute has welcomed the federal Government’s changes to Australia’s post-retirement superannuation system that it hopes will lead to improved living standards for retirees.

The legislation passed through Parliament on February 14. The raft of measures deal with the risks for retirees that they outlive their savings; it will give older Australians more financial options in retirement by making changes to the means test rules that will encourage the development of new financial products for retirees, as well as an expanded Pension Loans Scheme and an increase in the Pension Work Bonus.

Background

On 6 December, the government’s Bill, which changes how the value of longevity products are calculated for the asset and income tests for the Age Pension, was referred to the Senate Economics Legislation Committee.

“The legislation will help stimulate the development of products that will underpin the government’s objective that superannuation provide income in retirement that supplements or substitutes the Age Pension,” said Andrew Boal, Convenor of the Actuaries Institute’s Retirement Strategy Group.

“We support the changes, and also support the principle of requiring superannuation funds to offer a retirement income product to members,” Mr Boal said.

Australians enjoy among the longest life expectancy in the world, a trend likely to continue. However, retirees are currently offered slim guidance or choice when they take their retirement savings out of the superannuation system. Many worry that they will outlive their money.

“Since the early 1970s, the life expectancy of the average 65 year old has increased from around 12 years to 20 years for men and about 22 years for women. But longevity is not uniform, it varies considerably from person to person, so some form of longevity protection will be helpful for many Australians,” Mr Boal said.

Treasury developed a framework called MyRetirement, or comprehensive income products in retirement (CIPRs), to help retirees overcome their fears around longevity. Federal Treasury released a discussion paper in December 2016 and called for submissions from the industry, to help develop a more robust sector for Australians who are about to retire.

In submissions, industry urged greater clarity from the government around the treatment of pooled lifetime retirement income stream products and the Age Pension means tests.

Versions of these products are already offered in Australia. But take-up is limited and the market relatively under-developed compared with other nations like the Netherlands and Denmark, which are ranked one and two respectively, in the recently-published Melbourne Mercer Global Pension Index. They offer annuity-style payments for the lifetime of the investor, helping ease retirees’ fears they may outlive their retirement savings.

Among other changes announced late last year:

• An increase in the threshold superannuation balance, to $100,000 from $50,000, before a superannuation fund must offer a CIPR to its members.
• A two-year delay to the implementation of the proposed CIPR rules, allowing funds to better prepare for the MyRetirement environment from 1 July 2022.

Mr Boal said the Actuaries Institute has been concerned for some time that the retirement phase of the superannuation system was underdeveloped.

“We support the progress that has been made to remove barriers to the introduction of pooled lifetime income products, and we welcome the clarification of the treatment of CIPRs under the new Age Pension means test rules,” he said.

“We also support the government’s plans to prioritise the development of a retirement income covenant, and that all superannuation funds should develop a retirement income strategy for members.”

Mr Boal said income needs and spending patterns in retirement can and do vary significantly and there is no one-size-fits-all solution. “We strongly support the notion that trustees should consider eligibility for the Age Pension when considering a member’s income in retirement, and also how cognitive decline may affect outcomes.”

On the increase in balances, Mr Boal said: “Most retirees with superannuation balances above $50,000 by a reasonable margin will still be receiving a full Age Pension, which is indexed and guaranteed by the government.

“At this level, members are likely to already have longevity protection for at least 80% of their retirement income.”

In the meantime, superannuation funds must develop a retirement income strategy for members by 1 July 2020.

Changes to the SIS Act will add a Retirement Income Covenant, which will codify the requirements and obligations for superannuation trustees to consider the retirement income needs of their members, expanding individuals’ choice of retirement income products and improving standards of living in retirement.

The extension of the Pension Loan Scheme will also allow retirees with low superannuation balances access to wealth held in their home, providing further comfort in retirement.

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