The Australian Securities and Investments Commission’s (ASIC’s) recent changes to requirements for retirement calculator discounts could make a “significant” difference to consumers, as superannuation and retirement costs could be better estimated in line with their expectations for their post-work life living standards.
The regulator removed its requirement that superannuation and retirement calculators discount at a fixed rate of CPI at 2.5 per cent, instead allowing providers of these tools to use a higher rate to allow for rising community living standards beyond inflation.
The key takeaway of the change, according to Rice Warner, was that ASIC had confirmed the importance of maintaining living standards rather than purchasing power in retirement. The graph below illustrated the importance of this, showing that it could overstate retirement balances by as much as 50 per cent relative to using a wage deflater.
Impact of discounting on superannuation fund balances – CPI (2.5 per cent), wages (3.5 per cent) or mixed (CPI – retirement, wages – accumulation)
Source: Rice Warner
“To put it simply, it would mean the difference between you retiring with a Nokia, which you may have used 15 years ago, versus an iPhone – or the future equivalent depending on your age!” Rice Warner said.
The consulting firm warned that users of online tools and calculators were unlikely to appreciate the impact of ASIC’s change to their underlying assumptions however, meaning it was important that providers made sure that defaults were set appropriately.
What the “right assumption” was remained open for debate, Rice Warner said, in terms of whether indexation for calculators was closer to prices or, like the Age Pension, matched to wages.
“There is a growing body of research suggesting that, given that the actual expenditure of retirees is likely to fall during retirement, wage-based indexation sets too high a standard,” Rice Warner said.
“This argument is reasonable (given expectations on expenditure across the three phases of retirement) though the evidence based on available data is mixed as few good longitudinal datasets are available and much of the analysis relies on cross-sectional studies or limited longitudinal studies that rely on small samples over short periods of time.
“Overall, the impact of price-based discounting in retirement only is smaller as the time horizon is shorter. It is a reasonable assumption for public policy work though our preference is to use wages throughout for online tools and calculators to avoid confusing consumers and to show the Age Pension as flat in real terms.”
ASIC’s calculator policy change followed more than two years of consultation with the industry, leading Rice Warner to label it a “big win”.