I recently hosted a roundtable discussion about post-retirement solutions in the Australian superannuation market. Australia’s system is revered in many ways, but it’s curious to me that it can be a world-class system and yet have no real mechanism for providing retirement income.
The $1.4 trillion Australian system is unique in many ways. Mostly that uniqueness is a good thing. It’s mandated and compulsory for every working Australian, and last year the government committed to increasing the compulsory amount of contributions to 12 per cent. It consistently ranks highly in the Mercer Pension Index and it’s sustainable.
But the system is unique even in its language. Superannuation? Post-retirement? One academic put it succinctly when he said if you’re planning for post-retirement then you’re planning for death.
The language reflects the problem the roundtable participants sought to solve: there is no mention in the Australian vernacular about pension or income stream or annuity or quality of life in retirement.
Australia’s system benefits and suffers from being defined contribution. And it is this structure that is at the core of the current second phase of the system.
Former prime minister, Paul Keating, who along with others is famed with creating the system, recently made some comments about it including the description that “superannuation emerged from the cooperative model, like perspiration emerges from the pores of skin…” But more seriously he says that the original model of superannuation is under considerable pressure and in his view “the promise we make to the member has to change”.
From wealth creation to provision
The system needs to be redesigned to account for longevity and sequencing risks, but also to shift the mindset, and solutions, of superannuation funds from wealth creation to income provision.
The roundtable discussion was led by Jeremy Cooper and attended by a who’s who of the Australian retirement industry including leading academics and actuaries, the heads of Towers Watson and Mercer, and the representatives from many of the country’s largest funds.
The overwhelming outcome of the roundtable was a collective will to change the conversation topic to provision of retirement income. No longer, it seems, will the Australian system be a giant bank account. Income will become the aim of the game.
But an indication of just how far the funds will have to move to achieve that is that AustralianSuper, the largest of the Australian funds with two million members and $46 billion, has no real provision for individual retirement solutions.
Similarly, a comment by a Cbus executive was that the “sector is on the nose”.
What is required in Australia is what Russell’s Don Ezra calls “DB-isation of DC” in his book, The Retirement Plan Solution: The Reinvention of Defined Contribution, co-authored with Bob Collie and Matthew Smith.
Leading pension academic and consultant, Keith Ambachtsheer, explains it well in his August 2012 Ambachtsheer Letter. He said the traditional defined contribution model simply accumulates financial capital with no particular goal in mind. The popular target-date fund innovation does not change the fundamental reality as it simply introduces an age-based equity-exposure rule into the mix.
The game changer, Ambachtsheer says, is the shift to a target pension by a target date.
Ezra wrote an article in the Rotman International Journal of Pension Management, which Ambachtsheer edits, in which he outlines the need to understand members’ post-work wants and needs. He says funds should help members convert post-work needs and aspirations into consistent financial implications, help members understand that longevity risk increases with age, and separate the investment and longevity risk-mitigation decisions.
“The major point is that 21st century DC-driven plans don’t just have intelligent asset accumulation designs. Their asset decumulation designs must receive an equal share of innovative thinking,” Ambachtsheer says.
The good news from observing the roundtable participants is that a light has been switched on in the Australian superannuation industry and funds have finally made the realisation their purpose is to provide retirement income for members, not just hand over a chunk of money. The super fund executives are taking seriously their role of improving the quality of life of Australians in retirement.
In the next few years the design and provision of retirement income will be the focus of all funds in the Australian industry as they work out how to consider longevity risk, sequencing risk, inflation risk and volatility risk for every individual member.
The roundtable group wants the government to be involved in that discussion and has outlined the goal of the role of deferred annuities to be considered in the May budget.
It’s an exciting and innovative time in the Australian industry.