The shift from saving to spending

It’s 1991. The Wallabies have won their first Rugby World Cup. Paul Keating takes over from Bob Hawke as Prime Minister and Treasurer John Kerin announces that from 1 July 1992, under a new system to be known as the Superannuation Guarantee (SG), employers will be required to make superannuation contributions on behalf of their employees.

But a lot has changed since 1992, and the superannuation system is now starting to show signs that it is not accommodating the fact we are living on average nine years longer than the system was originally designed for.

“Our super system is more mature than most people realise. It’s doing the first part of its job, allowing people to accumulate assets through their working lives, with typical household super wealth at retirement in the $350,000–$500,000[1] range and increasing,” said Challenger Chairman, Retirement Income, Jeremy Cooper.

“This wealth was accumulated to provide income in retirement, but the system is not yet set up to do this next phase successfully…”

And while our superannuation system is the envy of many countries, ranking at number three in the world[2], the Government has recognised the need to modernise the system for our ageing population.

What are the government proposals?
In the 2018 Federal Budget, the Government proposed that superannuation funds will now be required to develop retirement income strategies for their members and offer Comprehensive Income Products for Retirement (CIPRs) that will provide their members with income for life, no matter how long they live.

Subsequently, the Government has confirmed that superannuation funds need to ensure these products are designed in such a way that their members will continue to broadly receive the same level of income from the product, even if the member lives beyond 100.

Further, the Government stated that allocating 100 per cent of a member’s superannuation savings to an account-based pension (a common way of investing for retirees), would not meet the definition of a CIPR as these products are generally not designed to provide income for life.

Why do we need these proposals?
Entering retirement brings with it many considerations not encountered during our working lives. Spending your savings in retirement is a fundamentally different proposition from when you are accumulating those savings. These new government proposals seek to help address these considerations.

What are these retirement considerations?
There are four major retirement income considerations. These are longevity risk, sequencing risk, inflation and cognitive decline.

Longevity risk
All retirees are exposed to longevity risk, the risk that they will outlive their savings. Longevity risk also has another dimension – the uncertainty of how long people will live. Put simply, the longer you live, the longer you are likely to live. A 65-year old female has only a five per cent chance of dying in the year of her life expectancy (currently 90[3]). This makes planning around retirement income needs all the more complicated.

Sequencing risk
Sequencing risk is the risk that the order and timing of your investment returns is unfavourable, resulting in less money for retirement.

When drawing on a portfolio, the sequence of returns matters. A retiree’s ability to recover from poor investment returns (or take advantage of lower market prices) is generally limited because strategies available in the accumulation phase (take more risk, keep working and contribute more) are generally not available. For more information on sequencing risk, visit

The risk that over time, inflation will increase the cost of living can present a significant risk over a lengthy retirement. Recent low inflation rates, following an extended period of inflation at ‘average’ rates, do not make it any less likely that inflation could increase at some stage over the next two to three decades.

Cognitive decline
Sound retirement income planning and advice involves the recognition that there is a likelihood that at some point along the way, one or both members of a retired couple may suffer cognitive impairment or dementia. Some researchers estimate that there are more than 400,000 Australians currently living with dementia and this is projected to double over the next 20 years[4].

What’s next?
The CIPR proposals are not proposed to come into effect until 1 July 2020, with the development of retirement income products to meet these requirements set to accelerate in the meantime.

The development of new retirement income products, such as deferred lifetime annuities where the regular payments do not start immediately, will give retirees more choice and flexibility and are an essential building block for CIPRs.

Mr Cooper says the “government proposals for a retirement income framework, including comprehensive income products for retirement (CIPRs), are a big step forward. They will be an enhancement, not a disruptive change.”

To find out more about the 2018 Federal Budget and how it could affect you, read the Challenger Federal Budget Report 2018-19.

Disclaimer: All content on YourLifeChoices’ website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

[1] ABS Survey of Income and Housing 2015-16.

[2]  Mercer’s Melbourne Global Pension Index 2017

[3] ALT2010-12 with 25-year mortality improvements from the Australian Government Actuary

[3] ABS Survey of Income and Housing 2015-16.

[3]  Mercer’s Melbourne Global Pension Index 2017

[3]  ALT2010-12 with 25-year mortality improvements from the Australian Government Actuary

[4] Brown, Hansnata, and La, 2017 ‘Economic cost of dementia in Australia 2016-2056’ Alzheimer’s Australia. Institute for Governance and Policy Analysis, University of Canberra

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