One per cent extra return from super a year equals at least 25 per cent more in retirement
Russell Investments’ input to the Cooper Review proposes more efficient implementation solutions to boost retirement savings
September 2, 2009 –Efficiency and good strategy planning by superannuation funds can significantly improve members’ wealth in retirement, according to one of the world’s leading pensions and investment experts Russell Investments.
Speaking at the Australian Institute of Superannuation Trustees (AIST) luncheon today Mr Don Ezra, Co-Chair of Global Consulting at Russell Investments, said every one per cent a year in increased returns during the accumulation period (ages 25 to 65) would increase retirement income by at least 25 per cent – and that this could be clearly achieved through improved investment strategies and implementation processes.
On the flip side a loss of one per cent a year over a working lifetime will reduce retirement income by more than 25 per cent.
The comments come as Australia’s super industry continues to debate the need for reduced fees to preserve super savings.
“We applaud the current fee debate – however there are also other logical and available ways to maximise super savings,” Mr Ezra said. “Superannuation funds can improve their implementation techniques by simply reducing unnecessary trades in multi-manager portfolios and reducing unwarranted transition management and foreign exchange trading costs. A transition management transaction for example can cost a fund up to 60-180 basis points per transaction.”
The comments reinforce Russell’s recent paper in relation to the Government’s Review into the governance, efficiency, structure and operation of Australia's superannuation system (Cooper Review), which highlights common implementation leakages and outlines available solutions to superannuation funds.
The paper says members’ savings were exposed to a range of costs due to poor implementation including: direct costs such as brokerage fees and excessive ‘spreads’ on cash balances; indirect (hidden) costs such as when funds appoint conflicted providers that are able to act ‘on the other side of the trade’; and risks incurred due to a fund to holding unintended exposures – such as being improperly hedged, or by letting exposures to various asset classes ‘drift’ from pre-agreed levels.
Mr Ezra said in addition to better implementation, superannuation funds could help members improve their strategies in three ways: encourage the use of a target date approach; assist members with skilling up on basic financial education; and help members draw down on their super gradually, taking into account the fact that 60 per cent of a person’s retirement income is actually earned during the retirement (decumulation) phase of life.
“All super funds should educate their members on the decumulation rule which states that, every dollar decumulated consists of around 10 cents of original contribution, 30 cents of investment return earned during the accumulation phase, and 60 cents of investment return earned during the decumulation phase. This is based on the reasonable assumption that an individual saves a constant percentage of pay from age 25 to 65 and decumulates for around 25 years. It’s an important rule for members to be aware of when planning for retirement,” he says.
Mr Ezra is also presenting at Russell Investments’ Annual Investment Summit tomorrow at the Sofitel, Melbourne, and Friday 4 September at the Westin Hotel Sydney where he will discuss his new book on retirement planning*.
A copy of Russell’s paper in relation to the Cooper Review ‘Don’t leave basis points on the table’ is attached.
* The Retirement Plan Solution: The Reinvention of Defined Contribution by Don Ezra, Bob Collie and Matthew X Smith.
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