Superannuation funds may need to shift their focus from longevity risk to ‘lifestyle risk’ under the government’s proposed objective for the superannuation system, Milliman has said.
The proposed objective – “to provide income in retirement to substitute or supplement the age pension” – emphasises the role of the age pension by implying superannuation is “not the sole key to retirement”, said Milliman principal Wade Matterson.
Despite Australians having over $2 trillion collectively in superannuation, 70 per cent of retirees still collect the age pension – a figure expected to drop only 3 per cent by 2055 Mr Matterson noted, making it “by far the largest” of the three pillars of retirement, outweighing both superannuation and private savings.
Mr Matterson said that the age pension would “underpin [retirees] (albeit frugal) lifestyle until they die”, meaning longevity risk would no longer be a “significant issue for superannuation funds”.
“Fund members with considerably higher balances – or more importantly annual incomes, which typically peak in later years – face a bigger dilemma,” Mr Matterson said.
“This is better described as ‘lifestyle risk’ – the odds that members are unlikely to be able to maintain a similar lifestyle throughout retirement– rather than longevity risk.”
Mr Matterson said funds will need to conduct “deep analysis” using multiple datasets and develop a clearer picture of member objectives in order to successfully mitigate this possibility.
“Helping members to tackle this risk requires far more than making broad-based assumptions, such as using retirement adequacy tables as a target,” he said.
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