Sometimes it’s puzzling to listen to super funds as they explain how difficult it is to solve the longevity risk that members face when they retire. It’s difficult to solve it at scale, sure, but it is a “problem” that financial advisers have been dealing with successfully for decades.
The fact that Australians are living longer isn’t a surprise to anyone in any way. It’s a trend that goes back almost as far as when life expectancy tables were first produced – in 1867, apparently, by Morris Birkbeck Pell, a professor of mathematics at the University of Sydney.
The Centre of Excellence in Population Ageing Research at the University of Melbourne says Australians’ life expectancy has “soared” – and that’s not overstating it – since 1870, from 46.5 years for men and 49.6 years for women.
The Australian Institute of Health and Welfare says life expectancy in Australia has been on the rise for at least the past 50 years: it’s up to 81.3 years for men, and to 85.4 years for women. AIHW notes that life expectancy has increased at a rate of three months per year since the early 1900s.
Fast-forward to the 21st century and the pattern of our working lives have changed much more slowly: we still enter the workforce, typically, sometime in our late teens or early 20s, and the Australian Bureau of Statistics says the average age we intend to retire is 65.5 years of age. But in practice, the ABS says, the average age of retirement is 56.3 years. Many people do not retire when and how they imagine they will.
In a best-case scenario – entering the workforce in our early 20s and retiring at 65 – we would be employed and contributing to super for around 40 years; in reality it’s more like 30 to 35 years.
If a woman retires at 65 and reaches her life expectancy then she would be retired for 20 years retired, but in practice it’s probably more like 30 years because she’ll retire earlier than 65. If everything were to go as planned for a man, he’d have 16 years in retirement but in practice it’s more like 25 years, for the same reason.
You don’t have to be a genius to work out that funding a 30-year or a 25-year retirement from a 30-year working life is quite a challenge. That’s even before we address issues such as adequacy and the disadvantages women face that are baked into the system.
So, none of this is surprising. It’s what gives rise to longevity risk, and it’s a risk that advisers have been managing for clients since the year dot. What has changed, though, is that super funds facing a wave of members moving into retirement – many of whom will get to that point sooner than they’d like – now have the government and regulators increasingly impatiently suggesting they pull their fingers out and get on with doing something about it.
For the past 30 years funds have focused intently on making the accumulation phase of a member’s lifecycle as efficient as possible, driving down costs and maximising risk-adjusted returns. Market or investment risk really was the biggest issue they had to manage. Now they’re being asked to start thinking about members’ decumulation, with investment, inflation and longevity risks.
It’s been likened to turning around an oil tanker, but it’s really like converting an oil tanker into many yachts. Whatever the simile, it’s a big ask.
Advisers are uniquely well placed to help with and it is why super funds should pursue every avenue open to them to incorporate professional financial advice into their retirement income solutions.
The term “professional” is used here advisedly; this is not about the so-called “qualified advisers” contemplated by the government as a second tier of information and guidance for super fund members. A “qualified adviser” should really be no more than a human version of the online calculators that super funds already offer.
These individuals (they’re not advisers) should not stray into the realm of the professionals, whose bread and butter is addressing the issues and creating solutions for clients when they retire, including income strategies, advising on annuities and other retirement income products, taking into account a member’s partner’s or family situation, advising on non-superannuation assets including property, estate planning, and aged care; and figuring out how all of this intersects with Centrelink and the age pension.
Not all retiring fund members will need such comprehensive advice, but super funds will struggle to serve the advice needs of those that do.
A publication released by Optimum Pensions last week, ‘Retirement Income For Life – Solving the Longevity Equation’, sets out in more than 150 pages all of the technicalities, intricacies and nuances of how advisers help individuals prepare for retirement.
“Retiring with confidence takes planning,” the guide said.
“The increased focus on retirement incomes by the Australian Government and the development of new products by insurers and super funds has led to changes in the breadth of knowledge required by financial planners.”
The publication notes that no single institution – including a superannuation fund – has access to all the information needed to properly plan someone’s retirement.
“Super funds know about their members’ accounts, but not their partner’s finances or indeed the family financial situation, including property, assets, and objectives in retirement,” it said.
The guide said financial advisers are ideally placed to “understand their clients’ holistic needs and aspirations, bringing all their information together from different institutions and service providers to help them plan their clients’ ‘best’ retirement”.
In other words, it’s difficult to see how any super fund can really give a member serious retirement advice – as opposed to guidance or information – without involving a professionally qualified financial adviser, not only for legal reasons but also for practical reasons. Retirement is complicated, multi-faceted and multi-dimensional and requires help from a skilled and experienced professional to navigate successfully.
The bigger issue is how super funds can tap into the resources they need to do it at the scale of tens of thousands of members retiring every year.
That’s why, from a legislative and regulatory perspective, getting at least two things right is absolutely critical. One is to open up pathways for people to join the advice professional, simply so there are more professional advisers available to meet advice demand as it continues to grow.
It’s not feasible to get enough new advisers into the profession to meet 100 per cent of demand but that shouldn’t delay measures such as streamlining the Professional Year and making it easier to bridge an existing tertiary qualification into an acceptable qualification to be an adviser.
But it also means making it clearer and simpler for members to pay for professional financial advice from their super fund accounts, should they want to (and as long as the advice they receive relates wholly or in part to their interest in their super fund).
If, as seems probable, funds themselves can’t assemble the ranks of advisers needed to meet demand, then it should made be as easy and as cost-effective as possible for members to retain an adviser of their choosing and pay for advice they receive on super from their account.
