The challenges presented by an ageing population put the onus on advisers to stay up to date with the latest technical know-how, Paul Rogan writes.
Since the age pension was introduced in 1909, the rules regarding eligibility for a full or part-payment have changed very little.
Population growth and increased longevity have combined to render the age pension one of the most commonly received transfer payments in a society that spends 35 per cent of its budget on welfare.
This basic entitlement has long-comprised the stock, or basic ingredient, in an increasingly complex soup of extra payments, allowances, concessions, super tax laws, health insurance, aged care and estate planning variables.
Recently, with the Commission of Audit and Federal Budget papers querying the long-term sustainability of our age pension settings, Australia has never been more aware that our silver cloud carries with it a dark-grey lining.
The bad news is that this looming “longevity tsunami” promises to ratchet up our dependency ratio and threaten our sovereign credit rating. The good news is that it will also fuel the growth of the retirement planning specialty for the next 20 years and beyond.
The greying of our population is obviously a clear and compelling business opportunity for financial advisers. It’s also a business opportunity for education providers looking to assist advisers to navigate their way through the maze of laws and interdependencies between super laws, age pension and aged care rules.
The demographic changes occurring in the Australian population affect retirement planning in a myriad of ways. With life expectancies up to 10 years longer than those enjoyed by their grandparents, today’s 65 year olds are more likely to have to consume some or all of their capital as income, and are less likely to prioritise the leaving of a large bequest to their retirement-age children.
Moreover, while the Budget’s specific restrictions on age pension eligibility and levels may not pass into legislation untouched, they undoubtedly signal the beginning of the end to the “age of age pension entitlement” in this country. Demographic change is not a party-political issue and its fiscal implications are too profound to ignore.
Around 2.36 million Australians currently receive a taxpayer-funded payment of indexed income for life, the easy availability of which has led to its categorisation by some asset managers as the risk-free cornerstone in the average retirement portfolio.
No wonder then that the fiscally responsible are calling for a gradual return to the age pension’s role as a safety net rather than an income entitlement.
Of course, plenty of notice must be given, but long-dated limitations on the age pension’s scope and generosity are a question of ‘when’ rather than ‘if’.
A whittling away of the age pension cornerstone, if timed to coincide with the growth in average super balances to meaningful levels, has clear implications for retirement planning.
The starting point of retirement planning may eventually switch from understanding and maximising eligibility for government benefits, to engineering an independently sustainable replacement income from accumulated wealth. The age pension may become the icing rather than the cake.
Of course, significant changes in retirement planning have already taken place over the last few years. Until 2008, retirement income planning didn’t materially differ from planning for wealth creation, aside from age pension and super tax considerations. The emphasis was on client risk profiling and asset allocation, with a heavy reliance on the expected returns from growth assets needed to fund perhaps 15-20 years of leisure.
With the global financial crisis came a reminder of market risk and the particular vulnerability of retirees, a unique class of investor whose ongoing lifestyle was largely dependent on transfer payments (welfare) and the consumption of their financial capital, given that their human capital in many cases was significantly depleted.
When creeping limitations to pension eligibility render this once risk-free income source unavailable or heavily diminished, private pension plans will also, by necessity, focus on better understanding and managing the key risks of retirement.
Some obvious risks, like longevity risk due to increased life expectancies, are fundamental considerations of retirement planning today, yet are inherently prone to miscalculation. For example, any plan to provide income to median life expectancy will fail half the time, by definition, because very few people in a given age cohort will actually die at the median age. Half will die earlier, and half, later. This under-estimation of longevity risk will be exacerbated if only backward-looking actual mortality data is used in estimating life expectancy, rather than enhanced estimates factoring in mortality improvements.
For the retiree and pre-retiree, key retirement risks include not only inflation, longevity and investment (including sequencing) risk, but also employment, contingency and political risk. People who are 60 years of age and over may be at the peak of their wealth but are also more financially vulnerable than they might realise. Difficulties in securing mature-age re-employment, health conditions, carer responsibilities and the spectre of supporting longer-living members of extended family must be taken into account by advisers and their clients.
With all of the above in mind, the job of a financial adviser specialising in retirement planning has never been more difficult. Yet the demand for their services has never been greater. Each day in Australia, approximately 650 people throw off the shackles of full-time employment and move (hopefully, voluntarily) into retirement. If industry averages are to be believed, 429 of them will become clients of financial advisers, whose funds under advice are already dominated (82 per cent) by retirement savings. The shifting sands of public and private pension provision and the inevitable shift to financial self-reliance in retirement combine to make adviser education and training a critical issue for the industry of the future.
Its timely then, that in response to this, the leading academic institution in the pension field has introduced a contemporary, elective Retirement Planning module to its post-graduate financial planning qualifications.
The University of New South Wales (UNSW) ‘Retirement Planning’ course is the first of its kind in the country, supplementing black-letter financial and legal core content with a multitude of adjacent disciplines ranging from actuarial studies to behavioural science, to public policy formation.
The new module will be offered in UNSW’s Graduate Diploma and Master of Financial Planning from Semester 2, 2014. It can also be taken as a stand-alone subject for students undertaking a Certificate in Retirement Planning.
The industry’s commitment to education could not have been introduced at a more opportune time. The retirement phase of the largest, healthiest and wealthiest generation in history has only just begun. Speculation is rife that the reduction in aged care subsidies and age pension transfer payments will eventually be accompanied by changes to superannuation tax concessions.
It’s a challenging time to be a retirement planner but will ultimately be a highly rewarding time - especially for those advisers willing to supplement their hard-wrought knowledge and experience with the most up-to-date technical know-how.
Paul Rogan is chief executive, distribution, product and marketing at Challenger.