The use of simple, impersonal models of superannuation has resulted in high numbers of superannuants not meeting adequate retirement income targets, according to research conducted by a global investment company.
Russell Investments Australia managing director Jodie Hampshire said a study of 8000 people within the firm’s $10 billion Master Trust found a personalised approach to asset allocation in super could increase the number of people considered as being on track to reach their retirement income goal by 70 per cent. The same approach would also result in higher projected retirement incomes for more than 85 per cent of people analysed.
Hampshire said the current superannuation system did not engage members and only offered impersonal, single solutions to all situations.
“Today’s super system sees most Australians defaulted into one-size-fits-all investment options, which apply a single asset allocation to all members, or an age-based cohort, and ignore the many pieces of additional personal information that could improve asset allocation at an individual level,” she said.
As a result of this, she said a retirement gap had developed between what retirement income people were on track to achieve compared with the retirement income they wanted to achieve.
This gap was difficult to understand due to the lack of national data on individual retirement income goals and Russell Investments had sought to address this with a new white paper, “Making Super Personal”, which covers the impact of default super options compared with a personalised approach.
Hampshire said the gap in retirement income could be improved by boosting contributions and changing how those contributions were invested prior to retirement. The white paper analysis found if individuals increased their voluntary contributions, adding up to 5 per cent of their salary, when tracking behind on their goals, the number of fund members getting on track to their goal would rise by more than half.
Hampshire said the key to lifting voluntary contributions was increasing people’s engagement with their super and to that end announced the release of the firm’s goals-based superannuation projection tool, GoalTracker.
The tool uses 10 data points, including a superannuant’s age, balance, salary and capital market forecasts, to assess how fund members are tracking towards their retirement income goal and offers a customised asset allocation to help them meet that goal.
Hampshire said the tool would be a game-changer and was a major shift from life-cycle funds, which used age as the main factor in determining a super fund member’s asset allocation.
“By focusing the superannuation experience on personalising the lifestyle each person would like to have in retirement, GoalTracker makes superannuation feel more real and members are more likely to take voluntary action to improve their likelihood of reaching their goals,” she said.
“By determining asset allocation at the individual level, GoalTracker can invest in more growth assets early in life and more intelligently reduce downside risk as a member approaches retirement. This reduces the chance of a significant market crisis, such as the outbreak of the COVID-19 pandemic, wiping out a large part of their savings just when they need it most.
“Our analysis shows that optimising asset allocations and contributions at the personal level can form a substantial part of the solution.”
