But Australia has a great reputation globally, and is a very helpful proxy for practices the rest of the world may like to consider for adoption in the future.
One response to an ageing society is to ‘follow Australia’ and make pensions compulsory, although the US and parts of Europe have yet to embrace this approach.
Similarly, in the defined contribution space, greater scale and more risk sharing are being actively encouraged by governments.
Indeed, the UK is now considering offering a collective defined contribution model similar to the Netherlands.
In these schemes everybody’s money goes into a single pool, which diversifies the risk. The income that people receive in retirement depends on the investment performance of that pool.
Many international systems are gradually realising the focus of the discussion needs to shift from a lump sum to retirement incomes, and education needs to play a big part in this.
In Australia, the Financial System Inquiry is directly tackling longevity risk and looking at retirement income solutions – but its interim report has also said the superannuation industry needs to improve its data collection.
A welcome by-product of better data could be an improved ability to more realistically forecast income in retirement.
The role of education
The UK offers an interesting comparison to the Australian approach to retirement incomes.
While on the surface it may appear to be going in the opposite direction – it has just stopped the compulsory purchase of annuities upon retirement – it is also now faced with around 300,000 to 400,000 people who no longer need to buy an annuity.
They need to be educated about the new options that are available to them and the UK government is working on ways to do this.
In Australia, the debate may be moving towards a compulsory annuity but the need for education around options is the same.
The ‘Australian way’ is focused on building as large a lump sum as possible on which to retire. The starting point has been the lump sum, not the income, and it’s that formula that has to be turned on its head.
There appears to have been the belief that the age pension is the 'annuity of last resort'. There has been no appetite for annuities on top of that, as people know there is a fallback income if they do not have adequate savings.
The role of data
To help people focus on income, rather than lump sums, one thing that can be done is to change the way that information is delivered to superannuants and pre-retirees.
There are strict ASIC requirements around the formulas used by superannuation funds for forecasting lump sums and incomes in retirement that appear on superannuation fund statements.
I hear from my colleagues in Australia that funds may be reluctant to make the assumptions that are necessary to forecast post-retirement incomes.
ASIC has promised ‘no action’ on a number of these concerns but, understandably, superannuation funds are still wary as they will always be held to account by their members if those targets are not reached.
But with the better collection of data, which is now required under the Stronger Super reporting requirements, there can be more clarity and certainty around the inputs required to make these forecasts.
Superannuation funds are working more closely with administration and custody providers in delivering the new data requirements.
We are collecting better historical performance information, which can be used for forecasts, and funds are taking a lot more raw data from us.
And if data collection improves as a result of the Murray review, the ability to make confident forecasts should get better.
The role of discussion
The other main uncertainty around retirement incomes is the question of transition to retirement or sequencing risk.
The differences between retirement outcomes of somebody who decided to retire in 2007 compared to somebody who retired in 2008 are huge.
I am witnessing a lot of discussion around capital protection, which does offer retirees some security but it also comes with a cost.
The important thing is to keep this discussion going and to not be afraid of including all options and potential innovations.
From sharing risk between employees and employers to looking at collective defined contribution schemes which have some resemblance to the old-fashioned 'tontines' – into which members paid an agreed amount and then, as a group, received a retirement income which varied based on member longevity in the scheme or the overall level of scheme funding. Nothing should be off limits.
It is only by encouraging and continuing a varied and comprehensive debate that the industry can come up with the product innovations that are required to sustain the rapidly aging global population into their twilight years.
Benjie Fraser is global pensions executive with JP Morgan’s Investor Services business.
