Reform needed for Australia’s superannuation, says Rice Warner

29 August 2014   Category: News, Asia, Australia, Global   By Derek Au

Australia’s superannuation pension scheme is in need of reform amid a swelling ageing population in the country, consultant Rice Warner said.

According to forecasting by the firm, by 2029 Australia will have two million males and 2.3 million females in retirement and drawing a pension from their superannuation savings. This would imply that around 40% of the nation’s retirement savings assets would be converted to retirement income streams, up from the current level of 30%.

Rice Warner said it expected many Australian pensioners to have insufficient savings for their retirement needs. Its latest research into the adequacy of retirement savings, commissioned by Australia’s Financial Services Council, said there was a savings gap of A$727 billion (US$680.97 billion) as of June 30 last year. This represents A$67,000 per person less than the adequate amount required for retirement.

“It’s great we are all living longer, but the fact is too many retirees will simply run out of money and be forced back on the Age Pension,” said Rice Warner’s chief executive officer Michael Rice. “The picture of Australia’s retirement demographic ‘bulge’ is not new. But new ways are needed to address the underlying problems of adequacy, funding and product design – even the fundamental need to deliver people more choice, greater dignity and a better standard of living in retirement.”

Mr. Rice said that the current default option of superannuation is to hand over a lump sum payment to members when they retire. However, he added that no default option is given for managing this sum, and it is here that improvements should be made.

Rice Warner has subsequently devised a retirement income solution which takes into account the needs of members through different phases of retirement, according to Melissa Fuller, the company’s deputy chief executive officer. She added that the product separates money required for the lump sum at retirement and invests the balance long-term to provide inflation and longevity protection.

“The account-based pension is converted to a distributing trust so members can derive income from stable fund earnings (and any tax refund from franking credits).  Meanwhile, the capital would be projected to grow steadily in real terms. The risk of market volatility impacting the underlying assets is also reduced as the member is not spending his or her capital,” said Ms. Fuller. She added that some superannuation funds have shown an interest in implementing the solution.