Super funds need to adapt to record number of retirees seeking income

There is a massive change coming to the $3.2 trillion superannuation system – and it is not just about another rash of fund consolidation.

It is now a given that the funds will continue to get bigger and fewer in number due to the benefits of scale and the effect of the dud funds being weeded out over time by the heat maps produced by the Australian Prudential Regulation Authority (APRA).

What has not been appreciated as much about super in Australia is that it will now need to rapidly change from being a retirement savings scheme into a retirement payments scheme.

A continuing and steady stream of Baby Boomer retirements will continue to challenge the investment strategies of super funds as they need to adjust to providing income for record numbers of retirees.

Pension payments growing fast

Reflecting that change, total pension payments are now expected to reach about $137 billion in 2040 – a big change from just $46 billion in 2021.

That means around 40% of the funds under management within super – about $1.3 trillion – will be owned by retirees who need income payments from their fund and an investment strategy that ensures it protects their capital as much as possible so that it lasts for their entire lives.

According to APRA figures, about 3.6 million Australians will move from the accumulation stage to the pension stage of superannuation over the coming decade, which will require quite a change in investment strategies and the management of cash.

Until now, most superannuation funds have been managed like a traditional equity fund with long-term capital growth the main aim rather than producing income.

That will need to change a little to manage the consistent outflow of pensions which will continue to grow over time and may challenge the current strategy of many big super funds of effectively having one big pot of money invested.

Investment styles adjust to income

That change is already happening a little, with retirees often changing their investment styles as they approach retirement and through the development of lifestyle funds that become more conservative about asset allocations as retirement approaches.

However, in many cases it would be wrong to become too cautious in retirement, with capital growth over time still very important in making funds literally last a lifetime.

For some better off retirees with larger nest eggs, it might also be a valid strategy to even increase risk tolerance over time to boost long-term returns.

The need for large super funds to focus on the retirement stage of super and produce excellent and easy to understand products for this stage has never been greater.