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New Retirement Estimates

An opportunity ... and a challenge

Andrew Boal

Context

After extensive market consultation, ASIC has substantially improved the relief it provides for superannuation trustees in relation to the content and relevance of the retirement estimates that   can be provided to members. The combination of the relief for retirement estimates with the relief for superannuation calculators specified in RG 276 provides an opportunity to seamlessly move members from simple estimates to more sophisticated calculators while at the same time enabling much greater consistency of the overall member experience. This is an excellent opportunity for meaningful engagement with members – especially those approaching retirement.

The more meaningful and useful member information that can be provided comes at the cost of greater complexity for funds. The simplistic systems currently used by many funds (in some cases just spreadsheets) will not be sufficient in the new environment. They will need to be upgraded if the opportunity is to be seized.

These upgrades could potentially be quite costly due to the updated calculations that the new regime requires. But this need not necessarily be the case.

Set out below, we have identified the member benefits that can flow from the changes and then explained how these can be delivered cost effectively.

Meaningful outputs

The first improvement in the regime is that projection assumptions are more attuned to each fund’s own costs and investment experience. The second, big, improvement is that funds can now provide “interactive retirement estimates” that allow members to explore options with alternative assumptions, including the impact of the Age Pension, in a similar manner to what is available from many superannuation calculators, and which are based on the members’ own interest in the fund.

Funds can now provide retirement estimates that consider contributions increasing in line with increases in the superannuation guarantee rate and reasonable, fund specific investment return assumptions to provide a more realistic projection of the lump sum at retirement for the member. It is in the retirement income and Age Pension treatment, however, that the changes become most apparent.

Under the previous Class Order CO 11/1227, retirement income from super was calculated by a fixed multiple of the lump sum – irrespective of personal circumstances. The Age Pension was based on the entitlement at the time of retirement, with no accounting for how this would change over time. As an example, a member who retires with a lump sum of $450,000 would receive the following retirement estimates.

  • Lump sum: $450,000
  • Annual income stream amount: $25,500
  • Age Pension amount: $1,360
  • Total annual income: $26,860

The Age Pension amount and total annual income assume the Age Pension entitlement will not change as super is drawn down, which we know is unlikely to be true.

Under RG 276, the same member retiring with a lump sum of $450,000 can be shown the following:

Figure 1: Income in retirement time series*

*The Age Pension is shown to increase over time due to the deflation requirements specified within RG 276

  • Lump sum: $450,000
  • Annual income stream amount: $43,800
  • Proportion of income from Age Pension to age 92: 45%

For our hypothetical member with $450,000 at retirement, this represents a greater than $20,000 difference in projected income per year when compared to the old regulatory regime.

This is a much more realistic and useful picture of retirement income for members who begin retirement on a partial Age Pension, or who can realistically expect to become entitled to a partial Age Pension during retirement.

Figure 1 shows the proportion of retirees with expected superannuation balances at various future years from the Deloitte Superannuation Market Projections Report 20211. Depending on their partner status, the category with the lowest balances ($0 to $250,000) can be expected to be entitled to a full Age Pension throughout retirement. The category with the highest balances (>$1m) can be expected to not become entitled to an Age Pension until well into their retirement, if at all. The categories in between can be expected to be entitled to a partial or full Age Pension for a substantial part of their retirement. This is a large, and growing, cohort of retirees.

Figure 2: Proportion of superannuation balances at retirement

Flexibility and complexity – updated calculation requirements

These more realistic retirement estimates are unfortunately more complex to execute across a full membership base. Under the previous Class Order CO 11/1227, the outputs required for retirement estimates could comfortably be applied across several formulae within Microsoft Excel or a few lines of code in your favourite programming language. Many funds and providers of retirement estimates would have been able to provide estimates in several spreadsheets with one row for each member after appropriate exclusions had been applied.

The calculations under RG 276 require each year of the projection period to be calculated individually to account for the variation in Age Pension entitlement, among other considerations. Further, the income that is drawn down each year to exhaust the superannuation balance by the end of the drawdown period cannot be calculated formulaically due to the changing Age Pension entitlement each year. Instead, an iterative approach to solve for the appropriate income in retirement must be applied.

Application of these calculations for each applicable member would be wildly impractical using spreadsheets and the infrastructure currently utilised for the previous Class Order. The move from approximately three or four simple formulae to hundreds of them generating time series data and iteratively solving for income means that funds will require a new type of solution to take advantage of the full engagement opportunity with members about their retirement.

This is the challenge.

Simplified delivery for cost savings

The Deloitte Flexible Interactive Retirement Estimates API (the “FIRE API”)  seeks to address this challenge and the associated risks by minimising the development and ongoing maintenance work that funds will need to undertake. Funds will be able to exploit the new opportunities by focusing their systems development on upgrading their member interfaces while simply having their systems call the API for the complex calculations. Deloitte maintains the calculations for regular legislative changes and certifies the system that delivers the projections.

The API allows funds to easily maintain a set of fund-specific assumptions (as enabled under the new regime). The API also allows members who engage with an interactive retirement estimate to update inputs such as returns assumptions and Age Pension details. This facilitates the seamless use of member information that is known by the trustee, editable assumptions, and member inputs which may be varied by the user to output estimated retirement amounts and income streams, as well as a drawdown time series inclusive of the Age Pension – without the need for each fund to build this all themselves.

Anyone who has dealt with retirement estimates knows that there will always be a number of “special cases” for which there is inadequate or conflicting information, or once-off transactions, that renders any calculated estimate unreliable or even potentially misleading. For this reason, the API also includes a comprehensive Screening Module which contains warnings and exclusions which are triggered if the retirement estimates may be unsuitable. Some of these warnings or exclusions are required by the regulations but others can be configured by each fund for any number of specific member cohorts.

Where to now

The changes in regulatory relief for retirement estimates, when coupled with the emerging impact of retirement income strategies under the Retirement Income Covenant, provide an exciting opportunity for funds and their members. Contact us if you want to discuss how we can help you take advantage of this new member engagement opportunity as quickly and cost effectively as possible.

References:

[1] The Deloitte Superannuation Market Projection Report 2022 is currently in preparation.