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Action needed on post-retirement income
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| David Anderson
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More innovation and action is needed in the post-retirement income space, with life expectancy increasing even further than expected, according to Mercer.
Mercer’s Securing Retirement Incomes paper, ‘The Australian Retirement Incomes Challenge’, used data from the major Australian public sector superannuation schemes and found that the life expectancy of a 65-year-old male had increased 0.9 years between 2005 and 2009 to 84.5 years.
David Anderson, managing director and market leader for Mercer in Australia and New Zealand, said that longevity risk remained one of the greatest retirement income planning challenges.
“Mercer expects the pressure on Australia’s retirement savings and income system in coming decades will be far greater than is presently forecast. Individuals will need more money and they will need to make it last longer,” he said.
Currently, contributions by the paid workforce to superannuation funds comfortably exceed the payments that funds pay to retirees, but the difference is only about 5 per cent of total system assets, Mercer found. Investment income is already more material to the growth of superannuation than contributions, according to Mercer.
This gap will narrow despite a planned increase in the superannuation guarantee to 12 per cent and will cross over in about 15 years, leading to a system that will be declining in real terms, Anderson said.
A key strategy will be a ‘whole of life’ investment strategy, utilising young members’ long-term investment horizon providing a high exposure to growth assets for a long period, but recognising the lower risk tolerance of pre-retirees, he said.
Delaying the start of retirement would also reduce risk and have a multiplier effect. Mercer’s actuarial modelling shows that deferring retirement by two years would increase the age at which a member’s superannuation savings runs out by about five years, Mercer stated.
“The industry must also develop products and solutions that effectively manage mortality risk and maximise income in retirement,” Anderson said.
“It’s time for our superannuation system to continue to evolve and take the next step up in design and sustainability.”
AUTHOR
Mike Taylor
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