The financial services industry needs to shift focus away from accumulation to decumulation thinking if it is to adequately meet the needs of those entering retirement, according to Challenger chairman of retirement income, Jeremy Cooper (pictured).
Speaking at the 2011 Morningstar Investment Conference in Sydney on Friday, Cooper said that the massive movement of baby boomers entering retirement presented an enormous value proposition for advisers. He noted that advice had a powerful effect on investment behaviour, and could help address such issues as longevity and inflation risk in the drawdown phase.
Cooper said there were currently about 20 per cent of funds in the pension phase. However, this was likely to increase dramatically as the population aged and as the retirement savings system matured. He noted that 50 per cent of retirees cashed out their superannuation on reaching retirement, but in less than 10 years industry experts expected that to change significantly – some 90 per cent were expected to stay in the system and take a pension, while only 10 per cent would take their cash as a lump sum, he said.
However, contributions caps continued to be a huge issue with $27.65 billion in tax in the 2011 financial year coming out of super, said Cooper. He said policy change would be required if the Government wanted to address the issue of retirees tending to take a lump sum. He added that there also needed to be a shift of thinking away from accumulation products and accumulation thinking that currently dominated. The industry still talked about expected returns on the retirement phase, which was not good enough, said Cooper.
“We need to go further and look at what assets will do year-on-year,” he said.
Cooper said the systematic and policy design around superannuation did not think hard enough about retirement. He noted that the age pension was actually the perfect retirement product, although due to means testing and other restrictions it was not enough to fund a comfortable retirement. He said lifetime annuities could copy the attractive features of the age pension, operating and behaving almost identically.
Cooper said most other retirement savings systems around the world had a deferred lifetime annuity option.
“It’s a good time to clear away the tax and other regulatory impediments around deferred annuities,” he said.
