UniSuper urges salary-based retirement targets

Universities-based industry fund, UniSuper is calling for a move away from fixed dollar targets with respect to retirement incomes adequacy and towards salary-based targets.

It claims such a move would deliver a more individually relevant measure for superannuation fund members to maintain their pre-retirement standard of living.

The superannuation fund is arguing that the notion of a “comfortable retirement” needs to be redefined with the current one-size-fits-all approach not the most effective way to help Australians achieve optimal retirement outcomes.

It said superannuation funds had traditionally relied on the Association of Superannuation Funds of Australia (ASFA) Retirement Standard to benchmark how members were tracking to retirement income adequacy. However, rather than always using a fixed-dollar target, UniSuper advocates also using salary based targets to deliver a more individually relevant measure to maintain their pre-retirement standard of living.

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UniSuper chief executive, Kevin O’Sullivan said: “For the foreseeable future, retirement income will likely remain a mix of the Age Pension and Superannuation savings”.

“While defining the role of superannuation as being to ‘supplement the age pension’ is a positive step forward, taken in isolation, it is quite subjective as it is relative to the standard of living enjoyed by the member prior to retirement,” he said. “It is important for retirees to be able to maintain their standard of living in retirement equivalent to what they enjoyed while working. While that can quite often be done on a lower income, it varies for each individual.”

O’Sullivan said UniSuper believed a more effective approach to understanding how some members were progressing toward their individual retirement goals was salary-based targets that measured an individual’s retirement income as a percentage of their pre-retirement salary – something that is more common globally, and inherent in defined benefit schemes.

“Defined benefit schemes have often been designed to deliver a retirement income stream of around 70 per cent of pre-retirement salary. While replacement rates are a matter of personal choice – an individual may choose to consume more now while still relatively young and healthy – the 70 per cent replacement rate has proven globally to be a realistic and effective level,” he said.

O’Sullivan said that working with global advisory firm Willis Towers Watson, UniSuper had used this global standard recently to develop a deeper understanding of the retirement preparedness of its members.

This Retirement Adequacy Index measures members’ projected retirement income as a percentage of their pre-retirement salary, better assessing how their standard of living in retirement might compare with that enjoyed during their working lives.

Key trends identified among UniSuper members included:

• Younger members are much more likely to achieve their target retirement income due to receiving super guarantee contributions for a longer period of their working lives; and
• Fewer than a quarter of members identified as receiving a ‘low income’ are projected to achieve their target retirement income; and
• Female members had a lower projected retirement income, though due to our generally higher super contributions (common in the higher education sector) the gap was significantly lower than the gap of up to 46 per cent thought to apply to Australian women on average.