One-size-fits-all approach to retirement income not working

14 Mar 2017

Need to better define retirement adequacy for members

The notion of ‘comfortable retirement’ needs to be redefined, with the current one-size-fits-all approach not always the most effective way to help Australians achieve optimal retirement outcomes.

While the current plan to enshrine the objective of superannuation in legislation is positive, the inclusion of an adequacy measure will help individuals better understand how much they realistically need to retire comfortably.

Superannuation funds have traditionally relied on the ASFA Retirement Standard to benchmark how members are tracking to retirement income adequacy. However, rather than always using a fixed-dollar target, using salary based targets help deliver a more individually relevant measure.

“For the foreseeable future, retirement income will likely remain a mix of the Age Pension and Superannuation savings,” UniSuper CEO Kevin O’Sullivan said. 

“While defining the role of superannuation as being to ‘supplement the age pension’ is a positive step forward, taken in isolation, it is quite subjective as it is relative to the standard of living enjoyed by the member prior to retirement.

“It is important for retirees to be able to maintain their standard of living in retirement equivalent to what they enjoyed while working. While that can quite often be done on a lower income, it varies for each individual.”

Defining a comfortable retirement

The ASFA Retirement Standard defines comfortable retirement as $59,808 a year for a couple and $43,538 a year for a single individual1. While dollar targets provide a tangible way to assess retirement preparedness, each individual views “comfortable” differently and these goals are not relevant for many Australians.

A more effective approach to understanding how some members are progressing toward their individual retirement goals are salary-based targets that measure an individual’s retirement income as a percentage of their pre-retirement salary – something that is more common globally, and inherent in Defined Benefit schemes.

“Defined Benefit schemes have often been designed to deliver a retirement income stream of around 70% of pre-retirement salary. While replacement rates are a matter of personal choice – an individual may choose to consume more now while still relatively young and healthy – the 70% replacement rate has proven globally to be a realistic and effective level.

Working with Willis Towers Watson, we were able develop a deeper understanding of our members’ retirement preparedness.

This Retirement Adequacy Index measures members’ projected retirement income as a percentage of their pre-retirement salary, better assessing how their standard of living in retirement might compare with that enjoyed during their working lives.

Key trends identified among UniSuper members included:

  • Younger members are much more likely to achieve their target retirement income due to receiving Super Guarantee contributions for a longer period of their working lives.
  • Fewer than a quarter of members identified as receiving a ‘low income’ are projected to achieve their target retirement income
  • Female members had a lower projected retirement income, though due to our generally higher super contributions (common in the higher education sector) the gap was significantly lower than the gap of up to 46% thought to apply to Australian women on average2.

“A one-size-fits-all dollar benchmark can be unhelpful for many Australians. A ‘percentage of salary replacement’ model more accurately reflects individuals’ circumstances, and is practical and simple to use and apply,” Mr O’Sullivan concluded.

1. ASFA: Retirement Standard
2. Senate Estimate References Committee Report: ‘A husband is not a retirement plan'