In 20 years the superannuation industry has learned from challenging investment markets. The increasing longevity of members will provide further lessons, writes Doug McTaggart , CEO of QIC.
20 super years Has it been 20 years already? The two decades since the Superannuation Guarantee (SG) and Queensland Investment Corporation (QIC) were formally established have certainly come around quickly. One of the most important lessons learned along the way is that superannuation funds, which have a long-term horizon, need a broadly diversified investment strategy. The approach of allocating so much to equities, and so much to bonds won’t cut it anymore. That means less liquid asset classes like direct property, private equity, infrastructure and timberland are increasingly being incorporated into funds’ asset allocation plans. The past two decades have also seen the industry shift from generalist to specialist investment management. The industry has also realised that it must abandon “set and forget” strategies.
Shorter-term asset valuations matter and there are risks and opportunities for funds when these valuations reach extreme levels. In most respects the super industry has improved considerably since it was sparked into being by the SG, but two parts of it have deteriorated: investment time frames have shortened considerably; and the obsession with peer risk has increased. Superannuation is entering a new phase in Australia as the ageing population edges toward retirement. The industry now has to turn its attention to the original objective of the SG: replacing retirement income. The next 20 years will have much to teach us.
NOW : longevity age With the first of the baby boomers hitting the official retirement age this year, Australia’s population has tipped over the demographic peak. We’re on the downward slope now. The statistics bear repeating. According to the 2010 Intergenerational Report, published by the Federal Treasury, the proportion of people aged 65 or more will increase from the 13 per cent it measured in 2010 to 23 per cent of the Australian population by 2050. Most of us are vaguely aware that we’re getting older but the Treasury figures bring a sharp focus to the image of an ageing nation. Given that Australia’s compulsory superannuation system was designed to tackle this problem – at least from a pension perspective – the public may not be unduly concerned by the country’s sagging demographic profile. But another, perhaps less wellknown, Treasury projection offers an even more sobering thought.
The number of very old Australians – defined as 85 and over – will more than quadruple between now and 2050, growing from 400,000 in 2010 to 1.8 million by 2050. We’re not just going to get old, we’re going to get very old. The fact that Australians’ average life expectancy has increased – even since the birth of compulsory super in 1992 – presents some interesting challenges for those who will enter retirement in the coming decades. They may live long, but will they prosper? With current life expectancy in Australia of about 80 (79 for men, 84 for women) people retiring today at 65 will need to plan their income to last 15 years on average. As life expectancy is expected to increase, many soon-to-be retirees could be required to stretch their savings over 30 years or more. There’s a very real risk that many Australians could run out of money in retirement. The superannuation industry has been grappling with how to manage this longevity risk for a number of years.