Plan to boost retirement income by 30% and make funding last longer

Should compulsory longevity risk management be added to all super products?

man adding up pile of coins on a calculator

The federal government may soon force super funds to change their ways in order to provide more retirement income that lasts longer, says an academic. And he believes funds need to do more to protect and even bolster super savings.

Academic actuary and associate professor at UNSW business school, Anthony Asher, has released a paper, Developing the Retirement Income Framework, which proposes that compulsory longevity risk management be added to all superannuation products.

Mr Asher says products that provide longevity risk cover could potentially increase retirement income by as much as 15 to 30 per cent and retirees would enjoy bigger incomes without running out of money.

“It seems clear that more direct government intervention may be required – just like the introduction of the Superannuation Guarantee, MySuper and even account-based pensions,” he said.

“While not likely to be popular, there is potentially a case for compulsory partial allocation of some members’ superannuation to lifetime income stream products in retirement.”

His modelling shows such products could increase incomes by 15 to 30 per cent “by using an appropriate allocation to suitable lifetime income streams”, but he says “draconian” laws currently stop super funds from giving members the advice they need to make this happen.

Mr Asher said funds should offer longevity protection products for all or part of a member’s balance and be able to advise on the pros and cons of such a scheme before paying any benefits on retirement.

Without such products, some retirees would either leave significant bequests or run out of money in later life, he said. Such products could also aid a “particular need to protect longer living partners with lower personal balances”.

“Members and their beneficiaries are prejudiced by the absence of options to obtain suitable income stream products, and trustees should be at risk if they fail to make such an option salient,” he said.

More efficient management of longevity risk could ensure higher living standards in retirement and eliminate the stress of whether or not savings will last, he added. It would also help the superannuation system better align with its objectives.

Mr Asher said most retirees have five basic requirements from their retirement savings: a high income, an income that lasts (including for a spouse), a stable annual income, access to enough capital, and a desire to leave something behind for children and family.

He said trustees should be able to offer longevity risk-style products that meet those needs and provide low-cost financial advice to help improve the living standards of older Australians.

This could work in a similar fashion to income protection insurance and life insurance products embedded in super products.

The paper also addresses the need to plan for the third stage of retirement.

“Despite the uncertainties around a retiree’s future aged care needs at the start of retirement, a choice of retirement income products can ensure income and/or a lump sum would be available to pay for fees should the need arise. This choice would be imprecise but could go some way to preparing the retiree for meeting future aged care fees and home support,” it said.

Mr Asher admits that further work needs to be done to “find solutions which assist retirees in planning for aged care at the start of retirement, but we would suggest that the requirement to think about a retiree’s ability to meet future aged care fees should be part of the member’s retirement income objectives considered as part of the retirement covenant”.

What do you think of this idea? Would you like to know that whatever superannuation savings you have would last your lifetime, or would you rather have total control over your money? What would you say if CIPRs became compulsory?

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    COMMENTS

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    Sundays
    13th Jul 2020
    10:49am
    The best schemes to provide lifetime income and a reversionary benefit to your spouse were the old Defined Benefit Schemes. Now deemed too expensive due to increased life expectancy and protection against fluctuating markets.
    Jacka
    13th Jul 2020
    11:35am
    I've always found when somebody refers to a law as draconian it simply means it doesn't suit their purpose or situation. I believe, if we had most of our old laws, that were referred to as draconian and replaced, the world would be a better place. As stated, a defined benefit account was by far the best investment a person could ever make. Unfortunately, these days unsustainable, due to stock market fluctuations excetera. Once again, superannuation is your money, money you've worked hard for over a life time and you should be able to spend it, save it, waste it, in any way you wish, without government intervention. Not to sound pompous but if you don't agree with that statement there's something very wrong with you. Have a good day all, Cheers Jacka
    Eddy
    13th Jul 2020
    2:47pm
    Do not entirely agree with you Jacka, yes it is your money but substantial tax concessions have allowed one to accumulate the amount of superannuation therefore it may be appropriate for the supplier of those tax concessions, ie the taxpayers, to have some say in how that money was dispersed. I have known of people who have used their superannuation in ways that did not relieve the taxpayers of the liability of paying to them the age pension, particularly those who retired at around age 55 (the old preservation age) and spent their superannuation having a good time so at age 65 (the old pension age) had so little money left they qualified for the full age pension.
    Jacka, I welcome Government intervention, it keeps me safe and my assets secure and, I suspect, so do you as long as it is to your advantage.
    KSS
    13th Jul 2020
    3:22pm
    Jacka, if you were only refering to monies saved and held outside of superannuation, then I would agree, it is your money to do with as you wish, no questions asked.

    However, super is very different. The whole purpose of super is to support someone in their retirement so that the reliance on a Government provided income would be reduced. To that end, yes the money is yours but is has a very specific purpose and should only be allowed to be used for that purpose.

