Super must switch focus to retirement phase: Chalmers
With millions more about to join the over-65s and fewer relying on the age pension, outliving savings becomes a key risk, says the Treasurer.
The government wants to change the conversation around superannuation to focus on a key concern of retirees that they will outlive their savings.
A Treasury discussion paper released yesterday, Retirement Phase of Superannuation, highlighted the uncertainty over longevity risk and requested input on how to address the issue.
It said an emphasis on the accumulation phase of super had resulted in fund assets growing to $3.6 trillion, “the fourth largest” pool of retirement savings in the world.
The Treasurer said the system had reached a point where fewer people would rely on the age pension and superannuation would become the primary source of income for retirees.
“More Australians are looking to their super to play a greater role in providing for their retirement,” he said. “Over the next 10 years, the number of retirees with a super account will more than double, with an estimated 2.5 million Australians set to retire.”
“With Australians increasingly living longer, healthier lives, many retirees are naturally concerned about outliving their savings.”
As life expectancy increased and the number relying on super also grew, it threw some features of the system into sharp relief.
“The problem is most retirees do not have access to the appropriate products to help them maximise their super over their lifetime.”
“In fact, 84 per cent of retirement savings are held in account-based or allocated pensions, with only 3.5 per cent held in annuities. Unlike account-based pensions, annuities offer the option of receiving regular payments for life, regardless of how long a person lives.”
Uncertainty about expenses in the latter part of retirement, including aged care, could lead to retirees holding on to more of their super than they needed to, with around half of all retirees drawing down pensions at the minimum rate.
“Minimum drawdown rates are generic settings which are not designed for, and do not lead to, an optimal retirement income for all retirees,” the paper said.
“For many, withdrawing at the minimum leads to a sub-optimal income stream. Their income varies arbitrarily and increases throughout their retirement despite the tendency for retirees’ spending to fall as they age, notwithstanding costs such as increased health expenses.
“Better strategies could see them with a higher income that is smooth across their life or better reflects consumption patterns.”
The discussion paper said the retirement system was “inherently challenging to navigate”, with multiple income sources, the needs of partners and dependents to consider, along with the risks to the nest egg itself.
It raised three key areas for examination:
- Supporting members to navigate the retirement income system.
- Supporting funds to deliver better retirement income products and services.
- Making lifetime income products more accessible.
It said the retirement income covenant, in place since July last year, meant super trustees had an obligation to “formulate, review regularly and give effect to a retirement income strategy” with three objectives: maximising retirement income, managing risks to that income and maintaining access capital.
However, a recent review of the covenant found a “lack of progress and insufficient urgency” from funds, with deficient analysis and patchy responses.
The covenant also excluded SMSFs, despite 1.1 million members holding one-quarter of all super assets and the fact they faced the same complex risks and decisions. The paper raised the possibility that SMSFs would be included in the retirement income covenant.
The paper said potential policy responses included:
- Developing alternative drawdown profiles to present to members, aimed at achieving different objectives.
- Developing default solutions to offer to different sub-classes of members based on factors such as superannuation balance or expected needs.
- Developing alternative investment allocations for members in retirement.
The Treasurer said work on the retirement phase aligned with its move to enshrine an objective for super in legislation. Consultation on the discussion paper closes on 9 February 2024.
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