Pensions Delivery Case Study
Tony Lally CEO, Sunsuper
30 October 2007
Rotman / ICPM / Netspar
Maastricht University
Discussion Forum
Superannuation in Australia
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A$1,150bn in assets
Four major segments
- Industry funds
- Retail funds/Mastertrusts
- Self-managed funds (<5 members)
- Corporate funds
Corporate funds moving to mastertrusts/industry funds (down from
555 in June 2006 to 290 in June 2007)
1. APRA Statistics Quarterly Superannuation Performance June 2007.
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Robust growth outlook for superannuation
Source: Trowbridge Deloitte Super 2015 model (AMP Capital presentation March 2007)
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Government Age Pensions in Australia
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No social security contributions
Age pensions are means tested
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Assets test
Income test
Full pension
Part pension
No pension
Assets
Up to $166,750
Sliding scale
Over $529,250
Income
Up to $3,432pa
Sliding scale
Over $38,760
Based on Single Person, Homeowner (@ 20 Sept 2007)
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Additional benefits with Age Pension
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Concession Card
Rental Assistance and Pharmaceutical Allowance
Complicates retirement planning
Significant focus for financial planners
Sunsuper background
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Established 1/10/1987
Sponsors – Commerce Queensland, Queensland Council of Unions/AWU
Employers - 60,000+
Members – 1,000,000 (3rd largest)
Funds at 30/6/2007 - A$12.7bn
Six Directors, three nominated by CQ, three nominated by QCU/AWU
85 staff
Administration outsourced, 350 staff
Investment management outsourced, Sunsuper team of 7 under CIO
Compulsory employer contributions of 9% of salary
Voluntary member contributions
Major focus to date on benefit accumulation pre-retirement
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At 30/6/2007 only A$150m in post-retirement product (1.2% of fund)
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Sunsuper - 25% of members hold 85% of funds
Sunsuper - members are under 40; funds are over 40
Pension regulations in Australia – pre 1/7/2007
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Benefits preserved to age 55 (60 if born after June 1964)
Taxation
Contributions
-employer
Contributions
-member
Investment
income
Tax-deductible
Non-deductible
Taxed at 15%
No tax
Lump sums
Pensions
Pre-retirement
- Taxed at 15%
Member
contributions
- no tax
Income taxed
at marginal
rates
After pension
commences
- No tax
Up to
$135,590
– No tax
May be 15%
tax rebate &
tax free
amount
Over $135,590
- tax at 16.5%
Age-based
limits
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No limits
Lump sum RBL
$678,149 (excl
member conts.)
Pension RBL
rules
Pension market in Australia – pre 1/7/2007
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All investment earnings tax-free once pension payment commences
Most fund members take lump sums on retirement
Mainly private retail pensions sold by financial planners
Products
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Lifetime annuities
Term annuities
Allocated pensions
Some products have concessions for Age Pension means test (eg
lifetime annuities)
Financial planning priorities
1. Age Pension qualification
2. Tax
3. Investments
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Pension regulations in Australia -1/7/2007 changes
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Assets can remain in super fund indefinitely
Members can contribute at same time as drawing down benefits after age 55
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Pre 1/7/07
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Transition to retirement
No limit on benefits payable
Taxation
Contributions
-employer
Contributions
-member
Investment
income
Tax-deductible
Non-deductible
Taxed at 15%
No tax
Lump sums
Pensions
Pre-retirement
- Taxed at 15%
Member
contributions
- no tax
Income taxed at
marginal rates
After pension
commences
- No tax
Up to $135,590
– no tax
May be 15% Tax
rebate and
deductible
amount
Over $135,590
- tax at 16.5%
Age-based limits
No limits
1/7/07
changes
After age 60
Limit $50,000 pa
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Limit $150,000 pa
Lump sum RBL
$678,149 (excl
member conts.)
Pension RBL
rules
Tax-free
Tax-free
No limits
No limits
Implications of 1/7/2007 changes
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Members will leave assets in super funds post-retirement
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Rapid growth in post-retirement market
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All assets
($bn)
Pension assets
($bn)
Pension assets
%
2005
765
145
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2010
1,332
367
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2015
2,159
712
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2020
3,332
1,095
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Older Australians will transfer non-super assets into super
Many people will transfer assets into super approaching retirement
New pension products required
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Year
Initial focus on transition to retirement products (salary sacrifice/pension drawdown)
Longer term solutions under development
Some gimmicks launched (eg linking ATM to pension accounts)
Sunsuper developing a complete retirement income solution
Source: Rice Warner Actuaries, IFSA Presentation, 2 August 2007
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Three distinct phases of retirement
Active
Ages 60 to 75
Passive
Ages 65 to 85
Frail
Ages 75 to 100
Continuation of lifestyle
but more time for leisure,
travel and family
Shift to more passive
activities, travel is closer
to home
Restricted mobility
means leisure activities
are limited
Some part-time work
Some unpaid charitable
work
Reduced contribution to
economy and society
Increased expenditure on Increased expenditure on Increased expenditure on
leisure, many are still net health. More frugal
health and aged care
savers
lifestyle.
