Novel ideas to address major challenges in Australia's retirement income system
Last week QMV opened the doors to its monthly thought leadership session ‘QMV Super Community’. We were joined by a panel of leading thinkers to discuss novel financial ideas to address major challenges in Australia's retirement income system.
Paula Allen - Non-Executive Director, VicTrack
Jeremy Cooper - Chairman - Retirement Income, Challenger
Pascale Helyar-Moray - CEO, Human Super
Josh Funder - CEO and Managing Director, Household Capital
Over 80 industry delegates joined QMV consultants at The Cluster in Melbourne for lunch followed by a thought provoking discussion moderated by QMV Executive Director, Michael Quinn.
Michael set the scene by introducing the important role which financial innovation has played in improving the lives of Australians, while at the same time highlighting the dangers that financial innovation can also transfer or create new risks.
Panelists shared thoughts on the importance of financial innovation to the Australian superannuation system. It was noted upfront that the modern superannuation system was Paul Keating’s ‘innovation’ to democratise wealth, shifting the focus from the top end of town to improve retirement outcomes across the broader Australian population.
However, it was also suggested that over the last few decades superannuation has evolved into a beast that suits some people and amplifies the marginalisation others, most notably baby boomers, females and low income or casual workers. In discussing the importance of ensuring that any innovation didn’t join the list of ill conceived or wasteful innovations, our thought leaders agreed that holistic and outcome focused innovation of good intent could certainly assist in improving outcomes for Australians.
Such an approach might consider the role that greater member awareness and engagement can play in promoting competition and innovation, while ensuring protections for Australians from exploitation remain robust.
NOVEL IDEAS DISCUSSION
The Australian superannuation system is well regarded, however it is not immune to problems. The panel were asked to consider novel ideas for resolving three challenges that Australians face in saving for a comfortable retirement: home equity, uncertainty in retirement and the family unit, including gender bias.
1. HOME EQUITY AS A SOURCE OF RETIREMENT INCOME
Michael challenged our thought leaders to consider that many Australians have most of their savings in their residential property.
While asset rich, many Australians are retirement income poor. What is the appetite for releasing household (real property) capital into the superannuation system to provide a better quality of life in retirement?
The panel highlighted that the median amount in funds saved at retirement is around $200K per household and the median home equity owned at retirement today is over $700k (Sydney and Melbourne house value today is approximately $1M). While the home in retirement provides ‘free rent’, the investment portfolio is concentrated in one asset and therefore having no diversification and no liquidity.
Baby boomers have the opportunity to live on average up to ten years longer than their parents, which is to be celebrated, but we need to remember that older boomers have not had the benefit of a full career of mandatory superannuation.
We discussed that baby boomers are fortunate to have entered a property market in which property values were only one-and-a-half times the average salary, deposits and financing was very achievable, plus their property(ies) today have appreciated to substantial levels. Herein we could find one source of financial innovation.
The panel discussed the prospect of considering innovative ways by which retirees might gain responsible access to equity in the home as income. While reverse mortgages had existed for some time, these were seen as having been poorly designed and utilised insofar as they had typically been drawn down as lump sums which were consumed too quickly.
The panel went on to highlight that while one quarter of baby boomers were averse to releasing home equity, three-quarters were open to the concept! The panel approached a position where the possibility of utilising home savings to provide retirement income or “bring forward” parts of an inheritance to address needs seemed worth serious consideration. The panel also noted that any form of innovation in the home equity space must come with regulation, communications and importantly, trust.
2. SHARING RISKS TO MANAGE UNCERTAINTY IN RETIREMENT
Michael then challenged to panelists to consider ways in which financial innovation could promote better outcomes by addressing the problem of uncertainty in retirement.
Longevity risk means that we do not know how long we will live, and therefore how much we should consume and save in retirement. In the 1990s the most common age of death was 78 years, today it is 87 years. The timing of our retirement, relative to the economic cycle, can create significant uncertainty in the form of ‘sequencing risk’; the fact that a portfolio with negative cash flows (ie spending) is path dependent. The sequence of investment returns matters.
Discussion focused on the fact that the trend towards greater individualisation of the superannuation system had seen some of the older financial structures well suited to managing uncertainty had fallen out of favour. Whether it takes the form of an annuity, pooled investment pension or default MyRetirement product, there is genuine opportunity to revisit some more traditional models to focus the effectiveness of the system.
The panel also discussed the prospect of providing greater certainty to retirees in managing longevity risk by pooling mortality credits. These credits could provide a limited degree of additional income support in a fashion similar to a deferred lifetime annuity.
There was also plenty of discussion around other practical ideas to assist Australians in addressing uncertainty in retirement by promoting behaviour in individuals which can contribute towards ensuring a more comfortable retirement. These include support for retirees who don’t own a home in the form of rental assistance, as well as inclusion of financial literacy in key life events, such as antenatal classes.
3. FAMILY ECONOMIC UNIT AND GENDER BIAS
The superannuation system is directed towards individuals as the primary economic unit in retirement. Michael proposed to the panel that the family remains the economic unit for many retirees and whether the focus should turn to the whole group, rather than the individual.
Most Australians do not ‘aspire’ to retire on the age pension and retirees of course want peace of mind, but the stark reality is retired singles receive around $21K per year in age pension while retired couples receive around $32K.
Panelists also discussed the challenges faced by a generation of females in retirement, with the gap in retirement savings considered a national emergency. While short-term solutions were needed to urgently address the increasing levels of elderly female homelessness, the panel agreed that longer-term strategies would need investment and collaboration from both the government and private sector.
The following financial innovations and practical ideas around the family unit and gender bias were raised and discussed:
Unpaid post-retirement work - can that be a currency?
Volunteer work has great value. Can volunteer work performed by retirees attract monetary or other benefits to help support their living expenses.
Superannuation coupling - somewhere between an individual superannuation account and an SMSF.
Should the high income earner in a couple receive all the superannuation? Can couples’ superannuation accounts be merged to achieve superannuation accumulation for both and split accordingly if the relationship breaks down? While such coupling would save on account fees and allow for more targeted financial advice, this was unlikely to be an innovation championed by the superannuation industry because of the disruption to the existing individualised model.
Lastly, Michael asked the panel what they believed would be the biggest financial innovation success stories over the next decade in the superannuation system. The panellists did not disappoint and left the audience with much to consider!
Understand and service members better by integrating DHS (Centrelink) and ATO data - to provide the right solutions for retirement we need a quantum leap in how much funds know about their members. Significant time and money is spent collating data already held by Centrelink and the ATO. Opening up access to this information into super funds could provide better targeted and more timely data and resulting financial advice.
Artificial intelligence - rather than just focusing on retirement, technology can play a role in tracking member earnings and spending habits throughout their working life. This would involve funds providing members with targeted and customised data (feedback) via pervasive nudging, using technology to bring their use and misuse of money to being front of mind.
Future Fund - the Future Fund shows strong signals of growth and innovation. Their work and influence is highly likely to prove pivotal in the superannuation system over the next decade.
This month’s QMV Super Community Session was very engaging and QMV would like to again take this opportunity to sincerely thank our exceptional panellists and delegates for their involvement. We look forward to seeing you at our next QMV Super Community event!
Mark Vaughan – Managing Director
QMV provides independent consulting services and technology systems to superannuation, wealth management, banking and insurance organisations. For further information please telephone our office p +61 3 9620 0707 or submit an online form.