How super can prepare for an ageing Australia

Today, Australia’s age pension system is comfortably supported by 4.5 workers per pensioner. But by the time a current 30 year old retires in 2050, the Department of Treasury forecasts that this rate will fall to just 2.7 workers per pensioner.

Needless to say, this has profound implications for future retirees.

The proportion of workers to pensioners (the “Dependency Ratio”) is a bellwether for the structural integrity of our retirement system. In its current state, we can expect three pillars of the Australian retirement system (the age pension, family home and super guarantee) to face major challenges, such as:

1. The age pension becoming less sustainable for future Governments, 
2. Home ownership continuing to concentrate towards the older or wealthier,
3. Many super funds’ net cash flow position moving towards negative.

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We have shown immense foresight in developing a robust retirement system that is the envy of most comparable countries. To maintain this privileged position, the industry must acknowledge its challenges, and continue to innovate. 

Opportunity knocks for super funds – however, supporting 21st century retirees will require new and creative services. 

An era of creativity

For a start, super funds need to take stock and think deeply about the skills available across staff and partners. Different skills will be required to more closely match investment strategies to members’ retirement needs.

An emerging school of thought revolves around the idea that super funds need to broaden their value propositions beyond mere investment vehicles to full-service retirement concierges – but what does that mean in practice? 

For a start, super funds can focus on the wellbeing and living standards of members rather than merely generating investment returns. This should lead to a better quality of life for retiree members, as super funds become a gateway to retirement planning, health and wellbeing services, or even aged care. 

A number of super funds have begun to factor in the demographic shift through an investment lens, taking sizeable stakes in retirement villages around the country. As members age, this presents a natural synergy for funds to explore – subsidising retirement living arrangements for members could provide more value than the equivalent cash amount. 

A similar shift in mindset will be required from insurance in super. People in their late 60s and over have less need for life insurance once mortgages are settled and children have moved out. However, retirees still face health risks and need a protection strategy. 

Cover for illnesses such as dementia or stroke could be more valuable than the broad insurance cover typically available through super. And if benefits are provided through direct support – such as in-home care – this might be a better member outcome than an equivalent lump sum payment. This benefit model is particularly compelling in light of a North American study showing that 74 per cent of people over 65 suffer from at least one chronic disease, and for retirees facing cognitive decline and a diminishing capacity to make financial decisions. 

A new risk dimension

Super funds must also recognise that members entering retirement face different risks to younger members and have different priorities as a result. Rather than being content to take on risk and watch balances accumulate over decades, older members will require investment strategies that manage sequencing risk (the risk of poor investment performance just prior to retirement) by factoring in their withdrawal behaviour whilst still allowing them to benefit from exposure to growth assets.

Super funds are also increasingly looking at lifetime income products, such as annuities, to provide security to older members with their increasing life expectancies. 

This trickle will soon become a flood following the release of the Government’s Retirement Income Covenant Position paper. As currently proposed, all funds will be required to offer a Comprehensive Income Product for Retirement (CIPR) by 1 July 2020. This CIPR must include a component of longevity risk protection that provides a “broadly constant income for life.” Simple account-based pensions will not be sufficient. 

Of course, longevity in product design requires a deep understanding of mortality trends and their influential factors – this is why it is the natural domain of insurers. Understanding these trends could offer ancillary benefits for super funds, including being able to provide more tailored member experiences and bespoke retirement solutions from a menu of different propositions.

Super funds can’t allow their members to face these risks alone, and should look to leverage the trust held in them through goals-based advice that helps members to mitigate risks and retire in comfort. Meanwhile, new savings products – outside the super balance with its many access restrictions and contribution limits – could support one-off costs, whether health-related expenses or a well-deserved holiday. If recent investment data is any indication, historically-maligned insurance bonds are beginning a resurgence. 

While some of these ideas will undoubtedly fall by the wayside, now is the time for debate – while we still have the luxury! Whatever happens, it seems likely that super funds will naturally move to become the key pillar in Australian retirement over coming decades – particularly as structural changes in our economy challenge the age pension and the very concept of home ownership for many young Australians. While there are many clear challenges for super, I look forward to seeing it evolve to a bold new dynamic.

Ashton Jones is Head of Investments, Retirements and New Propositions at TAL.