In all the coverage of the latest investigation into Australia's retirement system, one of the biggest issues overshadowed by the attention on whether or not to go ahead with increasing the superannuation guarantee is the thing that consumers often struggle with the most.
How much income will I need – and more to the point, receive – in retirement?
This was highlighted early on in the Retirement Income Review (RIR), which found that while the nation’s system is “effective, sound and its costs are broadly sustainable”, it is also complex, not well understood and could be improved.
“People need better information, guidance and good, affordable advice tailored to their needs,” the report, released last week, stated.
“The current financial advice regime is not meeting people’s needs. People struggle to achieve a stable income in retirement,” it continued deeper into the 648-page report.
While the complex issues relating to financial advice and affordability have long proven difficult to solve, the report also explored retirement income projections and the use of calculators in giving consumers more confidence to draw down an income from their superannuation.
Currently, many (but not all) super fund members receive a retirement estimate in their annual statement, including a projection of their account balance and annual income at retirement. Additionally, retirement income calculators are available on fund websites.
Conceding that super funds are restricted in what advice they can provide, the report nevertheless points to the need for better and more accurate long-term projections delivered in a consumer-friendly format. Like other studies, the RIR also highlighted the importance of assumptions when using calculators and the limited view they can provide.
An important consequence of not having access to more accurate estimates is that many super members have unrealistic expectations and are making big decisions without being aware of the risks involved, according to David Bell, executive director at The Conexus Institute.
It’s an area getting increasing attention, the corporate regulator ASIC reviewing its policy framework for setting the longer-term economic and financial assumptions for its MoneySmart superannuation and retirement planner calculators.
For super funds, the RIR found their online retirement income calculators tended to only calculate expected age pension income and suggested superannuation withdrawals. Also, the “assumptions used are not as closely regulated as retirement income projections”.
“Because they offer long-term estimates, assumptions are critical to the effectiveness of both calculators and projections. To help typical people balance their current and future incomes, default assumptions must be reliable and neither overly conservative nor optimistic,” the RIR said.
“The assumptions needed for these calculators and projections include future rates of return on investment, expected Age Pension income and benchmark retirement income. There is a role for regulation in ensuring the assumptions used in all tools are reasonable and consistent.”
Mr Bell said the problem was that fund projections are deterministic, meaning they only provide a single data point estimate, like an average, and don’t explain to consumers what could go wrong. The calculation could dramatically overstate or understate how much to expect from the retirement income pot.
“Consumers have no understanding of the range of retirement outcomes they may face,” he said. "There is a risk they will assume the projections to be certain and they may miss the opportunity to take actions to raise the likelihood of a minimum retirement income."
A better approach is to use a stochastic model which, in simple terms, produces information about the range of retirement outcomes, Mr Bell argued. He’s working on projects making use of UNSW Business School’s new sandbox program, where students are tasked with designing a stochastic retirement estimate methodology for ASIC. They are also charged with developing a way to communicate complex data in a way that can be easily understood.
Referring to the issue of retirement income calculators and projections in an update on its website this month, ASIC said: “ASIC is working to understand how consumers use and act on retirement projections and estimates, including by examining overseas models, and actuarial and other advice. We will consult publicly on proposed changes to legislative relief and guidance by issuing a consultation paper in 2021.”
Looking ahead at future sandbox projects, UNSW senior lecturer Kevin Liu said designing a stochastic retirement planning calculator was on the cards.
“Making consumers aware that the figures can change is a core part of the exercise,” he said. “They want to help provide a solution to a real-life problem and motivate industry leaders to carry out more serious work.”
The views expressed are those of the author and do not necessarily reflect those of the Westpac Group.
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