11 May 2016
Mega-themes like the re-emergence of China as a world power and digital innovation drive economic growth and offer those with the relevant skills limitless career opportunities. But what if you don’t speak fluent Mandarin or aren’t an IT geek? What if you are a recent graduate or soon to graduate in commerce, applied finance, actuarial studies, marketing, psychology or behavioural economics? Is there a mega-theme that could drive your career? The answer is yes – Australia’s ageing population.
Demographers’ age profiles of the population used to be shaped like a pyramid with many younger people at the bottom supporting relatively few older people at the top. They are now narrowing at the base with relatively few younger people supporting larger and larger numbers of people who are aged. To emphasise their point, demographers describe these emerging age profiles as coffin shaped, but the aged are living longer and longer. This is the emerging mega-theme that could drive your career. This is the growing demand for superannuation pensions and the need for non-superannuation financial products to meet the retirement needs of ageing generations starting with the baby boomers.
You may say, compulsory superannuation has been around since before I was born or 1992, whichever came first. Haven’t I already missed getting in on the ground floor of this mega-theme? The answer is no. Australia’s modern superannuation industry actually began in the mid-1980s with award superannuation but over the last 30 years it has focussed on accumulation, building a $2 trillion superannuation savings pool, not on actual retirement. There is a big difference between the accumulation and pension phases.
In accumulation, until people are nearing retirement, it’s a funds management issue – getting good average returns over a long period. But when superannuation fund members are nearing retirement, with almost as high a balance as they are likely to accumulate, sequencing risk becomes an issue. It’s no longer a question of average returns, it’s the risk that an adverse market event or events occurring close to retirement will reduce a retiree’s superannuation balance when they don’t have sufficient, or any, time left in the workforce for their superannuation balance to recover. Their standard of living in retirement may be permanently impaired.
There are two other principal risks that make retirement different from accumulation, longevity and inflation. Longevity is the risk a retiree faces of exhausting their superannuation assets and becoming totally dependent on the age pension. This seems a likely prospect with life expectancy from retirement age continually increasing and now around 90 years for women. Many will live much longer. Recent studies show many people respond to this risk by living much more frugally than is strictly necessary given their assets. That’s also a problem which needs a solution. It’s hard to plan your retirement finances when you don’t know how long you will live. For the majority, who will live a quarter of a century or more in retirement, inflation will also be a significant factor and there is a serious risk it will exceed their expectations.
The retirement solutions to deal with these issues have not yet been built nor has government policy been set. There have been 11 government policy processes since 2006 which have with varying degrees of effectiveness examined the need for better retirement outcomes. Two current processes should bring some clarity. The first is Treasury’s Review of Retirement Income Streams which will provide a framework for more efficient longevity products. The second was announced by the government when it responded to the Financial System Inquiry, agreeing to support its recommendation for the development of CIPRs (Comprehensive Income Products for Retirement) and to facilitate superannuation trustees offering these to their fund members. These will be composite products combining a pooled longevity product with an account based pension.
With baby boomers moving into retirement and the government about to set new policy for retirement solutions for an ageing Australia projected to last for many decades, this is the start of a mega-theme for the financial services industry with many exciting opportunities that could drive your career.
David Cox is Head of Government Relations at Challenger Limited, an ASX Top 100 company that specialises in retirement incomes. Challenger has taken interns from WiBF’s CEO Forum each year since 2014. You can reach David via firstname.lastname@example.org
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