Time for super sector to confront the ‘mother of all retirement risks’

Longevity risk – better known as the fear of running out of money in retirement – is the biggest issue in super and the system needs a revamp to reflect change in life expectancies.

It’s time for the superannuation industry to recognise the ageing of Australia with a reworking of the super system so older investors can get guidance on every aspect of retirement, says a new report from the Actuaries Institute.

The report, which coincides with a new discussion paper on retirement from the government, calls longevity risk – the fear of running out of money – “the mother of all retirement risks”.

According to the paper, the fear of outliving retirement savings is the biggest issue in retirement even though “retirees perceive market risk as the most important, highest ranking risk due to their exaggeration of market volatility”.

According to the paper by Andrew Gale and Stephen Huppert, the focus of the super system has been on pre-retirement issues to the “detriment of retirees”. The paper says reforms must be introduced to allow older Australians retirement “guidance”, where they can see how their retirement income and their access to other services, such as the pension system, fit together.

It also calls for encouraging workers to work later in life, raising awareness on home equity schemes (including the government’s Home Equity Access Scheme) and more assistance for the growing number of retirees who are renters.

Among the more controversial suggestion in the Retirement Matters paper are:

• Big super funds would be allowed to collect more data on their millions of members in order to be able to offer better guidance and advice;

• Older Australians should be on the boards of big super funds – with up to 30 per cent of some funds made up of retirees, super boards remain completely dominated by pre-retirees in the so-called accumulation phase of super;

• It also backs recent law reform proposals that the current Corporation Law legislation governing retirement is out of date and should be replaced with new special purpose laws;

• The guiding regulations of superannuation should be widened to move beyond individual member issues so that big super funds could design plans for couples and families. Big super funds cannot give advice to couples under current rules.

Federal Treasurer Jim Chalmers. Picture: NCA NewsWire / Martin Ollman

More than 4 million Australians are retired, with another 670,000 set to join that group over the next five years. Meanwhile, the expected length of retirement continues to extend. As the paper explains, when the pension system was introduced early last century, life expectancy was under 60 years. Today by the age of 65 life, expectancy is 85.3 years for men and 88 for women.

Treasurer Jim Chalmers has this week released a discussion paper canvassing ideas around retirement. The government is concerned that many retirees are spending less than they could and is exploring solutions including annuity-related retirement products.

It also arrives in the wake of the Quality of Advice Review from Micelle Levy, which the government has said it is approaching in stages. Levy has suggested allowing super funds to widen their ability to give advice, but this has not yet been cleared by the Albanese government.

Widening the ability of super funds to go beyond advice and guidance is seen as an ambitious target with only limited evidence that big funds are even prepared to access the proposed easing of financial advice restrictions. If guidance was allowed, super fund members could notionally get guidance on a range of non-financial life matters that would open new regulation risks.

As Stephen Huppert puts it: “Retirement has evolved significantly, and many people will choose not to follow conventional retirement patterns. The needs of people who have 20 to 30 years of retirement ahead of them are going to be very different to those who in the past had only a decade or so. It’s time to reimagine retirement and get the system up to scratch.”

Originally published as Time for super sector to confront the ‘mother of all retirement risks’