Speaking at a briefing in Sydney, Rice Warner chief executive Michael Rice said superannuation funds are making a “mistake” by moving pension-phase money away from growth assets.
“We think that the whole industry focuses on sequencing risk,” said Mr Rice. “[Super funds have an] obsession with trying to protect people's money, thinking that they’re going to take a lump sum when they retire."
However, the idea that Australia is a ‘lump sum society’ is a myth, according to Mr Rice – who remarked that even the Financial System Inquiry interim report noted that half of super benefits are taken out as lump sums.
“The real number is no more than 15 per cent, and the reason for that is that a proportion of that is actually put into term deposits outside superannuation,” said Mr Rice.
“The problem is people look at the APRA stats, which mix all sorts of things – death benefits, or money that’s taken out as lump sum and might be put in as a pension in another fund – so the statistics don’t tell you much,” he said.
Mr Rice rejected the sentiment that “lifetime annuities will save the world”, which he said is being promoted by the Institute of Actuaries, the Association of Superannuation Funds of Australia and Mercer.
“That will simply reduce living standards in retirement and add to [superannuation] costs, so it’s not the solution,” he said.
‘Life cycle’ funds, which shift members out of growth assets and into defensive assets as young as 40, will still fall in value during a GFC-style crash, he said.
“They’re not really protecting you as they say they are."
“And worse than that, many of them have fee structures that are unchanged, so you’re paying high fees on defensive assets but the proportion’s rising. So they’re pretty poor value,” he said.
Rice Warner’s solution is for superannuation funds to turn members’ account-based pensions into income-distributing trusts, said Mr Rice.
Under the proposed system, all income dividends and rents will move into the member’s cash account and franking credits would be converted into cash (rather than re-invested).
“If the member were to draw a pension at close to the minimum rate – which is no more than they get in an annuity anyway – they would then be drawing all of their pension payments from a cash account,” said Mr Rice.
“The capital would be untouched, [and the superannuation fund] can then invest in infrastructure and long-term investments because they’ll have their liquidity under control,” he said.
Rice Warner modelling showed that a 50-year-old member with an account balance of $500,000 would be better off with the proposed account-based pension strategy than a Challenger annuity 90 per cent of the time, said Mr Rice.
