Retirees at risk
The times are especially dangerous for people who have recently retired or are about to, according to Jeremy Cooper. CHOICE recently sat down with Cooper, who headed up the 2009-2010 study on behalf of government that became known as the Cooper Review, to talk about what he calls a “fundamental flaw” in the super system.
The problem isn’t hard to identify. Instead of reducing risk during the crucial period five years before and after retirement – which Cooper calls the “retirement risk zone” - most super accounts remain overly exposed to fickle share markets.
“If we go over a cliff like we did during the GFC, there’s nothing much people can do,” he says.
The portfolio imbalance across the retirement risk zone – when the investment strategy should be defensive rather than accumulative – is “a piece of unfinished business” that has yet to be addressed by the super industry.
Cooper argues that having close to 70% of your assets tied to share market movements when you’re looking to retire makes older Australians uniquely vulnerable to financial calamity.
Shaky track record
The super system has not served Australians well lately. According to numbers released in July last year by the Organisation for Economic Co-operation and Development (OECD), Australian super funds were the third-worst performing retirement funds among the more than 30 member countries from 2008 to 2010 – only Portugal and Estonia did worse.
Global consulting firm Towers Watson also pointed out in July last year that very few Australian super funds significantly reduce exposure to the share markets while shifting from accumulation to the drawdown/pension phase, with the average proportion invested in equities dropping from about 74% to 67%. And it turns out our super funds have the highest exposure to share markets among all OECD countries.
To be fair, keeping accounts in accumulation mode right up to retirement has seemed like a good idea given the overall gains in the markets from the early 1980s up until the arrival of the GFC in late 2007. But Cooper says the thinking has not kept pace with the shifting realities of global economics.
“The problem is systemic, and the industry’s really caught in the headlights on this one. More than any other country in the world, we have forced risk on our retirees and near-retirees.”
Case in point
Exhibit A for Cooper is one of Australia’s most popular types of post-retirement product, the account-based pension plans into which many super accounts are rolled. Drawdown requirements mean account holders must withdraw a certain amount every year to stay compliant with government rules, but for the past five years in a row Canberra has stepped in to decrease the amount because retirees have been faced with the prospect of selling assets worth a lot less than when they were purchased. According to Cooper, it’s an
Locking in losses also happens when you switch to a safer portfolio too late. “You’re just cementing your problems if you switch the balance of your account to fixed-interest products once the losses have been realised,” says Cooper. Not only has your account’s earning power been hobbled, but retirees are using up four or five per cent of the account annually, usually without any money coming in.
“The sort of returns you would need just can’t be realised.” But those in the retirement risk zone don’t have the luxury of waiting it out. With the world economy looking more treacherous than ever, Cooper maintains that baby boomers should look at trading the hope of recovery for the certainty of fixed-income products.