The superannuation industry has placed an extraordinary emphasis on helping members achieve a “comfortable” retirement, given it has so little information about what that actually means.
What we do know is largely composed of averages and assumptions that are ranked against the Association of Super Funds of Australia Retirement Standard’s portrait of the average Australian.
The standard represented an important step forward when it was launched in 2004, but expectations have since risen dramatically, along with the industry’s assets, which now surpass Australia’s annual gross domestic product and the size of the sharemarket.
The personalised nature of each superannuation member’s retirement journey means a single approach simply cannot deliver the necessary information, products and risk-management strategies required to achieve everyone’s desired outcomes.
Or as the Productivity Commission’s recent report into the industry’s competitiveness and efficiency put it, “Indicators which focus on the ‘median’ or the ‘average’ user will not necessarily reflect what is optimal for all or even most members.”
Funds need to take a more nuanced approach or a lack of member engagement will be the result.
Different funds, different members, different needs
An average couple requires about $640,000 at retirement (or $545,000 for a single person) to support a comfortable lifestyle throughout, the ASFA Retirement Standard states.
In 2013-14, the average Australian household had slightly more than half this amount of super – about $355,000 – at retirement, according to ASFA. However, this hides a wide disparity in actual retirement experiences. The median household super balance was just $110,000.
At the least, this suggests the ASFA Retirement Standard is of little practical relevance to many older Australians and those super funds attempting to improve their retirement experience.
A basic analysis of super fund data, segmented by age, underlines the problem funds face. For example, Australian Prudential Regulation Authority (APRA) data reveals that Hostplus members aged 45-64 had an average balance of about $40,000 (the bulk of its roughly 1 million members are much younger) at June 30, 2015. No amount of investment outperformance is going to lift these members into the comfortable category the ASFA Retirement Standard defines.
APRA data also reveals that a number of funds had relatively well-off members aged 45-64 years (although the data can be partially skewed with defined benefit categories), such as equip ($247,000), Commonwealth Bank Group Super ($215,000) and Energy Super ($200,000). Many of their members will have higher expectations about retirement than the standard assumes.
These differences between funds mean different strategies are necessary to support a comfortable retirement, which should be defined by members rather than dictated to them.
Assume less, learn more
The only way to deliver products and services that will deliver better retirement outcomes is to learn more about members.
This is no easy task, given there are more than 13 million Australians with (often multiple) super accounts and each has their own individual preferences and circumstances. But it is a crucial first step.
Too many funds assume super is the central hub of retirement – as expressed through the ASFA Retirement Standard – when they have little or no information about members’ wealth outside of super or their personal expectations.
As a result, too many members who can’t meet this standard then receive a devastating message: they’ve paid for a product for decades over a working lifetime only to be told they haven’t earned a comfortable retirement (as defined by the fund not the member).
This is a cue for disengagement. Funds with a large proportion of members who can’t meet the current standard should take this as a prompt to learn more about them. It requires better communication with members about their actual needs and better segmentation based on a far wider range of real-world data.
This combination can produce far more accurate estimates of what a comfortable retirement means for individuals and then help suggest a pathway to support it.
For example, an analysis that includes just one new real-world data set, the ABS Household Expenditure Survey, can radically reshape the fixed income goals expressed in the current retirement standards. An income goal defined separately for each member incorporates a more realistic expectation of spending requirements.
The opportunity to create better benchmarks is now there for funds, thanks to more open data and the rise of low-cost cloud computing, which has enabled analysis on a deeper level than ever before.
The super industry exists because Australians are forced to support its products for decades. Finding out what they truly need for a comfortable retirement, and helping them achieve it, is the least they deserve in return.
