Superannuation funds face challenge to convince retirees to spend their nest eggs

How do you convince someone who has spent their whole life building up a nest egg to start spending it?

It is a harder task than you might think and one that is really exercising the minds of the people running Australia’s biggest superannuation funds.

This is the big issue in how to handle what is being called the “silver tsunami” of an expected three million Australians enter retirement in the next decade.

What is needed is to give those three million Australians absolute confidence that they can spend money during their retirement and not scrape by on the bare minimum, hoping they won’t run out of money and might still leave an inheritance for the next generation.

That sort of confidence simply doesn’t exist at the moment which was emphasised by the recent ASIC report which found that superannuation funds have largely ignored their obligation to help members prepare for a comfortable retirement.

Government set for a crackdown

That led the Federal Government to warn of a crackdown if more isn’t done by super funds to prepare for the coming retirement onslaught.

However, it is not just retirees that are being let down by the lack of retirement spending certainty – it is also vital for the Australian economy for retirement savings to be spent to avoid economic stagnation.

You only have to look to Japan to see what happens when a thrifty ageing population can cause serious deflation and a sluggish economy.

Late to the party but super funds have some plans

It hasn’t been a total wipeout though, with some interesting plans being put forward by various super funds – many of them combining various services including estate planning and aged care to provide a total picture that would include a comprehensive and enduring living wage payment.

Perhaps the most adventurous of these was put forward by AustralianSuper chief executive Paul Schroder, who wants funds to be able to merge super, aged pension and also potentially a reverse mortgage into one single payment that would give retirees absolute confidence in what they had to spend in retirement.

Such a bold plan would require some new thinking – particularly effectively allowing super funds to arrange age pension payments on behalf of members, cutting the government out of the equation apart from providing the money – but would allow for a much more extensive change to spending certainty, as long as retirees remained in charge of their spending decisions.

However, it probably makes sense for super funds to assist in applying for a part or full aged pension and to integrate that into retirement planning and they don’t come any bigger than the $300 billion AustralianSuper juggernaut.

Extreme thrift leading to super inheritances

The “don’t touch the nest egg” extreme thrift issue is a very real one with a survey by annuity provider Challenger and National Seniors showing that an amazing one in every four retirees has no intention of drawing down their superannuation and very few people will tap into their housing equity, despite federal government efforts to encourage seniors to spend more in retirement.

That has led to a situation in which the retirement income review found that one in every three dollars paid out of the superannuation system will be an inheritance rather than retirement income by 2060.

The reason is fairly self-evident, with 84% of the people in that survey citing concerns about the cost of future medical and aged care.

The aim of around a quarter of retirees is to not spend their capital at all in retirement but to live off the earnings, with half wanting to preserve at least some of their capital as an inheritance.

So, without substantial change, we will be left with a tax effective inheritance system rather than a retirement income system, which was the original intention.

Housing remains sacrosanct

Even more concerning are the findings about preserving housing wealth for the future generations, with reverse mortgages only being used by around 2% of the survey respondents, with 67% wanting to pass their home on as a bequest to family members.

So, the challenge for the big super funds is clear – to reassure retirees that they can freely spend during their retirement years, there needs to be some fairly strong reassurance that future medical and aged care costs can be met and that the aged pension and possibly also a reverse mortgage will be there as a backstop if required.

It might be a big ask but perhaps AustralianSuper’s chief executive Paul Schroder has the right idea in trying to integrate the “triple threat’ of super, the aged pension and a reverse mortgage?

Time will tell but whatever the outcome, Australia can’t afford to let this issue slide for too much longer, with the economy really needing the spending kick start that only a less thrifty retirement cohort can provide.