As Australia's population ages, issues have been recognised in the superannuation and pension systems. Anthony Asher gives an update of what the Retirement Incomes Working Group (RIWG) is doing to make positive changes to the current systems and guide future product design.
Australia’s population is ageing. By 2054-2055, the number of Australians aged 65 and over will more than double, and one in every 1,000 people will be aged over 100. Driven by this issue, both Government and Industry are working to get the settings of Australia’s superannuation and aged pension systems right in the retirement phase. The RIWG is a working group of the LIWMPC whose purpose is to contribute to the development of better post-retirement income products and advice in Australia. Now that the Superannuation Industry Supervision (SIS) Regulations permit the introduction of more innovative income streams, including deferred annuities, the focus of work to improve post-retirement conditions has moved to a fairer and more consistent treatment of purchased income streams under the Age Pension Asset Test. Treasury have also issued a position paper which sets out a framework for a retirement income covenant for superannuation funds.
On the Asset Test, John De Ravin and I presented a paper at the Financial Services Forum (FSF) arguing that the current test is complicated and unfair, and should be abolished. The fiscal cost of the Age Pension could be reduced by including the house in a revised Income Test, with a reverse mortgage scheme providing cash flow to those with valuable houses and little income, who might not qualify for any Age Pension. Independently, both David Knox and Michael Rice made similar suggestions in presentations to the Forum, and the Institute is preparing a green paper combining these ideas.
On encouraging superannuation trustees to develop a retirement income strategy, the RIWG has focused on research that throws light on the current behaviour of pensioners and their financial planners. John De Ravin, Paul Scully, Jim Hennington and David Orford presented another paper to the FSF having researched how 2,500 planners formulate retirement income advice. They found that planners seem to assume an arbitrary age of death (such as 90 or 25 years from retirement) and where they used mortality rates, they did not include projected improvements. It seems that this advice could be improved by indicating the likely range of age at death – particularly for the last survivor of a couple in good health. Many planners also show “a heavy reliance on Risk Profiling Questionnaires despite growing sentiment that they only go part of the way to determining an appropriate asset mix.” Advisors are clearly reliant on software providers, and the RIWG is considering how actuaries might contribute in this area.
The RIWG has also worked with Strategic Insights to collect data on the actual drawdown behaviour of account based pensioners. The outcome of this research is a longitudinal study of the strategies used by retirees, which has been analysed by Igor Balnozan in his UNSW honours thesis. (The data he used was for 44,000 “allocated pensions” – roughly divided between those started in 2004 and after 2009). This research has provided two insights that can contribute to the future development of post retirement strategies.
- Firstly, 28% of the sample showed a strong tendency for drawing level dollar amounts throughout their retirement, with a median amount of $5,800 per annum, suggesting that there is demand for relatively small life annuities.
- Secondly, only 35% of the sample made at least one ad hoc drawdown while under observation. Ad hoc withdrawal accounted for 30% of the money withdrawn, but most of it was within the first five years of retirement, suggesting that it is used for planned expenses while retirees are in the active phase of retirement. More work is required to understand these patterns.
Given that many companies and trustees are considering the development of innovative income streams and deferred annuities, the RIWG is working on an Information Note setting out the issues that need to be considered for a well-designed product. A first draft was considered at an Insight’s session in December 2017, and a revised version should soon be available on the Institute website.
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