Switching to cash bigger negative impact than early release

Superannuation fund members who have switched to cash as a response to the COVID-19 pandemic will experience the greatest adverse impact, and members may need to keep working anywhere between two and eight years longer before retiring, according to Willis Towers Watson.

Willis Towers Watson’s latest research on the impact of the virus on retirement adequacy found that while the proportion of members that switched to cash was still reasonably small across the industry, it could be very damaging and was particularly acute for older members.

This, the firm’s head of retirement solutions Nick Callil said, reflected the impact of investment returns in what it called the “retirement risk zone” in the years immediately preceding and after retirement date.

Impact of COVID-19 on Retirement Adequacy Index (RAI)

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Source: Willis Towers Watson

The impact of the early release of super was higher for younger members with the exception of those with a low earnings base and account balance, where withdrawals were significantly less than the full $20,000.

The research noted that younger members were 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.

“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,” Callil said.

“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.”

He noted that funds needed to understand their membership, what their projected retirement adequacy looked like, and how it had changed through this time.