What can we learn from retirement overseas?

FeaturedWhat can we learn from retirement overseas?

Our perception of retirement is uniquely Australian:

“She’ll be right mate, my employer takes care of my super and the government will give me a pension when I run out.”

Because of this laid-back attitude, retirement is an afterthought for most Australians:


All that rushing doesn’t leave much time to pause and reflect on how we can make superannuation and retirement work best for ourselves, let alone everyone else.

Take me for example. For a person who only recently exited his twenties, I spend an (un)healthy amount of time thinking about retirement. This isn’t so much a reflection of my Millennial eagerness to race through the different stages of my life but borne out of a fascination of how the human experience evolves over time.

It’s clear that we have a world class retirement savings system – Australia has the 4th largest in the world by assets and consistently ranks among the top 3 for AdequacySustainability and Integrity (Melbourne Mercer Global Pension Index 2017). We punch above our weight. But why aren’t we the best and how can we get to the top?

Mercer raised four areas that need more focus in Australia’s superannuation system:

  1. Part time workers, contractors and gig employees
  2. Working women and stay-at-home mums
  3. Ensuring retirees have an adequate income
  4. Stability in legislative and regulatory reform.

Addressing these areas would make a real difference. But how can we continue to evolve our retirement system? Maybe should can start by reflecting on how others around the world culturally view and experience retirement.

UK and USA – one step back, two steps forward

Our closest cultural cousins, the UK and USA, can teach us a few things from opposite ends of the retirement spectrum. The UK is still feeling the effects of a tumultuous transition from compulsory annuitisation in 2015. Where previously Brits were obliged to take out an annuity at age 75, the UK has now adopted a model that looks a lot like where Australia is heading (although they have arrived at it from the opposite direction). The challenge for the UK, like Australia, is to provide the right mix of tax and social security incentives to ensure a balance of private retirement savings, public pension welfare and longevity risk protection.

At the other end, the USA has a comparatively miserly retirement system (the 401K) that relies largely on voluntary opt-in savings. Without a compulsory retirement savings framework, the USA continues to struggle with incentivising working Americans to adequately self-fund their retirement. Amidst this landscape, innovations in public policy are arising as bureaucrats turn to behavioural finance or “nudge theory” to incentivise employers and their employees to save for retirement.

As explained in the Planet Money Podcast “Nudge, Nudge, Nobel”, Richard Thaler (the father of modern behavioural finance) and some of his academic protégés proposed changes to how employers enrol their employees in 401(k) retirement savings programs with profound results:

  • implementing default enrolment into 401(k) programs where the employee must specifically elect not to contribute has now been adopted by 68% of companies
  • a Save for Tomorrow scheme where employers automatically increase the 401(k) contribution rate each time an employee receives a payrise has also been adopted by 3/4 of the companies above.

Continental Europe – a house is not a home

There are diverse retirement models throughout continental Europe but three examples I will touch upon provide an insight into the important role that progressive housing arrangements can play in a high quality retirement system:

  • Scandinavia, the world champions of retirement systems (MMGPI 2017), where both the “Neighbourhood aged care” and “Co-housing” models originate.
  • France, the home of Viager, a quasi-gambling style system of property exchange where the buyer wins or loses depending upon how long the seller lives.
  • Germany, which has protection for rental tenants practically written into its Constitution: “Property comes bound with duty. It must be used to serve the public good.”

Neighbourhood aged care (also known as Buurtzorg) and Cohousing has experienced a meaningful surge of public policy interest around the globe. Buurtzorg was first pioneered in the Netherlands with nurses self-organising to provide in-home care services. Enabled by technology with little administrative overhead it has been shown to reduce costs per patient by approximately 40% (compared to comparable care models). Cohousing involves retirees pooling their resources to establish sustainable living environments and sharing the cost of in-home care. This provides them with greater control over their retirement housing as they age and also tackles the most insidious and underappreciated risk associated with aging – social isolation.

