Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 329

Designing a world-class post-retirement system

In September 2019, Treasurer Josh Frydenberg announced the Retirement Income Review, with a public consultation paper to be released in November 2019 and a final report to the Government by June 2020. One of the three panel members is Dr Deborah Ralston, who in her previous roles, has written several articles for Firstlinks.

As a general guide to what Dr Ralston may be thinking, we republish an article from 2013. At the time, she was Executive Director of the Australian Centre for Financial Studies (ACFS), which published the Pension Index in conjunction with Mercer. We have often republished past articles by leading authors, accepting that their thoughts may have developed further.

ACFS is now the Monash Centre for Financial Studies, which is part of Monash Business School. Coincidentally, the 2019 Melbourne Mercer Global Pension Index has just been released, linked here, ranking Australia third in the world, behind only The Netherlands and Denmark, as we were six years ago.

 

The release of the latest Melbourne Mercer Global Pension Index earlier this month once again confirmed Australia as having a world class retirement system, coming in third out of 20 countries behind Denmark and The Netherlands.

But read past the rankings in this comprehensive 74-page report and there is a strong warning about the risks facing Australian retirees in the post-retirement or decumulation phase. This is an area that was largely overlooked as our system evolved from employer-sponsored, defined benefit schemes to defined contribution arrangements. To date, most of the focus has been on the accumulation phase of superannuation, but that’s changing as more baby boomers enter retirement.

Onus has shifted to the individual

In the past, employees lucky enough to be in a defined benefit scheme (and the majority weren’t) were guaranteed a retirement pension traditionally linked to their years of service and salary. But with the advent of compulsory superannuation in 1992 and defined contribution schemes, the onus shifted to the individual to be responsible for their retirement income.

What do these retirees seek? The report identifies the ongoing financial needs of retirees as a 'trilemma' which includes:

  • good investment returns and investment choice

  • protection from myriad risks – including investment, sequencing (poor returns immediately before or after retirement), longevity, inflation, expenditure and time (or interest rate), counterparty and liquidity (remember, behavioural finance risk shows individuals are far more sensitive to losses than gains, a characteristic particularly pertinent to retirees)

  • access to some capital during retirement to cover unexpected expenditures, such as medical.

Quite obviously, this combination of different needs facing individuals over the course of their retirement means there is no ideal solution. Even an indexed annuity will not meet every individual’s varying financial needs during their different stages of retirement.

This is indeed a complex problem and the best solution for any individual will depend on a range of factors including their total wealth, health and likely longevity, required standard of living, access to the age pension, etc. At the same time, the needs of individuals must be balanced with the public interest so that clear incentives are in place to encourage personal responsibility and avoid over-reliance on the public purse.

Features of a world-class portfolio for retirees

For the industry, legislators and administrators, how to solve the trilemma will be the issue in the coming years. So what’s required? The industry needs to provide the right products for an income stream – a portfolio of products that meet individual needs. This portfolio should include features such as:

  • limited access to the lump sum on retirement
  • some access to capital to allow to meet unexpected expenses
  • in the early stages of retirement, an income product to provide adequacy and security
  • a pooled insurance-type product to provide longevity protection for later years
  • a structure that allows for phased retirement as people continue to work part time.

People need to be educated about retirement, in particular the need to focus on consumption and not investment; it is a quite different phase to the accumulation stage. Research shows that people are typically happier in retirement, but in the immediate years preceding it worry about what will happen and, significantly, often fail to plan for it. The onus has to be on superannuation funds to invest more resources in educating their members about retirement – to literally change their mindsets.

For this to happen the government of the day has to articulate the main objectives of the retirement income system (including the role of the pension). It’s an issue that will encompass social, economic and tax policies and will require strong leadership, coupled with an energetic public debate, to ensure we get the policy architecture right.

Ideally, while the issue can’t be ignored, any policy changes regarding post-retirement income for DC funds will involve an inclusive public debate and a gradual introduction to allow those affected to adjust their expectations and make long-term plans.

