The Actuaries Institute has released an information note outlining some fundamental principles that should be adopted with regard to all retirement modelling.
The note entitled “Good Practice Principles for Retirement Modelling” sets out 11 principles that should make modelling for Australians more meaningful.
Most of the principles look to incorporate more practical issues when formulating retirement modelling such as Principle 1 suggesting retirement models should provide information and results that focus on the household’s financial goals: their lifetime consumption needs and wants.
To this end, the information note recommends the acknowledgment of individual’s lifestyle priorities by making the distinction between those items considered as ‘wants’ and ‘needs’. Further modelling should take into account how completely different each household is when examining retirement planning.
A more complete approach to modelling has also been advised with Principle 3 outlining models should be able to project all significant assets, liabilities and incomes at the household level.
“Unless the scope of a model is deliberately narrowed, it is normal to consider retirement modelling at the household level. This may be an individual, a couple or a family, but also includes the financial drivers affecting the household’s retirement,” the note said.
More specifically, the drivers identified include superannuation, retirement income streams, investments and amounts bequeathed to individuals.
According to the paper flexibility needs to be incorporated into modelling with Principle 6 stating models should be able to provide year-by-year projections of expenditure and assets and be able to allow for changes in personal circumstances and expenditure levels in any future year to allow for dynamic behaviours.
As such, The Actuaries Institute suggest accounting for all drivers that materially impact future outcomes and could therefore impact the retiree’s decisions.
In publishing the information note Apricot Actuaries chief executive Jim Hennington cautioned some of the principles actually differ from what is being applied to retirement modelling performed by some superannuation funds and financial planning software.
“The principles aim to lift current standards to move away from overly focusing on simple calculations and to consider risk and the complete household view,” Hennington said.
The Actuaries Institute is inviting industry feedback to the paper with a view to producing a Practice Guideline on the subject within the next three year.
