Australia ahead in retirement planning says new book
The Retirement Plan Solution charts how defined contribution systems can more effectively meet retirement needs.
Australia’s super systems held up as poster child of global pensions systems – but nine per cent contributions may not be enough
JULY, 7, 2009 - A new book on global retirement systems sets out a vision of how the system could be made better and has held Australia up as currently ‘the world’s most advanced defined contribution (DC) society’ – but says our nine per cent contribution rate may not be enough for a decent retirement.
Russell Investments’ Managing Director, Investment Strategy and Consulting Bob Collie and Co-Chair of Global Consulting Don Ezra have written the new book on retirement along with former associate Matthew X. Smith, now a senior vice president and the national defined contribution practice leader at Aon Consulting. The book, titled The Retirement Plan Solution: The Reinvention of Defined Contribution, examines the DC system and shows how improvements can make DC plans a far more productive force in securing retirement. Published by John Wiley & Sons, The Retirement Plan Solution includes an analysis of DC systems from across the world that brings into clear focus changes the authors recommend.
The book looks at the opportunities for improving the retirement systems – such as the need to save more; the importance of default funds; minimising fees; and a new approach to financial literacy – many of which are being hotly debated in Australia.
A key takeaway for Australian audiences is the US authors’ admission that America’s current employee investment education model is fundamentally flawed, and in fact ‘downright dangerous’. “We believe strongly that it is impossible to make the average plan participant an investment expert. It is not only futile to attempt to do so, it is counterproductive, and encourages behaviour that results in huge amounts of waste in the system,” the authors say.
“The best solution lies in a change of emphasis away from investment education and towards better default options…this means moving away from an emphasis on choice and education and focusing instead on building prepackaged solutions based on the best practices of institutional investment.”
Other emphasis is placed on the decumulation phase of retirement – where people have retired and are now spending their savings. The book’s savings model shows that, in a sensibly structured lifetime investment program, every dollar drawn down in retirement is composed of roughly 10 cents originally contributed, 30 cents of investment return earned in the accumulation (pre-retirement) phase, and 60 cents of investment return earned during the decumulation phase.}
“One of the most challenging aspects is how much income can be safely withdrawn in retirement each year. Too much and you could run out of money. Too little and your lifetime’s efforts and discipline in saving are providing you less than they could,” the authors say.
The book advocates the benefits of annuities for some parts of the community, noting that social security pensions provide a form of minimum for many retirees and illustrates how the benefits of buying an annuity increase with age – i.e. the later you buy an annuity the better. The authors suggest a new generation of annuity style products – such as the advanced life deferred annuity, and products that provide longevity protection but take more investment risk than traditional annuities – will evolve greatly over the coming decade.
“There will be choice on a scale that was simply not possible even five years ago,” the authors predict.
On Australia’s nine per cent contribution rate, the book says it is too early to judge conclusively whether the benefits from the Superannuation Guarantee (SG) system will be adequate for the majority of Australians. However the authors’ calculations find that even a lifetime contribution rate of 12 per cent may be too low to generate an income replacement ratio of 80 per cent of final pay from age 65.
"We're really pretty optimistic. There are many possible solutions that we outline," said Ezra. "What's more, we give individuals a framework for checking the extent to which they will have enough in retirement for basic expenses, for their desired lifestyle and perhaps also for bequests."
“All of us at Russell congratulate Bob, Don and Matt on their new book on retirement and on providing thoughtful answers to some fundamental questions,” said Andrew Doman, president and chief executive officer. “Russell Investments is steeped in a tradition of thought leadership, innovation and global vision, and the approach that this new book takes reflects that heritage well.”
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