Aussie super funds need to shift their focus: review

aussie super funds urged to report progress

Australia’s $3.4 trillion superannuation industry is one of the best in the world – ranked sixth for a second year running in a global review. But … concerns about adequacy are dragging it down.

Those same concerns are keeping many older Australians awake at night.

David Knox, senior partner at Mercer and lead author of the Mercer CFA Institute Global Pension Index, says: “What we’re also finding with increased education in many countries, is people are entering the workforce a bit later.

“You can’t enter the workforce later, retire at the same age and live longer. Something has to give.”

Read: Putting ‘how much do you need’ numbers to the test

That ‘something’ is retirement security– clearly reflected in the YourLifeChoices 2022 Older Australians Insights Survey. The survey is yet to close (you can complete it here), but more than half of the 4000 respondents so far say that don’t believe they have – or will have – enough funds to cover their retirement.

Dr Knox says our superannuation system ranked well – it received a B+ with Israel, Finland and Norway – but required substantial change to improve retirement outcomes.

It scored 86.8 out of 100 for integrity and 77.2 for sustainability, but only 70.2 for adequacy, which measures how much income the system ends up providing retirees in retirement.

How to boost confidence

The problem is in the decumulation phase, he says, with not enough focus on giving members confidence in retirement.

“We’ve done well in accumulating our assets through compulsory superannuation, what we’re now doing is needing to focus on retirement income,” Dr Knox says.

“We’ve had the Retirement Income Covenant legislation passed in February and super funds have had to develop their strategy and publish it from July 1. That is a good step, but it is only step one.”

Read: Five things you didn’t know about annuities

Dr Knox wants the government to require funds to show retirement income projections in members’ annual statements.

“That [would be] a very helpful development, because instead of focusing on the accumulation, let’s focus on our future income,” he says.

“It’s time to change the orientation, the focus and even the language, so that retirees start spending in a confident way.”

And spending in retirement is a problem area.

Spending in retirement

An AMP report finds that three in five working Australians fear they will outlive their retirement savings and almost half don’t know how much money they’ll have or need at retirement. Despite that, most believe they’ll have a $200,000 shortfall.

That fear is affecting retirees’ quality of life, with millions lacking the confidence to spend their hard-earned nest eggs, the report concludes. Treasury’s Retirement Income Review drove this home, noting that a significant portion of the population passes away with as much as 90 per cent of their super savings untouched.

Read: Traps to avoid when retiring overseas

The Mercer pension index is a study of global pension systems. It benchmarks 44 retirement income systems around the world, highlighting strengths and shortcomings in each and suggesting possible areas of reform.

Recommendations included:

  • Increase the coverage of employees, such as ‘non-standard’ workers and the self-employed, given that many will not save for the future without being compelled to.
  • Increase the pension age and/or retirement age to reflect increasing life expectancy.
  • Promote higher labour force participation at older ages to increase retirement savings and limit the number of years in retirement.
  • Encourage higher levels of private saving, both within and beyond the pension expectations of many workers.
  • Introduce measures to reduce the gender pension gap and those that exist for minority groups in many retirement income systems.
  • Reduce leakage from the retirement savings system prior to retirement, thereby ensuring that the funds saved, often with associated taxation support, are used for retirement income.
  • Improve the governance of private pension plans and introduce greater transparency to improve the confidence of plan members.

“What we’re really talking about is the living standards of retirees,” says Dr Knox. “It’s much better to tackle this now than wait for that debate to happen in the future.”

Iceland, the Netherlands and Denmark topped the index for the second consecutive year, each earning an A for their sustainable and well-government pension systems.

All three countries provide generous minimum age pensions as a percentage of the average wage. “They have got both pillars working well, they have got a generous minimum pension and most people are in a private pension system,” says Dr Knox.

Are you planning to work for longer due to fears that you do not have enough superannuation? Would you like super funds to provide annual estimates on how much super you will have at retirement age? Why not share your thoughts in the comments section below?

Written by Janelle Ward

Energetic and skilled editor and writer with expert knowledge of retirement, retirement income, superannuation and retirement planning.

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