There can be no doubt that big data is a big part of superannuation these days.
At AIST’s recent Conference of Major Superannuation Funds held last month on the Gold Coast, the potential for the mining of data to revolutionise and disrupt our industry was an ongoing theme across the conference’s 66 sessions.
But when it comes to post-retirement – an area that we are all being urged to focus on – there is very little data to work with. Yes, the Australian Bureau of Statistics has information on superannuation balances and, to a lesser extent, “other” financial assets, but there is a paucity of data on how retirees actually spend their money.
In the area of lump sum withdrawals, for example, we know that almost half of all super benefits are taken as a lump sum, but we still don’t know a lot about drawdown patterns. While some retirees are using their super to pay off debt or take a holiday, others invest in term savings deposits and we don’t know how they are using it. And for those retirees with account based pensions, it is far from clear whether the current settings on minimum withdrawal rates are delivering the best possible outcomes for everyone.
There are myriad of factors – in addition to super balances – that determine income levels in retirement. Home ownership, inheritance, marital status, life expectancy and work history – to name just a few lifestyle and financial variables point to there being far more similarities among a bunch of 20 somethings than a group of 60 or 65 year olds.
While still in its early stages, a joint research project between AIST and the Australian Centre for Financial Studies (ACFS), has highlighted the challenges of developing income products and getting the regulatory settings right for this disparate demographic.
The project involves modelling income scenarios for various retiree cohorts using different product combinations – involving account-based pensions, lifetime annuities and various combinations of both.
Early findings suggest that choosing the right product – or product combination – makes a huge difference to retirement income levels.
Take the case of ‘Sandra’ a non-homeowner who reaches retirement with $100,000 super balance and no other financial assets. Her income is highest when she invests her entire super balance into an account-based pension, and withdraws at the minimum withdrawal rate. If she reaches the age of 95, her annual income will be many thousand dollars higher than if she had chosen a lifetime annuity or a product combination, although her income in earlier years may be less than the ASFA “modest” standard.
By contrast, the research suggests that ‘Martin’ a homeowner with $250,000 in super and $100,000 in other financial assets achieves the highest retirement income if he invests 75 per cent of his super balance into a basic lifetime annuity and 25 per cent into an account-based pension.
But in the case of both Sandra and Martin, the current policy settings around minimum withdrawal rates result in lumpy income levels throughout their retirement, which may not be in either of their best interests.
Outlining the framework for the research project at CMSF, ACFS’s Professor Deborah Ralston acknowledged that a lot more work needed to be done before any hard conclusions could be drawn. The project is yet to consider the role of deferred annuities and to examine outcomes for a range of other cohorts, based around super balance on retirement, other assets, gender and marital status.
Key findings aside, the research has already demonstrated that post-retirement solutions are likely to be very different for different people.
As the Government reflects on the Financial System Inquiry recommendations around post-retirement, we hope it also reflects that a one-size fits all product solution is not the answer. Allowing super funds to deliver postretirement products taking into account their particular fund’s demographics will deliver the best outcomes for Sandra, Martin and the rest of us.