Three per cent.
That number has remained unchanged since 2014, as the assumed annualised rate of return on superannuation balances for the purposes of forecasting a member’s estimated retirement lump sum, under RG 229.
The problem with 3 per cent or any other generic number is that is doesn’t account for a member’s circumstances, such as their age or asset allocation, and there’s no scope for super fund trustees and platform providers to leverage more tailored projections, based on any personal advice a member has received.
For people with a financial adviser, the projections contained in their member statement often differs significantly to those in their advice documents, causing unnecessary confusion.
But there is currently a unique opportunity for policy makers to examine the effectiveness of RG 229.
Treasury’s upcoming Quality of Advice (QoA) Review provides a catalyst for the industry to rethink how projections are calculated and communicated, with a view to improve the accuracy and meaningfulness of information contained in member statements.
It is illogical to apply the same investment return to a person in their 20s who has a longer time span, and someone in their 50s on the verge of pre-retirement, given their different stages in life, objectives and capacity to accept risk.
ASIC acknowledges that this approach is problematic and “more likely to be misleading” for certain cohorts, namely members of eligible rollover and defined benefit funds, people over age 67 and those with low account balances.
Furthermore, the way benefits are represented as a lump sum rather than a retirement income stream does not reflect the design and intent of superannuation and is counterproductive to work being done by the industry to educate consumers about the purpose of superannuation.
Super fund trustees and platform providers should be able to customise projections and communicate benefits as income.
Technology can help facilitate this.
Pleasingly, the QoA Review has vowed to look at the role technological innovation can play to improve processes and deliver cost savings to aid advice accessibility.
Key benefits of showing people the likely income their superannuation will provide include:
- A higher probability of them contributing to superannuation earlier
- A deterrent to withdrawing super as a lump sum at retirement
- A gauge on how they’re tracking towards their retirement goals; and
- An indication of how long their superannuation is likely to last
At a basic level, this could be seen as a form of free advice to the masses, aligning with the QoA Review’s fundamental objectives.
The availability of this information is likely to increase member engagement, encourage people to think more deeply about their future, and seek professional advice earlier.
Treasury understands the importance of accurate retirement projections, with its 2020 Retirement Income Review Final Report finding Australians value meaningful retirement projections to help them understand whether they have saved enough for retirement.
ASIC data shows that in 2019, 6 per cent of the population aged 45 to 65 used the regulator’s free MoneySmart Retirement Planning calculator to get a better understanding of their retirement income from super and the age pension; how contributions, investment options, fees and retirement age affect retirement income; and how working part-time or taking a break from work affects their super balance.
Ideally, all Australians should receive high quality, affordable personal financial advice, however, no matter how affordable and accessible advice becomes, there will always be a large proportion of people who won’t seek it.
Knowing this, allowing greater flexibility in the calculation and preparation of retirement income projections would be a relatively simple way to give super members valuable information and insights into their future in order to aid more informed decision-making.
It would go a long way towards ensuring the QoA Review has a meaningful, long-term impact.
Kevin Liao, executive director of product, Dash Technology Group
RG229 that’s referenced in this article which uses a 3% rate of projection seems at odds with the retirement calculator on the moneysmart website which does allow for increasing returns based on the underlying asset allocation.
Totally sensible suggestion. Would educate and inform and, if presented with a smart infographic, bring even clearer understanding for decision making.