Just as there's no one right answer for your clients when it comes to preparing for retirement, so too with countries. While most developed countries face similar demographic challenges to ensuring retirees' long-term economic well-being, each has its own approach to potential solutions.
Australia's approach, a reliance on the employer-funded Superannuation Guarantee (SG) system, is particularly noteworthy.
Over the last quarter-century, Australia has reshaped its superannuation system and in doing so has changed how investors save for retirement and the role advisers play. Many other countries are just beginning to encourage the growth of an employment-based system in order to ease the strain on universal, taxpayer-funded systems.
Australia's response – a mandatory SG system funded by employers – has experienced rapid growth in participation, coverage and assets under management. Australia ranked fourth in the Melbourne Mercer Global Pension Index 2018, behind Denmark, the Netherlands and Finland, across a broad range of criteria that assessed adequacy, sustainability and integrity of 34 national retirement systems globally.1
When private pension (superannuation) assets are viewed as a ratio to gross domestic product, Australia sits behind only the Netherlands, according to the Global Pension Assets Study 2019 by Willis Towers Watson's Thinking Ahead Institute.2
Today, nearly all employed Australians are covered by superannuation. The system has grown to become the world's fourth-largest private pension industry with $2.7 trillion under management as at 30 June 2018.
With an emphasis on SG rather than defined benefit (DB), policymakers have transformed Australia's pension system into the most defined-contribution-oriented, or DC, of any of the world's developed market pension systems, with about 86% of total assets in DC schemes.
DB/DC asset split 2018
The government's goal for superannuation is to provide income in retirement to substitute for or supplement the taxpayer-funded.
Efforts to increase sustainability of the public age pension system put greater onus on the individual to plan for retirement, and advisers play an important role. Some clients may have only one superannuation account to their name, while others may have multiple accounts. Your advice will be crucial in helping clients decide when they can sustain retirement and how to turn their superannuation savings into retirement income.
1 Mercer (2018) Melbourne Mercer Global Pension Index, Australian Centre for Financial Studies, Melbourne, p. 6.
2 Willis Towers Watson's Thinking Ahead Institute (2019) Global Pension Assets Study 2019, p. 11.
Advisers are seeing firsthand the effects of a population that, while growing, is skewing older with clients more focused on retirement and health concerns rather than saving for that first house or higher education.
The ongoing retirement of the baby boomers (those born from 1946 to 1964) is only one of many trends affecting retirement in Australia.
To get a sense of where Australia is headed 40 years from now, the Australian Treasury issues projections of demographic trendsopens new window. Among the notable statistics:
The proportions of both men and women aged 65 and older are projected to increase significantly in the decades to come, at the expense of the "working age" population.
The projected shift in Australia's age distribution, 2011 and 2061
Viewed with a global lens, the ageing challenge is not as dire in Australia as in many other developed markets. Compared with other advanced economies, Australia will remain one of the "youngest" developed nations in 2030 (as shown in the bar chart). However, in absolute terms ageing remains a significant factor in the design and sustainability of Australia's retirement system and that has implications for advisers.
Growing older: International comparisons of population aged 65 and over, 2010 and 2030
These demographic trends offer a way for advisers to discuss retirement-related issues with their clients. With the average ageopens new window at retirement for recent retirees at 63.6 years for men and 62.1 for women, living in retirement could stretch two to three decades. That has income and spending ramifications for the over-65 set and implications for younger clients who'll need to invest with a long retirement in mind:
Providing guidance around the answers to such questions adds to the value you can offer to your clients.
Despite the size and growth of the superannuation system, debate continues over whether mandated employer contributions will provide enough income for individuals to live off once they retire.
Will the super system ensure that retirees, regardless of their career paths, have adequate income?
The primary way that researchers measure and compare the adequacy of pension systems globally is through the net replacement rate. It's simply the percentage of pre-retirement income that a country's retirement savings system provides from both publicly funded and workplace schemes.
The idea is that someone's standard of living in retirement should be a reasonable proportion of their working-life comfort level. Because most retirees no longer face major expenses such as a home mortgage or raising children, they typically don't need to replace all their pre-retirement income.
The Australian system in 2016 delivered a
|Average net earnings||43%||39%||63%||62%|
|Half average earnings||95%||92%||73%||73%|
|High average earnings||45%||41%||59%||58%|
Source: Organisation for Economic Co-operation and Development, Pensions at a Glance 2017 – OECD and G20 Indicators (2017), p. 107.
Replacement rates for Australians with lower incomes are among the highest globally and nearly 30 points higher than the OECD average. That indicates Australia's government-funded age pension is meeting its core "safety net" function.
As the proportion of retirement income attributable to mandated employer contributions and tax-preferred voluntary contributions increases, the degree to which Australian retirees depend on the age pension should decrease. As the Super Guarantee rate rises from 9.5% of employee earnings to 12% over the next several years, the projected replacement rate is expected to rise significantly.
Advisers can demonstrate their value to clients through guidance on how to integrate assets such as property with superannuation assets.
As you help your clients plan for the future, you operate within systems and rules in place here and now. Macro-policy decisions may be out of your control, but by developing deep relationships with clients, you can help them make critical decisions about their retirement plans, adapt those plans as circumstances change and stay on track as your clients head to and through retirement.
Like other countries, Australia provides preferential tax treatment for retirement savings to encourage people to save for retirement in private pension plans.
But Australia takes a different approach to that tax treatment than most other countries.
In private pension systems globally, money may be taxed at three points:
In Australia's superannuation system, super guarantee and salary sacrifice (or pre-tax) contributions and all investment earnings are taxed at a
Investment withdrawals after age 60 are tax-free, provided that the member has satisfied a "condition of release"opens new window – generally retirement – and their drawdowns are taken as lump sums or from eligible retirement income stream products. Different rates may apply to untaxed funds, such as government/public-sector super funds.
For accounts below the $1.6 million cap, once an investor turns age 60, drawdowns from a taxed super fund are generally tax-free when taken as a super income stream or lump sum withdrawal. Those under age 60 may pay tax on withdrawals.
While tax incentives are a major driver of transaction behaviours within the Australian system, the government has introduced various policy adjustments in recent years.
The complexities of the tax system provide opportunities for advisers who have tax planning expertise to help clients' make good decisions that address their individual circumstances. Individuals may find it difficult to keep up with changes to the various income thresholds and contribution caps associated with super. That's an area where you can demonstrate the value of advice.