    Now whether there should be legislation that enforces the purchase of an annuity or other product for some or all of the funds or some other way of ensuring that the money is neither 'wasted' nor gifted (even after death), is a question that clearly does need to be discussed.
    Mariner
    13th Jul 2020
    3:39pm
    If schemes like the proposed one come in the younger generation will be even less inclined to save for super. I was afraid of that when at 65 I took the lot out. Do not get much return on it but it supplements my part pension and should I want to I can spend it the way I want to.
    Skeeta
    13th Jul 2020
    12:26pm
    I'm confused as to what Mr Asher is talking about. Maybe you could give some examples in laymans talk. I'm sure I'm not the only one to be mystified.
    Skeeta
    Greg
    13th Jul 2020
    4:02pm
    He's suggesting that our super monies (either some or all) be used to purchase an annuity.

    Through life you pay into a superannuation fund.

    At some point after your preservation age (and most commonly at pension age) you change your super fund money into an Account Based Pension where you get a regular payment from, basically drawing down on that, what was, your super money.

    Some people buy an annuity when they retire, ie: $500,000 in super and you buy the annuity with that money, the company you buy it from guarantees to pay you X dollars for a certain time (like 20 years) or for life. Some people only use part of that super, say $200,000 to buy an annuity and keep the $300,000 in an Account Based Pension. The annuity allows a certainty about income.

    Mr Asher is saying that it could be made mandatory to buy an annuity with some or all of your super money. This way you have a certainty about income, X dollars from the annuity and Z dollars from the Aged Pension.

    Hope that helps and made sense to you. I'm sure others will fill in the blanks.
    sunnyOz
    13th Jul 2020
    12:30pm
    One way to assist would be to allow retired seniors to continue adding to their superannuation if they want to. At least up to their asset/income limit.
    It is discriminatory that you can do this, only if you have some type of job. The govt has just brought in a rule where people aged 65 and 66 can add to super - I miss out by a few months. Again - why the discrimination?
    Buggsie
    13th Jul 2020
    12:51pm
    I have a defined benefit scheme and continue to draw an indexed pension after 20 years in retirement - very expensive for the state govt but part of my employment benefits during a 40 year public service career. My wife had an allocated pension from a retail fund but we cashed it in due to very poor returns and high fees. Most people with allocated or account based pensions are simply getting their own money paid back to them, often in annual amounts that don't suit their needs. We cashed my wife's super out and are now investing and spending the money as we see fit - as is proper, it is our money after all. I don't agree that someone's super should be directed by govt or fund regulation into any product other than the one or ones that the owners of that super desire. Enough is enough - super is already over regulated in Australia and often does not represent a good investment strategy as we age.
    Tanker
    13th Jul 2020
    3:15pm
    Buggsie you are one of the fortunate ones to have had a Defined Benefits super as these were nearly all Government schemes. Most of us were not that lucky and do the best we can with what we have ended up.
    We have an "Income Stream" from our industry fund and given the very modest amount we had at retirement it has done us nicely.
    We do live modestly but have not tried to leave much to our children when we depart this mortal coil so have at times withdrawn cash amounts as required.
    We have also downsized appropriately and have enjoyed overseas trips as well as traveled Australia.
    To many people are expecting to live purely off the interest from their super without touching the Capital. I can only ask why?
    Farside
    14th Jul 2020
    12:31am
    Tanker, you may not be in a defined benefits scheme but you have still played your hand well and enjoyed your retirement. Good question why people expect to live purely off the interest from their super without spending down their Capital. I hope you find the answers persuasive.
    Cheezil61
    13th Jul 2020
    12:54pm
    Our money & we should be able to access & do what we please with it,not be controlled by big brother like we are with just about everything in life these days! I'm sure that by the time I need to access my super (in around 8yrs time) the govt (or someone else) will have found a way to get their greedy mitts on all or most of our super balances somehow! I have only put money in super to minimize tax (forced by big brother again) - not that there is much of it but it doesn't earn much interest sitting under our mattresses (as Malcolm Fraser once suggested) but at least it might be safer (until burglars get in- but they probs deserve/need it more than the other robbers called govt/banks/financial istitutions/super companies etc!)
    You are just not meant to get your head above water any more & have to fight hard to avoid being scammed or robbed (including legally) by so many different places!
    Horace Cope
    13th Jul 2020
    12:58pm
    I tend to ignore what academic actuaries and associate professors have to say. Their theories have not been tested, they are very quick to spend other peoples' money and a lot of them spend too much of their life cocooned away from the real world.
    mike
    13th Jul 2020
    1:54pm
    Could you explain this more clearly
    Skeeta
    13th Jul 2020
    4:46pm
    Thanks for the explanation Greg. It makes sense now.
    Skeeta
    GrayComputing
    13th Jul 2020
    6:33pm
    We have earned an untested pension by our life of work and supporting workers.
    No more asset tests for pensions ever again.

    We have earned an untested pension by our life of work and supporting workers.
    Tell your politician how you will vote if they do not want to make this into law.
    Ring then today.
    ph
    13th Jul 2020
    6:51pm
    None of this would be needed if all citizens were eligible for the government pension, and all monies over that be taxed appropriately. The costs for annuities are outrageous, IMHO


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