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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Jim Hennington

Crucial tables used in software to estimate retirees’ longevity and calculate how best to ensure their savings last, need a critical update, the Actuaries Institute said.

The tables have a material impact on the way retirement income strategies and products are evaluated, and currently underestimate longevity.

“To have more than a coin-toss chance that a person’s retirement planning horizon is sufficient, you need to look at the timeframe that gives 80% or more certainty of being sufficient,” the Institute says in a research note to financial planners.

It goes on to say that while there is uncertainty around how long any one person will live, there are significant factors to take into account that result in big variations for groups.

For instance, a couple of average health, aged 65 (male) and 62 (female), need a plan that lasts until he is 100 in order that they can be 80% sure their financial plan meets their potential lifespan. “That is 16 years longer than if the adviser used the simple look-up table for a 65-year-old male.”

Actuaries Institute President Nicolette Rubinsztein said the government has made a strategic commitment to improve retirement income products, hoping to boost incomes for older Australians. But it is clear the tools financial planners use may not reflect best practice when it comes to Australia’s increasing life expectancy, she said.

“Life expectancy calculations are often required in the superannuation and financial planning industries,” Ms Rubinsztein said. “They have a material impact on the way retirement income strategies and products are evaluated.”

Over the last 50 years, Australians have seen a rapid and consistent increase in lifespans. In 1970, the average age of death for women in retirement was just over 80. In 2010 this had increased to age 87, which is what today’s basic lookup tables are using. But financial planners need to also consider how much this will increase between now and the time someone retiring today reaches their 80s or 90s.

“A healthy, well-educated female entering retirement today, who had an affluent career and enjoys a good quality of housing, is just as likely to live beyond age 100 as she is to die before age 80,” the Institute says.

If an adviser group has 1,000 healthy, educated, professional 65-year old couples as clients, it could expect more than half of these households to still have one spouse alive at age 95.

The basic lookup tables used in legislative instruments and financial planning tools used by advisers don’t allow for this critical planning issue. Clients need significantly different advice and strategic investments than if their life expectancy was assumed to be age 84 or 87.

Factors that affect longevity include improvements in medical research, living standards, nutrition and lifestyle, education, occupation, genetics and wealth.

Jim Hennington, the author of the research note, is from the Actuaries Institute Retirement Incomes Working Group.

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“The goal for Optimum Pensions is to educate the retirement industry about the options available to ensure Australians have access to a better range of retirement income streams. This is my life’s passion and I am proud to be able to invest in the people and solutions that will help shape our future,” said David Orford, CEO and Founder of Optimum Pensions.

This latest announcement will see a range of experts work within the business, as well as provide a range of outsourced expert insights. The team contributes a wide range of technical, operational, marketing and communication skills that will deliver a new range of income streams for superannuation funds and life insurance companies to provide sustainable retirement incomes.Peter Rowe has moved into the newly created role of General Manager, following his initial appointment as Manager, Business Development. His responsibilities will include spearheading the organisation at an industry level, as well as rolling out the strategic roadmap for products and solutions. Peter has spent over 25 years in the superannuation industry with over 30 years in senior management roles. He has had extensive experience in pension management and administration.

Jim Hennington joins as Head of Innovation, taking on the responsibility for product design and developing modelling tools to make Optimum’s pensions accessible to planners and retirees. Jim is a Fellow of the Institute of Actuaries of Australia.

Stephen Huppert will hold the consulting role of Head of Engagement, utilising his 25 years’ experience in superannuation, wealth management and life insurance in his promotion of Optimum Pensions and the retirement challenges it is addressing. Stephen is a Fellow of the Institute of Actuaries of Australia.

David Moxon, Consultant – Communications and Education brings his senior management experience in product development, marketing, communications and planning to developing the marketing strategies and materials for Optimum products.

Tamara Ben-Moshe, Consultant – Brand and Strategic Marketing, will share her in-depth insights and senior marketing experience with the superannuation and retirement industry to put Optimum Pensions and its services on the map.

Cathryn van der Walt, Consultant – Media, will be responsible for media and analyst relations, promoting awareness of the new opportunities Optimum Pensions presents to the financial services industry.

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Jim Hennington

The end of the 2017 financial year will put an unprecedented compliance squeeze on accountants servicing Australia’s 580,000 self-managed super funds, according to industry experts Topdocs and A.S.A.P.

Speaking at the launch of Topdocs’ integration with A.S.A.P.’s revolutionary online advice service for SMSF accountants, A.S.A.P.

CEO Jim Hennington said: “Many won’t realise it yet, but this traditional tax planning period will present extraordinary compliance costs and risks for SMSF accountants, whether they’ve chosen to become financial licensees or not.

“The rule change imposes a burden on all SMSF accountants because they need to know when the advice line would be crossed. The rules are technical and safeguards are needed. Yet at the same time, the Government is introducing the biggest reforms to superannuation in a decade.

With the number of accountants being licenced still remaining very low, many practicing in the area of SMSFs are looking for a solution to mitigate their risk, but to still continue to be active in this space. Topdocs’ Managing Director, Jake Spakman, believes the new offering that Topdocs and A.S.A.P. have combined to develop provides accountants with such a solution.

“Unlicensed accountants can now utilise A.S.A.P.s online advice service to obtain Statements of Advice for SMSFs and pensions, and at the same time, create the necessary documents through Topdocs.

Without a license, accountants must refer their clients to a planner for financial product advice. This integration offers a streamlined alternative to obtain statements of advice and the necessary legal documentation.”

Topdocs new integration is one of a number of new services they will be launching at next weeks’ SMSF Association conference in Melbourne.

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