The viager system in France is a little more complex to understand but shares some things in common with equity release products. Viager involves a private contract between two parties whereby:

  • the seller remains within the property and receives a lump sum amount (known as the bouquet) and a fixed monthly payment from the buyer for the rest of their lives
  • the buyer receives a discounted purchase price for the property (determined by the sellers calculated life expectancy) but is exposed to the risk that they are required to continue paying the seller if they live longer than their calculated life expectancy.

Germany has a relatively simpler approach to guaranteeing housing security for retirees through an extremely strong legislative framework designed to protect renters. Germany has one of the lowest home ownership rates in the developed world precisely because of how heavily stacked the decks are in favour of renters:

  • tenancy laws strongly favour tenant rights over landlord rights
  • rental increases are legally capped to 15% over a 3 year period
  • mortgage-interest payments are not tax deductible by home owners
  • long-term leases are common and may be transferred across generations.

Japan – why retire at all?

Japan has one of the highest average life expectancies in the world. If anyone could be considered the masters of a long and healthy retirement, it’s Japan. So where in Japan should we look for the secret sauce? The region where women live longer than anywhere else in the world – Okinawa.

In the local Okinawan dialect, they have no word for retirement. Instead, the concept of “Ikigai” remains supreme. Translated literally it means “a reason to wake up in the morning.” Ikigai imbues Okinawan’s entire adult life and extends beyond just pursuing hobbies in retirement. Okinawans take responsibility for what they are taking from and contributing back into the world until their final days.

Hear Dan Buettner explain this better than I ever could in his TED talk:

To culturally shift our mindset from retirement to purpose, we must ask ourselves:

  1. What do I like doing?
  2. What am I good at?
  3. What allows me to live my values?
  4. What can I give back?

Our Ikigai lies at the centre of these 4 questions.

Returning to Australia

The flip side to all of this is that many economies around the world don’t enjoy the freedoms and benefits of a strong social safety net (let alone a generous lifetime age pension). As a result, many cultures do not yet enjoy the expectation of a long and relaxing retirement. Instead, the combination of shortened life expectancies and the need to work to maintain an adequate income mean that most reach the end of their life still employed.

Even with emerging economies that are more matured, such as in Latin America, retirement products are so homogenous that the only competition occurs on price. This provides little incentive to innovate and consumer engagement in their retirement savings all but impossible.

Australia should be grateful for our world class retirement system but acknowledge that it has largely been built on the back of 3 long-standing pillars:

  1. pioneering compulsory superannuation contributions
  2. our cultural obsession with home ownership
  3. a generous age pension safety net.

“So what can we do to keep Australia at the forefront of global retirement trends?”

Mercer had a few ideas which they shared in their 2017 MMGPI survey:

  • apply a mandatory Superannuation Guarantee (SG) Contribution requirement at all wage and salary levels (currently applies above $450 per week)
  • review superannuation arrangements for part-time workers, contractors and the gig economy (where employers are no legislatively required to contribute)
  • focus on reform to improve retirement savings outcomes for women through increased mandatory contributions and greater protections for stay-at-home mothers who are dependent upon their spouse’s superannuation savings
  • separate superannuation regulatory reform from the political cycle by placing ongoing legislative responsibility in the hands of independent bodies.

One thing is for certain, Australian consumer expectations about superannuation will change dramatically as technology, demographics and regulatory forces ripple through the system. Personalisation will be demanded by a Millennial-dominated workforce. Speed and control will be expected as on-demand real-time services (such as Amazon, Uber and the New Payments Platform) become ubiquitous.

