Solving the superannuation conundrum: generating income in retirement

Solving the superannuation conundrum

One of the greatest financial challenges facing Australia will be supporting the biggest ever generation of retirees over the coming decades.

National Sector Leader, Wealth Management

KPMG Australia

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The Financial System Inquiry (FSI) Report's Recommendation 11 seeks to address this issue. According to the report, at retirement superannuation assets are not being efficiently converted into retirement incomes, which has a huge impact on living standards as retirees run out of money.

According to the Federal Government’s Intergenerational Report of 2007, almost 25 percent of the population will be aged over 65 by the year 2050. Consequently, planning for retirement has become an urgent priority for a government that simply cannot afford to financially support such a huge number of retirees.

Don't overlook income

Few Australians are aware of the critical role that income generation plays in securing a comfortable retirement. In terms of individual preparedness for managing retirement, there are clear problems to navigate. According to the December 2012 Retirement Income Report – Investment Trends, 50 percent of Australians will outlive their super by 13 years. It's not really surprising given few Australians understand just how much they need in retirement. The Australian Securities and Investments Commission's MoneySmart website reveals that Australians need a lump sum of A$744,000 for a comfortable retirement1 and a weekly income of A$1,114.76.2

"The requirement for trustees to create a default retirement income product is a step in the right direction – but there's far more work to do before Australia has a robust financial framework for retirees. The availability of retirement product could be considered a necessary but not sufficient condition as it does not of itself require any change in consumer behaviour."
John Teer
National Sector Leader, Wealth Management

One framework, multiple solutions

It's clear that improving education on preparing for retirement is critical. But Recommendation 11 highlights the equally important imperative for Australia to encourage income generation by removing barriers to product development and encouraging the take-up of products that will support this, such as pooled longevity products.

In the first instance, this will require a real shift of focus for investors, financial advisers, product innovators and government alike. Over the last 5 years the key focus of retirement regime reviews has been on the accumulation phase and on the lump sum. Income has had very little attention. With the whole system weighted towards mandatory super and accumulating a cash pile, some key things will have to happen to shift the system towards income generation.

Key shift

The first key shift needs to be a move from a fund to employer (B2B) paradigm in accumulation to a fund to member (B2C) model as retirement income products are tailored for individual member outcomes.

To reach and engage members in the B2C retirement phase will require a far more holistic approach to process and information sharing. We cannot ignore the need for far better systems, processes and communication. This means a comprehensive retirement framework that delivers a real digital strategy and environment is a critical priority.

To be able to move a whole generation towards income production means we need a straight-through process where members can easily have a 'whole of retirement' view of their investments. This will create the 'bird's eye view' that so many retirees lack, and that will powerfully underscore the need for income. A better digital platform will also enable members to easily share additional financial information – such as spouse's assets – that may impact that 'whole of retirement' view.

There also needs to be a broader discussion about creating income while individuals are still in the accumulation phase, or the opportunity to be prepared will be lost. And given the clear tendency of Australian retirees to take their lump sum and run and no real framework for how to use it to create income or the products to help do so, it's time for government to step in.

The creation of a default retirement income product for fund trustees is a step in the right direction – but there's far more work to do before Australia has a robust financial framework for retirees. The pure availability of a product does not of itself require any change in consumer behaviour.

Broader discussion

There also needs to be a broader discussion about creating income while individuals are still in the accumulation phase, or the opportunity to be prepared will be lost. And given the clear tendency of Australian retirees to take their lump sum and run and no real framework for how to use it to create income or the products to help do so, it's time for government to step in.

The creation of a default retirement income product for fund trustees is a step in the right direction – but there's far more work to do before Australia has a robust financial framework for retirees. The pure availability of a product does not of itself require any change in consumer behaviour.

Taxing times

There's also a disconnect between Recommendation 11 and the reality of Australia's tax system that needs to be addressed. At the moment, our tax structure is not amenable to product structures that really assist retirees.

In the US, for example, there are tax incentives to invest in variable annuities at 55 and top them up until retirement at the age of 67. This enables pre-retirees to start generating income and thinking about income far earlier. We simply don’t have the tax structure to enable this kind of product development.

Similarly, long-term care is a mature product in the US with federally subsidised premiums, but because there’s no government support through tax incentives, this kind of retirement product simply cannot exist in Australia.

Survival of the fittest

While the key focus of Recommendation 11 is clearly on individual retirees, without a different approach to investing in the future – and specifically in income products – the very survival of many funds is also under question. As the age profiles of their investors changes, their profitability begins to decline as they remove lump sums but don't reinvest in income generating profits. So creating and offering income products will be a key business decision for funds going forward.

It's time for a mature retirement marketplace – and it's time for government and funds to collaborate towards that end. The FSI is a start, but really dealing with the financial realities of retirement will take a far more rigorous approach to transforming the tax, product and mindset barriers that currently exist.


1. Assumes couple, retiring at age 65 who will live to an average life expectancy of about 85 and desiring a comfortable lifestyle. ASIC Money Smart, August 2014.

2. Couple, comfortable lifestyle, ASIC MoneySmart 2014.

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