More consistent variables in retirement calculators needed

Superannuation fund calculators that provide retirement income projections to members need to be made more consistent across funds, Willis Towers Watson believes.

In an analysis the global risk adviser said the wide variations in calculators was in the assumptions being adopted in the projections.

However, while recent legislation required calculators to show the present value of any future project amount payable that was calculated using a deflator rate of 3.2% p.a., the issue of consistency of other assumptions still remained.

The analysis said there was modest dispersion in the income growth/deflator assumption, and greater dispersion in the investment return assumption from minimum to maximum assumptions of 4.1% p.a. (pre-retirement) and 4.3% p.a. (post-retirement).

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“These wide ranges may reflect differences in a number of underlying factors such as the strategic asset allocation of the default investment option, fees, or forward-looking return assumptions,” it said.

“Whatever the reasons, the aggregate difference in the default return assumption that users can be presented with across different tools can be significant.”

While the default age adopted in super and retirement calculators was typically 67, there was an outlier fund that used an assumption age of 60 which was materially different but could be representative of when the fund’s members usually retire.

In terms of life expectancy, half the providers surveyed used either age 90 or 92, and the other half ranged from 81 to 89.

“This represents a significant range, with a potential difference of 10 years in retirement being reflected in the projections,” the analysis said.

It said these differences impacted retirement income projections in which the firm used three life phases to illustrate.

The largest projected difference was a 48% increase in investment returns for those ‘starting out’ and a 25% drop in ‘run out age’ for those in the ‘workin’ hard’ category.

“Investment returns, retirement age and run out age are consistently the highest ranked assumptions in terms of materiality,” it said.

“If the industry is concerned about providing greater uniformity of projection results for members using superannuation and retirement calculators, in our view the focus should be on providers addressing the consistency of all these important default assumptions through a regular review process.

Willis Towers Watson said providers of retirement calculators needed to review the “reasonableness” of the chosen default assumptions on a regular basis.

 “Where we have assisted providers in these reviews, the starting point is often the default assumptions that are adopted by ASIC in its MoneySmart calculators, before considering whether fund-specific factors warrant adopting a different approach,” it said.