Pascale Helyar-Moray

A sharper focus on super funds’ responses to the Retirement Income Covenant has finally kicked them into gear to do more than pay lip-service to fulfilling their obligations.

Funds are realising that meeting a member’s retirement income needs will likely require information, guidance and in some cases financial advice, combined with a product solution of some description, whether that’s white-labelled or developed in-house.

But before any effective retirement income solution can be developed, a fundamental question needs to be answered: how much income does a member need?

Not all members have the luxury of asking that question – they’ll accumulate what they accumulate and their options for influencing the outcome are limited. And few (if any) funds can do a full financial analysis to work out retirement income needs on a member-by-member basis. So, they’ve commonly fallen back on the ASFA Retirement Standard as a benchmark.

ASFA updated its standard last week to reflect recent cost-of-living increases. It said the amount a retiree needs to spend each year to enjoy a “comfortable” standard of living in retirement had increased by 6.1 per cent to $70,806 a year for couples, and $50,207 for singles. Apart from anything else, this increase illustrates clearly one of the key issues facing retirees, and which any RIC solution must consider, namely inflation risk.

But the ASFA standard has a well-recognised omission: it does not account for mortgage or rent payments that an individual may need to continue after they retire. The ASFA income figures are used as references in calculators across the industry, including on ASIC’s Money Smart website, which notes that “both [figures] assume you own your own home”.

The cost of housing omission was highlighted with the release of the Intergenerational Report, also last week.

It noted that the largest asset held by Australian households has historically been the family home, making up about 37 per cent of household wealth in 2019-20. This compared to superannuation at 22 per cent. But fewer and fewer people own a home, and this poses an issue for the retirement system.

The report noted declining home-ownership rates for all age groups, including those immediately pre-retirement (aged between 60 and 64), where it fell by three percentage points between 1981 and 2021. Declines over the same period have been greater among younger people (17 percentage points for those aged between 25 and 29; and 18 percentage points for those aged between 30 and 34).

The report referred to the impact on the cost of living of not owning a home.

“Those who own their home generally have lower housing costs in retirement compared with renters, as well as a store of wealth that can be drawn on in retirement,” it said.

“Changing trends in home ownership rates and in mortgage indebtedness present a fiscal risk to Age Pension spending in the future and may impact patterns of how superannuation is drawn down.”

The report also said that while costs associated with the retirement income system in future are expected to remain constant relative to GDP, “trends in life expectancy and home ownership could present risks to sustainability”.

In other words, the IGR painted a picture where people are either becoming home owners much later in life or not becoming home owners at all and, as a result, more people will retire with mortgage debt (if they’ve become home owners) or paying rent (if they haven’t), and will be forced use their retirement savings to continue to pay rent, pay off the mortgage or continue making mortgage repayments.

So it’s potentially misleading for an increasing number of fund members to rely on an income target if that target does not factor in rent and mortgage payments that an increasing number of them seem likely to face.

This is an issue that Super-Rewards founder and executive director Pascale Helyar-Moray says is becoming more evident as interest rates rise and rents are jacked up by landlords across the country. Helyar-Moray says she can see the penny drop in seminars and presentations when this issue is presented to audiences – that even if they hit the recognised retirement income target, it may be a long way short of what they need.

She says the average age of a first homeowner today is 36 and likely to rise “because property prices keep going up and it’s taking longer and longer and longer for someone to get onto the home ownership ladder”.

“The ASFA standard covers the costs of utilities, et cetera, but a massive omission is its line-by-line budget doesn’t include any provision for mortgages or rent,” she says.

Helyar-Moray contends that the retirement standard could understate how much an individual needs to accumulate to fund a comfortable retirement standard of living by as much as 30 or 40 per cent – which is about the proportion of income currently accounted for, on average, by mortgage repayments or rent.

It’s also worth also noting that 11 interest rate increases in the past 12 months and well-publicised residential rent hikes across the nation have affected the cost of living for a significant proportion of the population in a way the retirement income standard just leaves out.

“We see the gaps that the industry doesn’t,” Helyar-Moray says. “Because we’re in the business of helping people trying to bridge that super gap, and because of changing economic conditions, we have realised that the gap is a lot greater than anyone thinks it is.”

She says the components that make up the retirement standard should be reviewed, and this in turn must lead to a rethink of how much people should be aiming to accumulate in super. That figure could now be well in excess of $1 million.

This is also where advice enters the picture. Any competent financial adviser would recognise that an individual’s retirement income objectives need to take into account debt or ongoing expenditure obligations.

A problem arises where a super fund member can’t access appropriate advice because their fund doesn’t offer it, or they won’t seek advice because they think it’s too expensive or their needs aren’t complex enough, and they rely instead on a published figure that does not reflect the reality of their situation.

To the extent that they have planned for their retirement at all, or have planned with a particular annual income figure in mind, they may find themselves entering retirement facing the prospect of spending more each year than they expected to, and therefore depleting their savings sooner; or having to reduce their standard of living so rent or mortgage obligations are covered by the amount they can afford to spend.

It’s a risk the Intergenerational Report highlights clearly, but one which the industry, through ongoing reliance on the current retirement standard income figures, may not be adequately addressing. Not taking account of a fundamental societal change could risk the superannuation system letting people down just when they need it most.

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