Trustees and service providers can either ride the wave of innovation and reform that will sweep across the Australian superannuation landscape or be swept away in the tide. Regulators, employers and trustees will need to work together to make this innovation work for end consumers, but the ideas below should be possible:

  • employers to offer salary packages which include automatic increases to the super contribution rate at each pay rise (particularly whilst the government drags its heels on increasing the mandatory SG contribution rate).
  • jointly held retail superannuation and pension accounts that provide consolidated retirement outcome projections for couples and families
  • unique superannuation accounts that can be easily switched between funds allowing the “pot to follow the person” wherever they go in their career
  • legislation to make renting a stable and compelling alternative to home ownership and reduce the tax incentives associated with property investment.
  • flexible workplace arrangements that enable a slow disengagement from full-time work and encourage retirement gap years before returning to the workforce
  • retirement counselling and transition services provided by super funds to support involuntary retirees who exit the workforce in a sudden manner
  • including the family home in the assets test to determine age pension eligibility to encourage downsizing and retirement funding through home equity release.
  • progressively lifting the eligible age to access superannuation and the age pension to align automatically with increasing life expectancy assumptions.

But perhaps, more than anything else, we all would benefit from adopting a more nuanced perspective on retirement (akin to the Ikagai concept I described earlier).

If we did, maybe we would all segment our lives a little bit differently:



If you enjoyed this article, please like or comment below. You can read my previous articles on topics as diverse as artificial intelligence, blockchain and Milennials at my website Fintech Freak.

Disclaimer: The views and opinions expressed in this article are solely those of the author in his personal capacity. The information contained in this article is general advice only and does not take into account your individual needs, objectives or financial situation. 

4 shockwaves shaking up the superannuation sector

4 shockwaves shaking up the superannuation sector

This article has been syndicated by Financial Standard and is available in the Expert Feed section of FS Super’s Journal of Superannuation Management

The super system is big. Much bigger than you realise. It’s so big that most numbers describing super are incomprehensible:

  • $2.3 trillion of assets invested in 2017
  • $10 trillion of assets estimated by 2040
  • wellbeing of 15 million working Australians
  • the 4th largest pension system in the world.


For a system so big, it’s no surprise that shifting it in a new direction takes time. Right now it’s being pushed and prodded by external forces harder than ever.

In this article, I delve into how these forces are creating four big shockwaves that are rippling through superannuation and reshaping it for future generations.

1. Big isn’t better (but it helps)

APRA has had enough. For years it has taken an influencing rather than instructing approach to the perceived problem of too many underperforming funds. The prevailing wisdom has been that consolidation or outsourcing within the sector was inevitable:

The merger option for small super funds

It’s clear now that APRA sees the scale=success equation as more nuanced. To prove it, they have gotten very specific on their criteria for success and will be naming and shaming funds that don’t measure up or have a long-term plan for sustainably improving member outcomes:

Why is APRA becoming so interventionist? In my view, it’s a product of many superannuation funds losing focus on core values (more on this later). The first and foremost responsibility of a fund is to ensure members receive an adequate return for the fees they pay. For some struggling funds, their only way forward will be to merge with others or outsource core activities.

I am hopeful though, that many funds can refocus on their core purpose and provide a more compelling, cost-effective and tailored proposition to their members. One big barrier for smaller funds to do this is the complexity associated with legacy product rationalisation. A myriad of regulations still operate to make it complex for trustees and providers to consolidate or transfer members to more contemporary products. The successor fund transfer regime is good but more can be done by regulators to assist funds in this regard.

Choice and competition is always good for consumers, particularly when funds differentiate their proposition by focusing on areas where they can truly add value to their specific member base. What use is retirement advice when the bulk of members are under 50? What benefit is there for life insurance if the member is under 25 with no mortgage or dependents? Funds need to know what their members are paying for but more importantly what they value. The best way to find this out? Ask them.

2. How to live safely in a net outflow world

“Do not fear death so much, but rather the inadequate life.” Bertolt Brecht

Like many members, I fear death less than I fear not making the most of the years that I have left. Superannuation theoretically plays an extraordinary role in protecting and preserving the lifestyle of hardworking Australians in their retirement years. The problem is, the system was built to make it easy for workers to get money into super (while taxing them on the way in) with little thought as to how they would get money out 40 years later (hence no tax on the way out).