Housing upgrade
Housing downsizing
Retirement village or
nursing home
The world closes down gradually with advancing age
Source: Rice Warner Actuaries, IFSA Presentation, 2 August 2007
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Pension provision needs to reflect lifestyle needs
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Highest expenditure in Active Phase
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Reduction in needs as lifestyle becomes more frugal in Passive Phase
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More conservative (no scope to recover from losses)
Local holidays, retain car longer
“Discount” lifestyle
Many retirees run out of superannuation and fall back on Age Pension
Expenditure in Frail Phase grows
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Capital needs (upgrade white goods, house, car)
Holidays (trip of a lifetime)
Health costs peak, although there are significant government subsidies
for health expenditure in these years
Decision-making ability is diminished
Aged care and accommodation needs change
Sale of home to fund nursing home care in old age
Segmented approach required
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Retirement can occur at any age
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Solutions need to consider key trigger retirement ages (55, 60, 65)
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Retirement at other ages need intermediate solutions
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Segment members at retirement by balances
1. Draw down lump sum over 0 – 10 years (0-$50,000)
2. Income to supplement Age Pension ($50,000-$166,750) (Single homeowner)
3. Income integrated with Age Pension ($166,750 - $529,250) (Single homeowner)
4. Independent income ($529,250+) (Single homeowner)
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Assumptions
o Lower balances mean lump sums over a short period post retirement – no income
o No Age Pension before age 65
o Transition to retirement strategy required
o Where members do not fit assumptions - advice/more information will be required
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Longevity
1. There are three inter-relationships
a)
How much is available for investment?
b)
How long is it paid for?
c)
What is the income level?
2. Two of these are known, the third can be calculated
3.
4.
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Pensions have historically focussed on maintaining purchasing
power which ignores
a)
Integration with Age Pension
b)
Age Pension increases in line with inflation
c)
Income needs deteriorate as people age
d)
Age Pension is the safety net for those with lower balances
A new approach is needed
Longevity options for members with age pensions
Option A (level total income)
Option B (level fund income)
Option C (flying start)
Option D (preserve capital)
Initial balance $310,000
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Longevity options for members without age pensions
Option A (level total income)
Option B (inflation-linked)
Option C (flying start)
Option D (preserve capital)
Initial balance $1,000,000
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Sunsuper retirement income solutions
• Strategy
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Build on the trust based on many years membership
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Provide options which are simple
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Pro-active member management
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Minimise requirement for advice
Step 1
Fallback
Fallback
Information for decision on pension
Telephone advice
Face to face advice
• Pre-retirement member engagement
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Assemble required member data (retirement date, retirement income needs, assets
etc.)
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Transfer all super assets to Sunsuper
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Provide appropriate retirement planning tools (tailored statements, written and web
based tools – eg video, calculators)
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Pre-dispose members to retire with Sunsuper
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Free advice/information support provided by phone via Member Advice Centre (MAC)
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Face to face advice available from Sunsuper financial planners (fee for service)
Sunsuper retirement income solutions (cont’d)
• Transition to retirement
- Salary sacrifice and drawdown pension concurrently
- Two accounts needed, contribution account is taxed at 15% on
earnings, pension account is tax-free
- More complex and requires higher level of advice
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Sunsuper retirement income solutions (cont’d)
• At retirement
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Segmented approach based on eligibility for Age Pension
Provide limited choices
Income level or expiry age for pension chosen by member
Best endeavours
Not indexed
Access to capital if required, reset income or expiry age
Target for self-select vs advice
Segment
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No Advice
MAC
Financial Planner
100% Age Pension
80%
15%
5%
Part Age Pension
20%
50%
30%
No Age Pension
80%
10%
10%
Sunsuper retirement income solutions (cont’d)
• Payment options
- Directly to bank account
- Monthly
- Tax-free
• Investment options
- Default option based on “real” fund holding assets with high
income and lower asset value volatility eg.
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Infrastructure
Property
Utilities
High-yielding shares
Corporate bonds
- Limited other options, one lower risk and one higher risk
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Sunsuper retirement income solutions (cont’d)
• Post-retirement
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Annual statement, reset income level or expiry age
Provide option to amend original selection
Report on investments
MAC/financial planners available for discussion/advice
Summary
• Traditional pension provision will not meet retirees needs
• Guarantees are too expensive
• Retirees want flexibility to reflect changing lifestyles as age
advances
• Income needs reduce with advancing age
• Aged care is a special need requiring other considerations
outside super (eg sale of home)
• Best endeavours can best meet retirees needs when matched
with
- simple but adequate communication/advice
- appropriate investment processes
- Age Pension as safety net
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Thank you
This presentation contains general advice and does not take into account the investment objectives, financial situation
or needs of any particular individual. Because of this you should consider the appropriateness of the advice, having
regard to your own particular objectives, financial situation and needs before acting on any advice.
You need to apply the concepts to your own situation before making an investment decision.
You should obtain and consider a copy of the Product Disclosure Statement (PDS) before making a decision to acquire,
or continue to hold the product. You can obtain a PDS by contacting the Customer Service Hotline on 13 11 84 or by
visiting www.sunsuper.com.au.
Before making a decision to switch between superannuation funds you should consider whether there is any impact
from exit fees, withdrawal fees or loss of other benefits.
This publication has been prepared and issued by Sunsuper Pty Ltd (ABN 88 010 720 840) (AFSL No.228975) (RSE
Licence No. L0000291) which is the Trustee of the Sunsuper Superannuation fund (ABN 98 503 137 921) (SPIN SSR
0100 AU) (RSE Registration No. R1000337). While it has been prepared with all reasonable care, no responsibility or
liability is accepted for any errors or omissions or misstatement however caused. All forecasts and estimates are based
on certain assumptions which may change. If those assumptions change, our forecasts and estimates may also change.
Contributions to superannuation are subject to the preservation rules.
Sunsuper Financial Services Pty Ltd (ABN 50 087 154 818) (AFSL No. 227867) is a wholly owned subsidiary of
Sunsuper Pty Ltd.
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