Superannuation balances are ineffective in providing an actual picture of a fund member’s retirement income and may be obscuring action that would lead to higher final balance in the fund.
Macquarie Applied Finance Centre honorary fellow Peter Vann said that fund performance and annual balances have been used by retail, industry, corporate and self-managed superannuation funds as a backward looking, point in time result.
However these are removed from the purpose of superannuation — to provide a retirement income stream — and give little or no indication of a member’s likely annual income after retirements.
“Superannuation balances appear to most fund members as money they can’t access and are focused on returns but not on where the member may be heading in retirement,” Vann said.
“If super funds produced member reports with an estimate of annual retirement income based on that balance most members would understand that idea better than the current annual reports. They already receive a regular pay-check from their employer and super statements could reflect that approach of ‘how much will I have in the hand each week?’.”
Vann said the shift would not require high levels of financial literacy or education but “would have powerful consequences that created greater engagement by fund members before retirement in address retirement income adequacy”.
He said fund members would be faced with saving more, retiring later or changing their investment strategy which opened up the potential for financial planning advice.
“It sounds like a paradigm shift but this is not a new idea and is something that should have been done 20 years ago when the move began from defined benefit to defined contribution funds,” Vann said.
“An estimates approach allows members and their advisers to model returns and volatility in different asset classes during real market conditions and aims for long term outcomes based in the future and not short term fixed past returns.”