A big shift is coming. Australia’s population is ageing rapidly. The number of people above retirement age grew from 1 million to 3.5 million in about half a century. Within our lifetimes, 1/4 of Australians will be aged over 65 and 1 in 14 will be aged over 85. Source: Ageing in Australia

What’s worse? People don’t even realise that they’re living longer and continue to underestimate their future life expectancy. A National Seniors Australia (NSA) surveyof 2,000 of its members found that, on average, seniors over the age of 50 underestimated their life expectancy by seven years. This generational change will result in many, if not most, funds moving into a net outflow position and the Federal Government’s fiscal deficit position growing rapidly:

Few funds are well equipped to service members in such an environment, let alone help them to make the transition to a comfortable retirement. The funds that proactively focus members’ attention on a retirement outcome rather than an account balance or annual return will be the ones best placed to win. In this future, funds will only succeed by boldly partnering with specialist providers to:

  • individually tailor retirement solutions for members
  • provide calculators and tools to demistify projected retirement income
  • cost-effectively protect against longevity and sequencing risk
  • offer savings and retirement alternatives to superannuation
  • equip members to overcome their behavioural biases that lead them to be overly conservative and apathetic about their future self.

Regulation may force their hand anyway but funds can’t rely on a Comprehensive Income Product for Retirement (CIPR) or an Alternative Default Model regime alone to deliver quality retirement outcomes. Regulators may even go further in fulfilling their promise that superannuation policy setting will be reoriented around a retirement income focused purpose. The unspoken threat on the regulatory horizon is future governments dipping into the superannuation honeypot by taxing retirees on pension withdrawals. Then we would really see a new retirement paradigm emerge, one that may no longer be so dependent on superannuation.

3. If you build it, Millennials will come

“If I have seen this far, it is by standing on the shoulders of giants.” – Sir Isaac Newton

In many ways, this could be the mantra of the super “disrupters” gaining a lot of press attention. There are new ones popping up every day, super designed for:

  • the lads (Grow Super)
  • techies (Spaceship)
  • women (Human Super)
  • mobile addicts (MobiSuper)
  • first grade spellers (Zuperannuation) – kidding!

I’m an inherent skeptic about whether these new entrants are in it for the long haul. But really, that doesn’t matter. What matters is that they represent an important customer acquisition trend. You can make prospective members care about the fund they select by tailoring the experience down to the lowest possible level (or the lowest common denominator in the case of Grow Super’s hilarious ad below):

But what’s behind their sudden rise? A mix of technological and market trends:

  • the rise of outsourced administration / trustees for hire
  • a rapid improvement in out-of-the-box superannuation software solutions
  • the advent of seamless electronic contributions/rollovers (aka Superstream)
  • savvy entrepreneurs and VC investors seeing big captive margins in the super industry and sniffing a quick juicy pump and dump.

Incumbuents can learn from this. Millennials will gravitate towards those companies and people who share their values or have similar core characteristics. You shouldn’t have to start a whole new super fund to provide a great experience to female members. In fact, Spaceship’s entire proposition could be encompassed by making available a single tech-focused investment option within an existing fund and marketing the hell out of it.

So why aren’t more funds doing this? Corporate inertia and high barriers to entry surely play a part. The bright side is, if there’s an easy answer, there’s an easy solution…

4. Forget FinTech, focus on the fundamentals

Blockchain, bitcoin, artificial intelligence, insurtech, supertech. They’re all just spokes on a wheel. This one’s on top, then that ones on top, on and on it spins – crushing the innovation ambitions of super fund board after super fund board.

Unlike Daenerys Targaryen though, I’m not advocating that funds break or reinvent the innovation wheel. Rather, funds need to return to their core principles and reflect upon how they add value to members. At a recent presentation by Bravura’s Darren Stevens, I got profound insight into the areas where Australia’s largest superannuation fund (Australian Super) believes it can add value to members long term:

  1. net returns (gross returns less fees)
  2. insurance
  3. education / advice
  4. retirement planning.

