Deloitte says we must do better for retiring Australians
Adequacy and the Australian Superannuation System- a Point of ViewDOWNLOAD
25 June 2014: Unless people work longer, or contribute more, their superannuation accumulation will, in many cases, be inadequate to support them in retirement. A new report from Deloitte Actuaries & Consultants looks at what the superannuation industry, Government and members can do to secure a better financial outcome for retiring Australians.
Special Superannuation Adviser Wayne Walker and a primary author of the Deloitte report said: “The system in its current form will not deliver adequacy. It must change. From government we need policy settings that build trust, foster greater efficiency and competition, and sensibly apply concessions across the working lifetime of individuals.
“The industry needs to develop products that assist individuals to better manage investment, inflation and longevity risk, and support those products by providing members with knowledge to make informed decisions. And finally, individual Australians must stand up and become involved in their superannuation so that they get the most out of the system and prepare themselves for their retirement.
“The bottom line is that if we leave the system in its current form, members will need to contribute more - much more - to achieve even a modest level of financial security in retirement.”
Deloitte calculates that each person would need to contribute an extra 5.5% to 7.5% of salary to superannuation each year of their working life, in addition to the 12% superannuation guarantee charge, to self-finance a comfortable retirement, and not need to rely on a government financed pension with its increasingly restrictive eligibility conditions.
Walker said: “More fundamentally, we must continue to encourage and support employment beyond age 65. And even then we need the industry to innovate and help members better manage the many risks they are being asked to bear. A coordinated effort from Government and the industry is essential.”
The Association of Superannuation Funds of Australia (ASFA) benchmarks the amount of income Australians require to enjoy a modest lifestyle in retirement at age 65. Deloitte estimates the lump sum needed to produce a modest income in retirement as $340,000 for a man and $370,000 for a woman (due to average longer life). The lump sums for a comfortable lifestyle are much greater - $610,000 for men and $690,000 for women.
Average account balances as at June 2013 are at best a third of what is required.
|Amounts needed at age 65 (2014 dollars)||Average account balances – June 2013|
|Modest lifestyle||$340,000||$370,000||Age: 60 - 65||$114,000||$94,000|
|Comfortable Lifestyle||$610,000||$680,000||Age: 66+||$151,000||$133,000|
Source: Deloitte Actuaries & Consultants | APRA | ASFA
Walker explained that although these numbers may seem large, in context, the modest lifestyle amounts deliver an income of about $ 450 per week for single retirees, with at least 80% of this earmarked for essentials, including food, utilities, clothing, transport, health, and home maintenance. In consequence little is left for leisure. The comfortable lifestyle is set at $813 per week, leaving just over a quarter of these funds available for leisure.
Walker said: “It certainly does not allow for an extravagant or luxurious lifestyle. The fact that ASFA income standards presume that the retiree owns his or her home outright and is in good health is also often overlooked.”
In 2013 the Deloitte Dynamics of Superannuation research showed that even in 20 years’ time, at least 75% of retirees will still receive all or part of the age pension under current eligibility.
Source: APRA - Deloitte Actuaries & Consultants 2014 Adequacy POV
The situation will be compounded by the aging population, with the Australian Bureau of Statistics calculating that the number of retirees and pre-retirees is set to grow from 6.2 million to 7.9 million over the next 10 years. Therefore, the economic importance of this group will continue to increase.
Financial advice is a very important element of Deloitte’s focus as to how the three main groups – Industry, Government and members - can better manage the shortfall between adequacy and availability of funds in retirement.
Australians aged over 55 now account for two-thirds of all financial planning clients, as well as four out of every five dollars under advice. The quality of financial advice given to this group therefore is very much in the spotlight. How advisers advise on managing lump sums for instance, and from the Government perspective, in addition to the proposed changes to the Future of Financial Advice legislation, advice will no doubt garner significant focus in the 2014 Murray Financial Systems Inquiry.
Walker points out that most Australians do not receive financial advice until too late , with planners having tended to target those with the capacity to pay, generally with the larger benefits or assets, as well as those approaching retirement.
“However things are changing,” he says. “Super funds are now much more active in offering advice. And the concepts of limited and intra-fund advice hold out the prospect of more cost effective advice for many more Australians considering the level of contributions, appropriate investment options, amount of insurance, etc. Adviser groups, including those operated within superannuation funds are also being innovative with advice in Australia being ‘digitally disrupted’ as new ways are being developed to deliver advice to Australians in almost real time and at minimal incremental cost.”
“But is it too little, too late?” Walker asks.
Deloitte Superannuation leader Russell Mason said that Australia needs to make better use of deferred and reversionary annuities given our focus on lump sums.
He said: “A lump sum does not generate a guaranteed income throughout a retirement of uncertain length. In fact delivering lump sum benefits out of the superannuation system actually encourages Australians to dispose of their lump sum in a way that will increase their ability to access the aged pension.
“Our research shows that if the superannuation system produced a lump sum sufficient to generate a comfortable income for each person over their expected lifetime, we would need much more than the $7.6 trillion that we estimate will be in 2033.
“As is evident, health and aged care costs can rapidly eat into remaining savings resulting in a large, increasing, burden on the public purse as Australians outlive their savings.”
The Deloitte Point of View calls out the need to place some limit on the contributions that attract a tax deduction. “But the limits need to make sense,” says Mason.
“There have been many different regimes for limiting tax-deductible superannuation contributions in the past which have created uncertainty, inequity and discouraged retirement savings. Australians have tried to navigate multiple Reasonable Benefit Limits, specific contribution limits with some dependence on age, surcharges, and – most recently – on/off again indexation of the limits.
“The limits are now assessed year by year, with no scope for claw back to compensate for periods out of the workforce – continuing to create the gender divide - or for different lifecycle stages.
“There is limited and inadequate scope to top up super in the years approaching retirement to finance a comfortable lifestyle,” Mason added.
Walker adds: “In the current system, if you fall behind, then you are left behind.”
He says as people approach retirement and come to face with the grim financial reality that it represents, their ability to contribute and to make up for the lack of past contributions is effectively hamstrung by the annual limits imposed by the Federal Government. It therefore makes sense to recognise this and recast legislated contribution limits in a way that reflects the reality for most Australians.
Lifetime contribution caps are more rational, much fairer, and relate more closely to the amount of super an individual will accumulate the Deloitte report states.
NB: See our report here http://www.deloitte.com/au/superadequacy. See our media releases and research at www.deloitte.com.au.
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