A Not-So Super Future?

A Not-So Super Future?

Every Australian should have an interest in their retirement income. At Montgomery we have written a great deal about the power of quality businesses to generate the sort of income that maintains an investor’s purchasing power.

In the broader community however the discussion is framed by superannuation. Unfortunately, superannuation as a subject can be difficult to understand. To help provide some clarity, Challenger (ASX: CGF), an issuer of market leading products for retirement income, has presented an assessment of their industry through their Investor Business Update.

The generational avalanche is underway – the Baby Boomers are beginning to retire and Australians are living longer. Such is the magnitude of the shift that Challenger has estimated that in ten years time, the proportion of an individual’s assets that relate to post-retirement income will increase from 30 per cent to 40 per cent. Against this backdrop, it is becoming increasingly apparent that the current superannuation system is not equipped to support these demographic changes.

While one should remember the advice; never ask a barber whether you need a haircut, Challenger notes that there are insufficient financial products available to protect consumers from longevity risk. Most Australians are conscious of the need to invest for the future, but there is little understanding of the amounts required to sustain retirement.

If Australians do not have sufficient income at the end of their working lives, the responsibility to support their retirement will fall to the Government, who does not have the willingness nor financial capacity to pick up the tab. This was evidenced in the Budget commentary increasing the preservation age for the pension and making eligibility stricter.

If the Government is moving towards private provisioning for retirement, is the private sector sufficiently equipped to handle this responsibility? Multiple reviews of the financial system are underway in order to answer this question. While these reviews are in early stages, a central message seems to have emerged – Australia’s financial system is focused on wealth creation, rather than retirement income. More needs to be done to incentivise annuitisation.

You see, the objective of amassing a large superannuation account can result in the misallocation of capital at retirement. For instance, many people enter retirement with the same level of superannuation as their mortgage. In this situation, there is a tendency to offset the two, which produces an ineffective retirement income policy. So what needs to be done?

Challenger anticipates that the ongoing reviews and industry discussion will foster changes that remedy the issues. Indeed, it anticipates that the retirement landscape will look very different in ten years time than what it does today. Instead of an accumulation system, the superannuation industry will focus on providing products to minimise longevity risk:

– Superannuation funds may start to offer health insurance and aged care products.
– Longevity insurance will be a standard product offered by all funds.
– All-female superannuation funds may become more prevalent, which provides support for a demographic that has a longer life expectancy and is more likely to have experienced a broken income during their career.

Investors must keep in mind that there are no free lunches. The most certain path to the long-term preservation of purchasing power through growing income is the purchase of sound quality businesses at rational prices. Every Australian should be taking an interest in their financial futures. Regardless of age, don’t believe periodic deductions from your pay cheque will be sufficient for retirement.