Australia has an enormous opportunity to build a world-class decumulation system that gives individuals security and flexibility in retirement. But it will not be easy. The media furore and public angst that preceded the Labor Government’s April 5 statement this year when changes to the tax laws governing superannuation were being mooted highlights the political difficulties. But the longer we delay this debate, the harder it will get – politically, socially and economically.

 

At the time of writing this article in 2013, Professor Deborah Ralston was Executive Director of the Australian Centre for Financial Studies (now Monash Centre for Financial Studies, which is part of Monash Business School). It publishes the Global Pension Index in conjunction with Mercer. Prior to her appointment on the panel for the Retirement Income Review, Dr Ralston was Chair of the SMSF Association.

 

RELATED ARTICLES

Designing a world-class post-retirement system

Behavioural reasons why we ignore life annuities

In super, the Danes are great, Australia a close third

banner

Most viewed in recent weeks

Have the rules of retirement investing changed?

In retirement, we still want to reduce stock volatility while generating cash flows. The two needs have not changed, but the reward expected in the old days from interest payments has gone. What should we do?

18 Aussie names for your watchlist

A Morningstar stock screener reveals a cross-section of companies with competitive advantages that are trading at material discounts to estimated value. This is a list of 18 highly-rated names worth watching.

Hamish Douglass on what really matters

Questions on the stock market/economy disconnect, how to focus long term, technology's growing role, income in a low-rate world, Modern Monetary Theory and endless debt and the tooth fairy.

Buffett and his warning about 'virtually certain' earnings

While many investors are happy to invest in any online companies, Warren Buffett focusses more on the quality of future growth, buying companies whose earnings are 'virtually certain' in 10 or 20 years from now.

Kate Howitt: investing lessons and avoiding the PIPO trade

Kate Howitt identifies the stocks she likes and the disappointments, gives context to the increasing role of retail investors, and explains why the market is more of a 'voting not weighing' machine than ever before.

Welcome to Firstlinks Edition 379

It is trite and obvious to say the future is uncertain, and while COVID-19 brings extra risks, markets are always unpredictable. However, investing conditions are now more difficult than ever, mainly because the defensive options for portfolios produce little income. We explore whether investing rules have changed with new input from Howard Marks.

  • 15 October 2020

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 381

There is a popular belief that retail investors do not even achieve index returns due to poor timing of investing and selling decisions. The theory is that they buy after markets rise as confidence grows, then sell in panic when markets fall, and miss the recovery. This 'buy high sell low' tendency loses the advantages of long-term investing and riding out the selloffs. But the evidence for this belief is not convincing.

  • 29 October 2020
Investment strategies

Gemma Dale: three ways 'retail' is not the dumb money

There is a popular view that retail investors panic when markets fall, but in the recent COVID selloff, they were waiting in cash for buying opportunities. What's equally interesting is the stocks they bought.

Investment strategies

Unlucky for some: 13 investment risks to check

Risk isn’t something to be avoided altogether. To achieve returns beyond the government bond rate, some level of risk must be accepted. Assessing which risks to take and calibrating them is the investor's challenge.

Responsible investing

Four reasons ESG investing continues to grow

Although Australian investors are among the most ESG-aware in the world, with the vast majority wanting responsible and ethical investments, there are still some misconceptions to dispel.

Shares

Why caution is needed in Aussie small companies

Over the last 20 years, smaller Australian listed companies have outperformed larger companies but with greater volatility. Following a strong run in the last six months, the smaller end is looking expensive.

Financial planning

The value of financial advice amid rise of retail investors

Financial advice has moved well beyond simply recommending investments, with five major components to quality advice. Helping clients avoid potentially disastrous mistakes is often underestimated.

Economy

The 2020 US presidential elections

The US is days away from a presidential election with major repercussions for economic policy and investments in the US and the world. Views from First Sentier Investors and BNP Paribas Asset Management.

SMSF strategies

Can your SMSF buy a retirement home for you now?

It sounds appealing to acquire a property now through your SMSF with the hope of residing in the property once you retire, but there are issues and costs to check that may vary by state.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.