How your super is treated once you die has been scrutinised by the Actuaries Institute in its Retirement Income Review submission, along with a number of other shortfalls and inconsistencies in Australia’s retirement system.
The institute’s submission notes that when a person dies, the residual balance of his or her superannuation averages around one quarter to one third of the starting balance.
“This leakage to beneficiaries is an inefficiency of our superannuation system,” the institute wrote.
“Retirees can potentially achieve a higher standard of living if their entire superannuation balance is used to provide retirement income.”
According to the institute, there is a “real risk” that the Age Pension combined with an individual’s superannuation savings may not be sufficient to provide an adequate retirement income due to a combination of factors.
“These could include low contributions, insufficient investment returns, a reluctance to spend or because people live too long, outlasting their money,” it says.
Therefore, the group advocates the use of pooled products to offset longevity risk and ensure income for life. But such products are largely missing from the current retirement environment.
“At retirement, superannuation assets are not efficiently converted into retirement incomes due to a lack of risk pooling and over-reliance on account-based pensions,” it wrote.
The institute explains the problems of not pooling longevity risk.
“Consider 100 females who all retire at the same time at age 65. They all want a superannuation income of $10,000 per annum and to feel approximately certain that their savings can last as long as they live,” it says.
According to the institute, each female has a six per cent chance of living to 100. If they each want to be 94 per cent confident that their income can last for life, they need to ensure their income will last to age 100.
Assuming a zero per cent return on any investments, each would need $350,000 in savings at age 65. That’s $35,000,000 for the group.
Using Australian Life Tables (2015-17), 86 of the 100 females would live to age 80, 75 would live to age 85, 55 would live to age 90 and 26 would live to age 95.
So, if they work together as a group and pool their resources, each of the 100 females would need only $249,300 at age 65; therefore, to ensure their savings lasted a lifetime, the pool would only need to be $24,930,000.”
According to this and other modelling, retirement incomes could increase by around 15 to 30 per cent by combining an account-based pension with products that insure longevity risk, allowing retirees to “spend with confidence”.
“Pooling has the same effect as each person saving an additional 40 per cent in retirement savings,” says the institute.
However, it does acknowledge that this is simplified example of pooling and that, along with basis risk and the chance that lifetimes are shorter than assumed, there are downsides to such thinking.
“The downside is that when they invest, they are fully committing their savings towards the need for lifetime income.”
The institute says Australians need to develop a better understanding of retirement income policies and how much money they can expect to get in retirement.
“There is little evidence on the adequacy of retirement income in Australia because of a lack of good quality data,” the institute says. “Australians tend to underspend in retirement for fear they will outlive their money. Some retirees are net savers. But a lack of data means it is difficult to know if retirees have an adequate level of income.”
What do you think of the concept of pooling for longevity?
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