Research house Rice Warner has backed the corporate watchdog’s move to ensure that estimates produced by superannuation and retirement calculators are adjusted for inflation and rising living costs.
Specifically, ASIC has removed the requirement that these calculators discount at a fixed rate of CPI minus 2.5 per cent and instead encourages online tool users to employ a higher rate that allows for increased living standards.
“Though it sounds uninteresting, the difference can actually be significant,” Rice Warner said in a release on Tuesday.
“The policy change from ASIC is a big win – following more than two years of consultation – for the industry and providers of these calculators everywhere.”
According to Rice Warner, one of the nation’s leading actuarial firms, the key takeaway is that the regulator has confirmed the importance of maintaining living standards (not purchasing power) in retirement.
“This is important, because it may overstate retirement balances by as much as 50 per cent relative to using a wage deflator.”
Put simply, the new rule that takes effect on 5 December 2019, requires providers to supply a default inflation rate that also reflects cost increases. This way users can decide if future retirement assets or income are adequate.
Under the new rule, online tool providers also have the option of using a different inflation assumption to take account of the wage profile of the online user as well as the provider’s wage growth outlook.
Acknowledging that most online tool users are unlikely to appreciate the impact of the regulatory change, Rice Warner argued: “put simply, it would mean the difference between you retiring with a Nokia, which you may have used 15 years ago, versus an iPhone – or the future equivalent depending on your age!”
“Price-based discounting may be disadvantageous for full career projections as the Age Pension is indexed to wages and will grow in real terms over the entire period.
“Under such a scenario, researchers will find that the Age Pension will sufficiently cover most of the adequate benchmark.
“There is also near universal support for maintaining indexation of the Age Pension to wages, given that it would quickly reduce below community expectations were it to be indexed to prices.”
Despite this, the consultant called into question the growing body of research suggesting that, given that the actual expenditure of retirees is likely to fall during retirement, wage-based indexation sets too high a standard.
“This argument is reasonable though the evidence – based on available data – is mixed as few good longitudinal data sets are available and much of the analysis relies on cross-sectional studies or limited longitudinal studies that rely on small samples over short periods of time.”
Overall, Rice Warner added, the impact of price-based discounting in retirement is smaller as the time horizon is shorter. “It is a reasonable assumption for public policy work, though our preference is to use wages throughout for online tools and calculators to avoid confusing consumers and to show the Age Pension as flat in real terms.”
The ongoing debate about discounting during the retirement phase tells the consultant that more work needs to be done before industry and policy makers can agree on the right assumption.
“This work should focus on understanding the spending needs of retirees in different cohorts (or generations), sensitivities around these assumptions – for example, differing needs of renters and homeowners, singles and couples – and how these spending needs change throughout retirement including the transition to aged care.”