Governments around the world are grappling with the twin challenges of aging populations and increases in life expectancy. Wealth management firms, financial advisers and pension funds are seeking better ways to help their clients achieve their financial goals. There is much to learn from looking at how different countries tackle these challenges.
Here in Australia, saving for retirement is compulsory. Yes, every Australian worker pays 9.5% of their salary into a superannuation fund. The government introduced the compulsory system in 1992 so that Australians would have more than just the government-provided pension and voluntary savings to fund their retirements.
As a result, Australia, population of around 25 million, has the fourth-largest pool of pension fund assets in the world. It is approaching US$2 trillion – nearly 150% of the country's GDP.
However, superannuation is not super yet.
Much of the focus in Australia has been on how to improve the amount that people will have when they retire. This is not easy but relatively less complex compared to managing the transition from full-time work into the next phase of life.
One reason for the complexity around this transition is that the majority of Australians are in defined contribution schemes that pay lump sum benefits at retirement. There are many risks to manage and choices to be made, not just during the transition but for the rest one's life. The retirement phase is becoming longer and more complicated to navigate as each year passes. What a responsibility to put on the individual at this point!
Superannuation funds do provide guidance, but it is limited and members need to seek it out. Financial advisers can help, but for many, this is too expensive given their modest retirement balances.
We need to move past the accumulation phase and develop innovative solutions for the next phase of life. Here are some of the most common issues I see.
There are very few products available that can be used to manage longevity risk. One of the businesses that I am involved with, Optimum Pensions, has developed such a product. It is an investment-linked annuity that fits in the Australian regulatory framework and can be used by funds to help their members manage the longevity risk. We provide the algorithms that power the products as well as tools and collateral to help funds and their financial advisors work with retirees to create suitable retirement income streams from the available products.
About 70% of Australians are eligible for either a full or partial social security pension when they retire, or at some point in retirement. The processes for determining eligibility and then making an application are difficult to navigate. Retirement Essentials has developed a digital solution that helps Australians with this complexity.
The decision faced by retirees is more than just product selection. There are so many variables and so many competing needs. The transition involves understanding both financial and non-financial goals. We need to do more than just talking about superannuation and social security. Another business that I am involved with is Changing Gears, which has developed tools and frameworks designed to assist people to make a successful transition from full-time work. The programs developed to provide the context that helps people make more suitable decisions when converting retirement balances into retirement incomes.
Alex Rampall of Andressen Horowitz said, "The battle between every startup and incumbent comes down to whether the startup gets distribution before incumbent gets innovation".
Transiting to retirement is difficult and my preference is to help incumbents find a way to work productively with startups such as the three mentioned here. The key is to put the consumer at the centre.
Stephen Huppert is an independent consultant and advisor working with institutions big and small that are committed to improving the retirement outcomes of Australians. His clients range from established entities, including some of Australia's largest superannuation funds, through to emerging businesses bringing new solutions to the industry.
