The COVID-19 pandemic could result in superannuation fund members needing to work between two to eight years longer to restore their savings before retiring, according to new research from Willis Towers Watson.
The group’s findings have considered COVID-related factors beyond the early release scheme, including investment returns, switching behaviour and unemployment, projecting that the events of 2020 will have a negative impact on retirement outcomes for large numbers of Australians.
Willis Towers Watson established a pre-COVID retirement income baseline, referred to as a retirement adequacy index (RAI) for each of 12 “representative cameos” for super fund members aged between 30 and 60, at various income levels.
The RAI was recalculated to take account of the pandemic’s impact on investment returns, switching behaviour, the early release scheme and unemployment.
For consumers aged 60 with a low and high earnings base, the COVID crisis was forecast to result in their retirement being delayed by eight years if they were going to restore their pre-pandemic RAI, with a new retirement age of 75. Those in the mid-earnings tier would be stalled for seven years.
Meanwhile the younger consumers aged 30, were tipped to be held by two to three years as a result of the pandemic.
Switching investment options had the greatest adverse impact of all of the behaviour factors – with members in the high earnings bracket projected to lose as much as 18 to 58 per cent from their RAI, with the loss rising the closer they were to retirement.
Willis Towers Watson head of retirement solutions Nick Callil said while the proportion of members switching to cash was “reasonably small across the industry”, the analysis showed it can be highly damaging, particularly for older members.
Younger members were most impacted by the early release scheme as well as periods of unemployment, where lost income and the related compounding interest in the early years could equate to the largest differences in retirement.
Meanwhile impacted investment returns hit older consumers in the mid and high earnings bases the most.
The low earnings band showed the least absolute reduction across the board, due to overall retirement income being bolstered by the government Age Pension.
Mr Callil said some individuals, particularly higher earners may choose to retire with lower income if they are able to maintain their desired lifestyle, while others may boost their voluntary contributions.
“However, at a time where unemployment is projected to reach its highest since the [Great Depression], many members will not have the ability or inclination to use available income to support additional contributions even where the need is recognised,” Mr Callil said.
“Those who are unable or unwilling to make additional contributions may be forced to work past their preferred retirement age – if such an option is available to them. Clearly, for those approaching retirement, this approach may not be feasible with an additional working life of up to eight years required to achieve [pre-COVID-19] adequacy levels.”
However, Willis Towers Watson has said the coronavirus crisis could present an opportunity for funds to increase engagement with members by projecting their retirement income, as consumer awareness rises while many access the early release scheme.
“Funds need to understand their membership, what their projected retirement adequacy looks like, and how it has changed through this tumultuous time,” Mr Callil said.
“A retirement adequacy study, which produces [an] RAI for each fund member and selected cohorts, can provide valuable insights into the projected retirement outcomes of the fund as a whole, and help identify cohorts of members for targeted communications or other action.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].