MELBOURNE, August 27, 2020 — A range of factors caused by the COVID-19 pandemic mean superannuation fund members may need to keep working anywhere between two and eight years longer before retiring, according to research by Willis Towers Watson (NASDAQ: WLTW), a leading global advisory, broking and solutions company.
Willis Towers Watson Head of Retirement Solutions, Nick Callil, and Associate Director, Retirement, Erinn Cullinane, created 12 ‘representative cameos’ for superannuation fund members aged between 30 and 60, at various income levels1. The research, Impact of COVID-19 on Retirement Adequacy looked at COVID-related factors beyond the Early Release scheme to include investment returns, switching behaviour and unemployment.
The projections illustrate that the events of 2020 will have a negative impact on the retirement outcomes for large numbers of Australians. Nick Callil commented: “Some members, particularly higher earners, may choose to retire with a slightly lower retirement income if they are able to maintain their desired lifestyle with the funds available to them. For others, the most obvious action may be to contribute more by way of voluntary member contributions. However, at a time where unemployment is projected to reach its highest since the great depression, many members will not have the ability or inclination to use available income to support additional contributions even where the need is recognised.
“Those who are unable or unwilling to make additional contributions may be forced to work past their preferred retirement age – if such an option is available to them. Clearly, for those approaching retirement, this approach may not be feasible with an additional working life of up to eight years required to achieve pre COVID-19 adequacy levels.”
| Earnings Base | Low | Mid | High | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Age | 30 | 40 | 50 | 60 | 30 | 40 | 50 | 60 | 30 | 40 | 50 | 60 |
| Additional years required | 2 | 3 | 4 | 8 | 3 | 3 | 3 | 7 | 3 | 3 | 4 | 8 |
| New Retirement Age | 69 | 70 | 71 | 75 | 70 | 70 | 70 | 74 | 70 | 70 | 71 | 75 |
The research first established a pre-COVID retirement income baseline, referred to as a Retirement Adequacy Index (RAI), for each cameo. The RAI was then recalculated to take account of the impact of investment returns, switching behaviour, the early release scheme and unemployment.
Callil added: “Those in the low earnings band show the least absolute reduction across the board, due to overall retirement income being bolstered by the government Age Pension.
“Switching has the greatest adverse impact. While the proportion of members that switch to cash is still reasonably small across the industry, the analysis demonstrates that it can be very damaging and is particularly acute for older members, reflecting the impact of investment returns in the ‘retirement risk zone’ in the years immediately preceding and after retirement date.”
| Earnings Base | Low | Mid | High | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Age | 30 | 40 | 50 | 60 | 30 | 40 | 50 | 60 | 30 | 40 | 50 | 60 |
| Pre COVID-19 RAI | 91% | 84% | 75% | 68% | 117% | 107% | 102% | 94% | 190% | 186% | 184% | 179% |
| Returns | 0% | -1% | -1% | -1% | -2% | -1% | -1% | -2% | -7% | -7% | -7% | -12% |
| Switches | -2% | -3% | -3% | -5% | -6% | -4% | -6% | -18% | -18% | -28% | -35% | -58% |
| Early Release | -1% | -2% | -3% | -2% | -3% | -2% | -2% | -2% | -5% | -4% | -3% | -1% |
| Unemployment | -1% | -2% | -1% | -1% | -3% | -3% | -3% | -2% | -12% | -9% | -7% | -3% |
| Post COVID-19 RAI | 87% | 77% | 67% | 59% | 103% | 97% | 91% | 69% | 150% | 139% | 132% | 105% |
The analysis found the impact of early release is higher for younger members. The exception is those with a low earnings base and account balance, where withdrawals are significantly less than the full $20,000. Younger members are also most impacted by periods of unemployment, with lost income in the early years equating to the largest differences at retirement through the powerful force of compound interest.
As demonstrated, COVID-19 and the associated shutdown will affect individuals differently depending on their personal circumstances and actions. However, the current climate offers a unique opportunity for funds to increase engagement with members who, in many cases, will have connected with their fund more strongly than previously through accessing early release payments. Well-crafted and targeted communications can positively influence member behaviour, demonstrating the value of additional contributions and the importance of making appropriate investment choices.
Callil said: “Funds need to understand their membership, what their projected retirement adequacy looks like, and how it has changed through this tumultuous time. A Retirement Adequacy Study, which produces a RAI for each fund member and selected cohorts, can provide valuable insights into the projected retirement outcomes of the fund as a whole, and help identify cohorts of members for targeted communications or other action.”
Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential.
1 Based on the following assumptions: work to age 67 with no career breaks, receive contributions at the legislated SG rates, invest in a Balanced investment option throughout their working lifetime and retirement and be married with a superannuation account balance equal to their spouse throughout retirement, for the purpose of Government Age Pension and Target Income.