If most funds reflect deeply enough on their strategic ambitions, they would all boil down to a version of these four things. If a super fund’s value proposition is so ubiquitous, what is the purpose of having so many different funds? I think it comes back to my earlier point that choice and competition are good for consumers only if funds are adding value to the specific member base they serve.

For funds to have a differentiated purpose which reflect the members they service, they must understand the member preferences and characteristics that demand a unique and tailored service model. For example, one sector of the economy grossly under served by the superannuation system are contractors including those working in the “gig economy”. Where is Share Super – a fund designed for members in the sharing economy? *cue series A funding round* As ASFA points out, “It is crucial that superannuation settings are adjusted to ensure the superannuation system remains fit-for-purpose, and can best meet the needs of all Australians.” –Superannuation and the Changing Nature of Work

I’d argue that to better service members, most funds don’t need more or different regulation, but they do need to adjust their service proposition and provide more tailored solutions to members. Innovate but do it with purpose. This may sound odd coming from a “Fintech Freak” but innovation to me has never been about experimenting with the coolest new technology or chasing the latest upswing on the Gartner Hype Cycle.

Innovation must always be purpose-driven and customer-centric. Superannuation funds should look to the experience of sports drink giant Gatorade for inspiration. Gatorade invented new products by reinventing old ones in a “Third Way” approach to innovation. When Sarah Robb-O’Hagan took over Gatorade she eschewed the typical approaches to innovation (incremental improvement or a radical rethink) to focus on a Third Way of innovating around the current product to make it more valuable. Superannuation funds fighting for relevance amidst powerful regulatory, technological and demographic forces would do well to learn from this experience.

What other #shockwaves would you suggest are shaking up the #superannuation system? Please comment below with your thoughts to start a conversation.

The information contained in this article is general advice only and does not take into account your individual needs, objectives or financial situation.


How will Millennials live in retirement?

How will Millennials live in retirement?

By the time I’m 70, my retirement will hopefully begin. I’ve wanted to retire earlier but my $1.6 million (if I’m lucky) won’t be accessible tax-free until then. There was controversy in 2037 when the New Democrats indexed preservation age to our life expectancy but most people agreed it was time to tweak the system. After all, it had been many years since the now defunct Labor and Liberal parties had agreed not to touch the super system for two decades to provide some retirement planning certainty… 

This is, of course, a fantasy and given the Government-of-the-day’s proclivities to tinker with the super system, unlikely to ever become a reality. In the context of the major changes announced in the Turnbull Government’s inaugural Federal Budget, it is worth reflecting on the landmark years of the super system:

  • 1992: mandatory super contributions are introduced
  • 2006: taxation is simplified and super choice is enabled
  • 2016: the objective of super is enshrined.

Milennialls will look back on the most recent changes as a defining moment that reframed the super system around this objective:

“To provide income in retirement to substitute or supplement the Age Pension.”

The six biggest changes

Underpinning this objective, a number of changes to the taxation and access rules of super were flagged. However, there were six in particular that have the potential to significantly redefine the retirement of future generations:

