There is a mammoth demographic change now taking place in superannuation as waves of baby boomers near or enter retirement.

Rice Warner forecasts that the industry fund sector will be major beneficiaries as its share of superannuation retirement assets will multiply more than seven times over the next 15 years from just 2.5% to almost 19%.

We expect the number of retirement members in all superannuation fund sectors to more than double to 4.5 million over this period and the value of superannuation retirement assets to rise from $631 billion (as at June 2015) to $1.4 trillion (in 2015 dollars).This year alone, 250,000 new retirees will join the retirement ranks with some $35 billion in benefits.

The accelerating pace of the shift from the accumulation to the retirement phase will undoubtedly take some fund trustees by surprise. It is critical that funds understand the often-varied needs and circumstances of their mushrooming numbers of retired members, and ensure that appropriate retirement strategies are available.

Further, funds should make sure that the movement from the saving to the pension phase is as seamless as possible – particularly given that members are increasingly staying with the same fund into retirement.

Consider a few realities of the present super retirement system:

• There is no smooth, automatic shift from the accumulation to the pension phase. Among APRA-regulated funds, the process could be described as clunky. Retiring members staying with the same fund have to effectively exit the accumulation fund and then re-join as pension members.
• Unlike in the accumulation phase, there is no default pension structure. Some funds use their MySuper as their de facto default investment portfolios. These are typically a diversified portfolio that may simply replicate a fund’s pre-retirement balanced option or a lifecycle product that reduces expose to growth assets as retirees age. A number of funds use a bucketing approach that separates the money needed for pension payments from assets needed to provide longevity and inflation protection.
• There is little demand for the longevity products (lifetime annuities and group annuitisation pooling longevity risk) offered by several super funds. This suggests that these may have been developed without enough thought of the needs of retirees.

Funds face the challenge of gaining a proper understanding of their retirement members, particularly given that 90% enter retirement without gaining financial advice. But how well do funds really know these members who hold almost a third of the assets in superannuation?

Despite the wide variations in personal circumstances, retiring fund members generally fall into three broad groups. Members with less than $150,000 in superannuation tend to take a lump sum while members with more assets typically draw down the legal minimum pension each year. And then there is the small group of members who draw down enough in pension payments each year to match their lifestyles, knowing their savings will run out long before they die.

Ideally, funds should know which members fall into which group and then have different retirement strategies for each group.

The Financial System Inquiry’s (FSI) recommendation for a comprehensive default retirement income product with the minimum features set by the Government makes some sense. The inquiry recommends that its features include a regular and stable income, management of longevity risk and flexibility.

However, it will not be possible to meet all the recommended features with a single product that suits every retiree. This means the retirement product strategy will need to have multiple products – an example might be an account-based pension with some form of longevity protection.

Perhaps the most-pressing challenge for superannuation funds is to really know their members nearing or already in retirement. This is the first step to developing the right retirement products – whatever eventually emerges from the FSI recommendation for a default pension product.

Retirement: Snapshot by asset value and members*

* Includes assets backing transition-to-retirement pensions and members receiving TTR pensions.