Steve Utkus

Vanguard has released its second edition of How Australia Saves – a report which takes a deep dive into how Australians are managing their superannuation savings and the outcomes they are achieving.

The report takes a look at trends in contribution behaviour, choices and outcomes at an individual member level of over 2.3 million members over the three financial years to 30 June 2018, representing close to 10% of all APRA-regulated fund assets.

The report is the product of a collaboration between Vanguard and three of Australia’s leading profit-for-member superannuation funds – First State Super, Sunsuper and VicSuper. Vanguard launched the first edition of How Australia Saves with the support of founding partner Sunsuper back in 2017.

The research is based on methodology developed by Vanguard’s Centre for Investor Research in the US who have been producing How America Saves since 2000, with annual updates providing a unique insight into trends in defined contribution (DC) plan participant behaviour and retirement plan design.

Steve Utkus, Head of Vanguard’s Centre for Investor Research said “We are delighted to issue this second edition of insights on the Australian superannuation system.  Our view is that comprehensive data analysis can help inform better retirement policy and industry practice.”  The new publication joins similar Vanguard efforts in the U.K. and U.S.

“One of the key research insights is that while retirement systems differ across countries, certain behavioural characteristics are globally pervasive, such as inertia in decision-making.  This puts the onus firmly on policymakers and industry to ensure both defaults and policy settings are well aligned to the best interests of members”, said Mr Utkus.

Superannuation in 2018 – still a maturing system

Paul Murphy, co-author of the report, Senior Manager, Government Relations & Industry Policy at Vanguard Australia, presented key findings of the 2019 report at the launch event in Sydney commenting, “Despite its size and rapid growth rate, the Australian superannuation system is yet to reach full maturity.

“Superannuation is at a key tipping point in its evolution with its transition into a broader lifetime pension system, fuelled by the movement into retirement of the initial cohort of the baby boomer generation.

“What this report provides are key metrics which can provide a foundation for long term evidence-based assessments as markets and regulation evolves.”

Only 12% of members made additional contributions

The report showed that member contribution rates are firmly anchored to the Superannuation Guarantee demonstrating the importance of good policy design.

Twelve per cent of working members made salary sacrifice or non-concessional contributions or both during the period studied and the level of these voluntary contributions was consistent during the three-year period.

Self-directed members made a higher proportion of voluntary contributions, with 25% of members in this category contributing over and above the Superannuation Guarantee.

Female members made more non-concessional contributions than males across all investor types observed.

The data showed a strong correlation between age and voluntary contribution rates.  Members with total contribution rates between 10% and 15% of salary in 2018 had a median age of 49, and members with contribution rates above 15% had a median age of 59.

Few members hold extreme asset allocations, default options most popular

The research confirmed a vast majority, 87%, of accounts were solely invested in default (MySuper) investment options.

Only 1% of members had no allocation to growth investments such as shares and property, while at the other extreme, the percentage of members investing exclusively in growth investments was also only 1%.

Over the past three years the allocation to growth investments across the full member population remained consistent at 69%. Surprisingly, the report showed that self-directed investors were on average choosing a more conservative asset allocation with 59% allocated to growth assets.

Median investment returns were strong

The median estimated total return for fund members was 10.2% for the one-year period ended 30 June 2018. Over the three years the report covers, median estimated member total annual returns were 8%.

There was wide variation in returns among members, however members holding the lifecycle and target risk options had very little dispersion in estimated returns while unsurprisingly self-directed members saw the most variation in risk and return outcomes.

Member switching was muted

Only 3% of total members made one or more portfolio switches during the 2018 financial year, which was consistent with the previous two years. Both target risk and self-directed members displayed higher rates of switching than lifecycle members at 4% and 16% respectively.

Low incidence of fund rollouts and withdrawals

Only 4% of members rolled their funds into another APRA-regulated super fund during the period, and 1% made a partial rollout. Less than 0.5% of members rolled out their super funds into a self-managed super fund.

In the group studied 2% of members in 2018 were pensioners receiving regular income stream payments, with a median withdrawal of $21,321 or 8% of account balances (including lump sum withdrawals as well as income stream payments).

Another 1% of members were in the Transition to Retirement (TTR) eligibility age bracket, with a median age of 62.  Among this group 16% availed themselves of the TTR facility in 2018, with a median drawdown of 9% of account balances.