  1. A lifetime cap on tax-free pensions: is $1.6 million enough to live comfortably in retirement? The Liberal Government is betting that it is by restricting tax-free pension account balances to this amount. This will have an enormous industry-wide impact, making administration more complex for superannuation providers and requiring advisers to rethink their wealth accumulation plans for clients.
  2. Restricting voluntary contributions: it just got even more difficult for workers to make contributions above the mandated employer contribution level. For the young who are salary sacrificing into super, the limit on pre-tax contributions (i.e. concessional) will be reduced to $25,000 p.a. For those closer to retirement or who have received a one-off windfall, your ability to make after-tax contributions (i.e. non-concessional) has now been reduced to a lifetime limit of $500,000. Importantly, this lifetime limit applies to non-concessional contributions made since 2007.
  3. Taxing transition to retirement earnings: the Government will remove the tax exempt status of earnings supporting a transition to retirement (TTR) pension. TTR pensions have been particularly popular with those that have been reducing their working hours whilst still earning a relatively high income. They have been even more popular with advisers recommending a re-contribution strategy. That will all end and TTR pensions will be treated more like accumulation accounts.
  4. Removing the work test: this has been a long time coming and will allow individuals to contribute to their super, regardless of their employment status. This will open up a range of contribution options to older Australians, including downsizing the family home and increasing the prevalence of spouse contributions.
  5. The untimely demise of anti-detriment payments: this was an unfamiliar benefit to most average Australians making super contributions but a well-known value-add by advisers that could find the right super fund. Essentially, a super fund could elect to provide a refund of a member’s lifetime contributions tax payments upon their death. This has been used heavily in estate planning but was inconsistently applied throughout the industry and won’t be available anymore.
  6. Resurrecting (tax-free) deferred annuities: deferred annuities have been seen by a number of insurance and superannuation providers as the silver bullet in the retirement income debate. Given the advantageous nature of these tax changes, expect to see a lot of innovation in this space and increasing focus on product-centric retirement income solutions.

Predicting the impact on Millennial retirements

These changes should be read in the context of the newly defined objective of the super system. Simon Swanson (Managing Director, Clearview) summed this up well in arecent interview:

“Superannuation is no longer a wealth accumulation game, it is a retirement income game.”

I see a number of long-term super industry trends emerging during my (and other Millennials’) working life as a result of these changes. Some will emerge rapidly, whereas others will be so imperceptible they will only be apparent in generational hindsight. In order of speed and likelihood of change:

  1. increasing system complexity: this one is a no-brainer and perhaps not the boldest prediction ever made. These changes add to the complexity of the system for both providers, advisers and most importantly members. Expect to see the consolidation of superannuation funds accelerate as the costs of administration become too much for sub-scale providers. Quality advisers will continue to be worth their weight in gold to members trying to navigate the murky retirement waters.
  2. diversifying retirement product mix: expect to see a comeback in insurance-based products including deferred annuities and insurance bonds. A mix of these products, along with an account-based pensions may become a more affordable and compelling proposition. Automated decision support tools will proliferate assisting members to determine their optimal product mix to achieve their desired retirement income and lifestyle.
  3. encouraging self-employment and entrepreneurship: a subtle aspect of the changes is how they benefit the self-employed by making it easier for them to contribute to super. At the same time, as the company tax rate falls to 25%, there may be incentives for the self-employed to restructure more income through their companies. Furthermore, high income earners will have to find other investment opportunities outside of superannuation such as equity crowdfunding and investing in small businesses. This prediction is slightly more far-fetched but I wonder if it will be an unintended consequence of Malcolm’s much-touted innovation economy.
  4. inter-generational poverty: in many ways, the wealth of current pre-retirees has been built on the twin pillars of home ownership and superannuation. This may be slightly controversial, but what if these super changes merely add to the growing body of thought that younger Australians are being affected by one of the worst examples of inter-generational poverty visited in history? As house prices continue to rise (perpetuated by negative gearing tax concessions that continue to be preserved by the latest budget), the likelihood of Millennials owning their own home decreases by the year. Combine this with the new objective of super and there is the potential for Millennials to have less tax-effective wealth accumulation opportunities than their predecessors. We could even see the emergence of a new advice specialty – overseas retirement planning – as Millennials with limited retirement incomes, but freed from the shackles of home ownership, set sail for fairer (and cheaper) shores.

You can read my series on ideas transforming Australia’s wealth in 2016 below:

Idea #1 – Goals-based investing

Idea #2 – Blockchain (Part 1, Part 2, Part 3)

Idea #3 – Roboadvice

Please note: this article is for general information and illustrative purposes only and should not be relied upon for any purpose. The accuracy of the information contained within cannot be guaranteed.  You should consult a financial adviser before making any personal financial decisions.