Pascale Helyar-Moray

A sharper focus on super funds’ responses to the Retirement Income Covenant has finally kicked them into gear to do more than pay lip-service to fulfilling their obligations.

Funds are realising that meeting a member’s retirement income needs will likely require information, guidance and in some cases financial advice, combined with a product solution of some description, whether that’s white-labelled or developed in-house.

But before any effective retirement income solution can be developed, a fundamental question needs to be answered: how much income does a member need?

Not all members have the luxury of asking that question – they’ll accumulate what they accumulate and their options for influencing the outcome are limited. And few (if any) funds can do a full financial analysis to work out retirement income needs on a member-by-member basis. So, they’ve commonly fallen back on the ASFA Retirement Standard as a benchmark.

ASFA updated its standard last week to reflect recent cost-of-living increases. It said the amount a retiree needs to spend each year to enjoy a “comfortable” standard of living in retirement had increased by 6.1 per cent to $70,806 a year for couples, and $50,207 for singles. Apart from anything else, this increase illustrates clearly one of the key issues facing retirees, and which any RIC solution must consider, namely inflation risk.

But the ASFA standard has a well-recognised omission: it does not account for mortgage or rent payments that an individual may need to continue after they retire. The ASFA income figures are used as references in calculators across the industry, including on ASIC’s Money Smart website, which notes that “both [figures] assume you own your own home”.

The cost of housing omission was highlighted with the release of the Intergenerational Report, also last week.

It noted that the largest asset held by Australian households has historically been the family home, making up about 37 per cent of household wealth in 2019-20. This compared to superannuation at 22 per cent. But fewer and fewer people own a home, and this poses an issue for the retirement system.

The report noted declining home-ownership rates for all age groups, including those immediately pre-retirement (aged between 60 and 64), where it fell by three percentage points between 1981 and 2021. Declines over the same period have been greater among younger people (17 percentage points for those aged between 25 and 29; and 18 percentage points for those aged between 30 and 34).

The report referred to the impact on the cost of living of not owning a home.