CFA (Chartered Financial Analysts) Societies Australia, representing the Australian chapters of the global CFA Institute (CFAI) of investment management professionals, has released a report titled ‘An Ideal Retirement System’ (Report), prepared for CFAI by Mercer Australia. The Report forms part of CFAI’s ‘Future of Finance’ initiative, which seeks to shape a trustworthy, forward-thinking financial industry that better serves society. ‘Retirement Security’ is one of the initiative’s six key areas of focus.
Using a set of ten principles, the Report considers what industry can do to deliver adequate benefits that can be sustained and trusted by the community.
Ten Principles of ‘An Ideal Retirement System’:
1. Clear objectives for the whole retirement system, including the complementary roles of each pillar of income or financial support
2. A minimum level of funding should be made into a pension system for all workers with contributions by employers, employees and the self-employed
3. Cost-effective and attractive default arrangements before and after retirement
4. Administration and investment costs should be disclosed with some competition present to encourage fair pricing
5. Flexibility as individuals’ personal and financial circumstances vary, and retirement will occur at different ages and in different ways across the population
6. Benefits provided during retirement should have an income focus but permit some capital payments, without adversely affecting overall adequacy
7. Contributions (or accrued benefits) at the required minimum level must have immediate vesting. These benefits should be accessible only under certain conditions, such as retirement, death, or permanent disability
8. Taxation support from the Government in an equitable and sustainable way, providing incentives for voluntary savings and compensating individuals for the lack of access to their pension savings
9. The governance of pension plans should be independent from the government and any employer control.
10. Appropriate regulation, including prudential regulation of pension plans and some protection for pension scheme members
Mr Anthony Serhan, CFA, President of CFA Society of Sydney, said the CFA recognises that one of the most pressing topics on the global stage was the fear of a looming retirement crisis. It is a key community issue that must be addressed for the health of the financial system and society as a whole.
“There are ongoing challenges facing members as beneficiaries of all retirement systems, including Australia where mandated superannuation makes most members of the community an investor,” he said. “This Report adds to the current discussion on these issues by focusing industry-wide debate on solutions that bring us closer to an ideal retirement system, one whose key aim is to function first and foremost for the benefit of our community.”
Author of the Report, Dr David Knox, a Senior Partner at Mercer in Australia, said that while Australia’s retirement system ranked amongst the best three systems in the world (see note 1), the Government needed to focus on three key areas in its response to the Financial System Inquiry in terms of the retirement system.
1. The Government must establish clear objectives for the whole retirement system, including the complementary roles of each pillar, and incorporate the provision of a minimum income to alleviate poverty amongst the aged population.
“A good system has a range of income sources or pillars for retirement,” Dr Knox said. “For Australia, think the age pension, compulsory SG, voluntary super and other savings outside super, including home ownership. We need to know the purpose(s) of each pillar and how they fit together.”
“The Financial System Inquiry (FSI) recommended that the objectives of super should be clear. This principle goes further: what is the objective of each pillar and how do they fit together? There is disconnect between the principles.
and objectives of the system and how the community comprehends it and this has influenced systemic behaviours toward saving for retirement. To improve community engagement in superannuation, the Government’s response to the FSI must establish a link between the two by providing the community with a comprehensive road map of the retirement system and features such as tax, policy and legislation and by then educating the community on how to use its understanding of the system to proactively build more value into retirement savings.”
2. The benefits provided from the system during retirement should have an income focus but permit some capital payments or withdrawals during retirement, but without adversely affecting overall adequacy.
According to Dr Knox, the main purpose of superannuation was to provide lifetime income during retirement, not bequests or wealth transfers to the next generation.
“However there needs to be some flexibility as the financial needs of retirees are not constant nor uniform. Access to some capital during retirement is needed for a variety of reasons: we believe the suggested 20 -40 per cent is reasonable.”
3. The Government should provide taxation support to the funded pension system in an equitable and sustainable way, thereby providing incentives for voluntary savings and compensating individuals for the lack of access to their pension savings.
On this third point, Dr Knox noted that most governments provide financial support to the private pension system for a variety of reasons.
“The Association of Superannuation Funds Australia estimates individuals need to spend $42,433 a year to achieve a comfortable lifestyle, which is about twice the level of the full age pension. Mercer research ‘July 2014 survey of 1500 people aged 50-80 years old’ shows that half of the population underestimate their life expectancy by more than two years, and on average women underestimate it by three years. So an underestimation of two years in your savings could leave you relying solely on the age pension and foregoing a comfortable lifestyle.”
“This is a reality the Government must deal with. The support needs to be fair within each generation and also needs to be sustainable over the longer-term,” he said. “Also, a lifetime approach to support this system is more desirable than an annual approach as retirement savings should be based on our lifetime earnings rather than a year-by-year approach. It’s also important that we recognize the need for those outside the paid workforce for a variety of reasons to continue to build their retirement savings.”
Notes
1: 2014 Melbourne Mercer Global Pension Index Report