Thanking our partners

Wrapping up the session, Vanguard managing director, Frank Kolimago said “We would not have been able to compile this report without the gracious participation of our research partners, founding partner Sunsuper, along with First State Super and Vic Super joining us in this edition, who all share our common goal of improving member outcomes.

“Our aim is to deliver this research on a biennial basis, providing high quality and impartial data that becomes a critical resource over time as the superannuation industry continues to evolve.”

Deanne Stewart, CEO of First State Super said: “Our collaboration with Vanguard and our partner funds has produced research that allows us to understand how Australians are managing their super and their retirement outcomes at scale.  This insight into member behaviour will support our efforts to shape the future of superannuation and inform the development of products and services that will help members to achieve the best retirement outcomes.”

Scott Hartley, CEO of Sunsuper commented “A research project of this magnitude is no small feat, but I truly believe that the work we’re doing through How Australia Saves is invaluable for us as an industry in terms of delivering better outcomes for and engagement with our members.”

Michael Dundon, CEO of VicSuper said “We have no doubt that How Australia Saves will be increasingly influential in identifying opportunities for participating super funds in looking for ways to better serve their members. We’re pleased to be able to be involved in this valuable piece of research that will help us create even better experiences and outcomes for our members.”

Download the full report: How Australia Saves 2019.

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Nathan Zahm

Vanguard has launched a new suite of research aimed at helping Australians plan for a comfortable retirement.

Vanguard’s Investment Strategy Group has developed tools which can assist investors and their advisers compile a comprehensive retirement plan, and execute a sensible spending strategy, to ensure income endures throughout their retirement years.

The research spans three new white papers:

• Vanguard’s Roadmap to Financial Security: A framework for decision making in retirement.
• From assets to income: A goals-based approach to retirement spending.
• The role of the age pension in your retirement plan.

At a launch event held in Sydney yesterday, Paul Murphy, Vanguard’s Senior Manager for Government Relations & Industry Policy said, “While a major focus of the industry remains on the pre-retirement accumulation of wealth, and the policy and regulation that surrounds this, what can get lost in the debate is that the superannuation industry ultimately exists to provide income in retirement.”

Mr Murphy explained why the post retirement experience can mean greater uncertainty for people due to the move to a much less structured financial state than what they are accustomed to in the accumulation phase with mandated contributions and default settings.

“It’s a big shift from pre to post retirement with greater uncertainty perhaps explaining why research is showing some retirees are leading overly frugal retirements,” said Mr Murphy.

Nathan Zahm, Senior Investment Strategist and research co-author said, “With population and life expectancies of retirees in Australia rising while portfolio yields remain at historically low levels, the need for retirees to implement an informed retirement plan is more critical, and yet more complex than ever.

“A myriad of challenging decisions and trade-offs stand between a retiree and a financially secure retirement, and knowing where to start can be overwhelming.

“There’s no universal route to financial security in retirement, but there are common steps in the journey and this collection of resources empowers retirees through their own journey, which should lead to greater confidence in their ability to meet retirement goals.”

Vanguard’s roadmap to financial security: A framework for decision-making in retirement, details a four-step process that allows retirees to capture their unique priorities and use their financial resources in a way that best aligns with achieving their goals and mitigating their risks.

“The framework provides foundational knowledge about the goals, risks and resources individuals will need when planning for their retirement, and it can be applied regularly throughout retirement and adjusted when necessary as needs and circumstances evolve,” said Mr Zahm.

From Assets to Income details a new spending rule developed by Vanguard, which combines aspects of two popular spending rules – the dollar plus inflation rule and the percentage of portfolio rule – to allow retirees to benefit from good markets by spending a portion of their gains, while weathering bad markets without a significant reduction in spending.

The final paper, The role of the age pension in your retirement plan, reviews the basic rules of the age pension and what retirees should take into account when considering pension entitlements in conjunction with their superannuation to meet their retirement spending needs.

Discussing the paper, Mr. Zahm emphasised the value of the age pension, and its importance in retirement.

“For many Australian retirees, the age pension is a meaningful portion of their retirement income and should be considered as part of the retirement planning process.

“If we assumed that the age pension did not exist, single and coupled retirees targeting the ASFA Comfortable Living standard would need roughly $400,000 or $700,000 respectively, in additional financial assets.

“Achieving financial security in retirement may be a universal goal, but there’s no universal way to get there. The right strategy for investors will be determined by their individual circumstances,” Mr Zahm concluded.

The new research papers can each be found on Vanguard Australia’s website.

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