Today’s retirees much worse off than a decade ago: Glenn Stevens

People retiring now have got it much tougher than a decade ago and will need to take more risks, warns the RBA chief.

People leaving the workforce now have got it much tougher than those who left a decade ago and will need to take a lot more risk in order to fund their retirement, the head of the Reserve Bank says.

With central banks around the world lowering interest rates to stimulate their economies, yields on low-risk assets such as term deposits have plummeted, RBA Governor Glenn Stevens told a wealth management conference in Sydney.

That forces retirees to take more risks than they would have needed to in the past in order to generate an adequate income for the future.

“The key question is: how will an adequate flow of income be generated for the retired community in the future, in a world in which long-term nominal returns on low-risk assets are so low?” Mr Stevens said.

“This is a global question. Just about everywhere in the world the price of buying a given annual flow of future income has gone up a lot.

“Those seeking to make that purchase now — that is, those on the brink of leaving the workforce — are in a much worse position than those who made it a decade ago,” Mr Stevens said.

“They have to accept a lot more risk to generate the expected flow of future income they want.

“The problem must be acute in Europe, where sovereign yields in some countries are negative for significant durations,” he said.

“But it is also potentially a nontrivial issue in our own country,” Mr Stevens added.

He said yields on investments were the “lowest ever in human history”, adding that he believed it would take a while for interest rates to recover to pre-GFC levels.

“It will be quite an adjustment to get back to that world and it seems to be quite slow in coming,” he said. “Ultimately the financial rates of return we see will one day bear a normal relationship to that real set of capital earnings.”

Mr Stevens’s speech was wideranging on topics of financial regulation, but he offered no clues on what the Reserve Bank might next do on interest rates.

The RBA will hold a policy meeting in early May, with markets seeing a 50 per cent likelihood of a further interest rate cut.

The RBA will also revise its economic forecasts in May, amid expectations it will lower its economic growth expectations.

Mr Stevens told a conference in New York a week ago that the question of further interest rate cuts “must be on the table.”

Speaking this morning, he also called for a cultural change in the financial services industry, saying the sector depends on trust.

Referring to recent cases of misconduct within the industry, Mr Stevens said the root cause appeared to be an erosion of a culture that placed great value on acting in a trustworthy way, along with distorted incentives.

Finance depended on trust, and where trust had been damaged, repair was needed, Mr Stevens said.

Dow Jones, AAP