Kathryn Spragg, Liability Strategist, Asset and Liability Management
Historically super has been predominantly viewed as a concessionally taxed environment in which you can accumulate assets for use in retirement. Only more recently has the focus moved towards its true purpose – retirement incomes. But is what you see happening to your super account balance enough to indicate what to expect as a retirement income?
The answer is not necessarily.
If we look to recent history we see a clear example of why retirement income is not solely about your account balance.
Over the period from January 2014 to beginning of May 2016, the value of the QSuper Balanced investment option has increased on a time weighted basis by almost 10 per cent per annum. The corresponding unit price is show in the chart below1.
On this basis, it might be expected that, for members invested solely in the QSuper Balanced option, retirement outcomes (or super balances at the point of retirement) have been improving over this period.
But what about the retirement incomes?
At retirement, there are many factors that influence how much income you draw from your super account. These include whether you’re single or in a couple, how old you are when you retire, your other assets and income, eligibility for the Age Pension and your spending preferences, to name a few.
A lifetime annuity rate2 (shown below) is considered a reasonable substitute for the income that can be generated from a super balance throughout retirement. Admittedly our members may not necessarily invest in annuities in reality. And while alternative retirement investment strategies (to an annuity) would likely give a higher expected result there is greater uncertainty around the outcome. A lifetime annuity therefore provides an appropriate base case and these rates are, to a great extent, driven by the longer term investment outlook that is relevant to retirement.
Now over this same period we have seen lifetime annuity rates decrease. That is you now get less income per $1 invested. We consider this to be reflective of the expected low return environment that we currently face.
In our view annuity rates decreasing in isolation is not necessarily a cause for concern. However it is necessary to consider the combined effect of asset movements and annuity rate changes.
To assess this, consider the scenario below where super assets are accumulated over a 40 year period based on a sequence of returns and inflation actually experienced. At retirement these accumulated assets are used to purchase a lifetime annuity. The table below illustrates the comparison of retirement outcomes at the beginning and end of the period considered:
Lifetime annuity income
1 January 2014
$36,000 per annum
1 May 2016
$27,000 per annum
Despite the accumulated retirement assets being higher at the end of the period, the resulting retirement income is lower. This suggests that the asset returns experienced in recent years have been insufficient to offset the reduction in income rates – leading to an income recession.
At QSuper we are considering more than just the accumulation of super assets when we target retirement outcomes. We analyse the impact of our investment decisions on what you, our members, actually experience. And we’re happy to share our thinking around this with you as it evolves.
1 The chart shows the unit price for the QSuper Balanced option for the Accumulation account plotted from January 2014 to May 2016.
2 The lifetime annuity rate is based on market rates for a Guaranteed Annuity (Liquid Lifetime) with CPI indexation for a 65 year old female as provided by Challenger.
The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only and you should get professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
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Liability Strategist, Asset and Liability Management
As a Liability Strategist, Kathryn’s responsibilities include modelling member outcomes (assets and liabilities) to inform the development and monitoring of investment strategies for QSuper’s default members both in accumulation and in retirement.