Sharing the risks

5 min read
5 min read

Currently, nearly all Australians are left to manage their superannuation risks in retirement. An example of this is the uncertainty people face around how long their money needs to last. Typically, retirees have little idea of whether they will be someone who survives into their late 90’s or if they might be one of the ones who die before they reach age 70. This uncertainty means nobody can accurately determine how much to safely withdraw from their super each year and be confident it will last.

The only option most superannuation funds offer to provide a retirement income is an account-based pension. With this pension, you make withdrawals from your balance as your ‘income’. Take out too much, and it could mean running out.

Studies referenced in the Actuaries Institute submission the Retirement Income Review indicated that most pensioners err on the side of caution and spend less than their assets can theoretically sustain, that is they are self-insuring their longevity risk. This cautious behaviour may mean a poorer retirement outcome. It also means significant death in retirement benefits are being paid to their children/estate. But that is not what superannuation tax concessions are designed to achieve.

Sharing the risk

Better retirement outcomes can be delivered by sharing risks amongst groups of retirees and helping each other. For example, pooling investments to gain more diversity or pooling longevity risk to deal with the uncertainty each retiree faces about their lifespan. Modelling by the Australian Government Actuary for the Financial System Enquiry Final Report shows that pooling longevity risk can result in a more stable lifetime retirement income that is 15 per cent to 30 per cent higher than merely drawing down from an account-based pension.

The account-based pension is perhaps misnamed. It is not a pension in the traditional sense. It is an investment account that requires a minimum level of annual withdrawals. The minimum level is a percentage of the balance which varies by age. For retirees under age 65, it is 4 per cent and increases at 75, 80, 85, 90 and 95 years when it reaches 14 per cent, although these rates have been halved by the Government for the short term as a response to the COVID-19 pandemic.  There is no guarantee that the level of income paid will last for any specified length of time, let alone for life. Both the investment risk and the longevity risk are placed entirely on the individual.

A pension for life

The Government is currently reviewing the need for superannuation funds to offer better options for their retired members to turn super into income that will last for life. By providing an opportunity where longevity risk is insured will allow a pension to be paid for life.

The mathematics of insurance is based on pooling risk. People use insurance to insure their home and contents, cars and so on. They pay premiums which are pooled together with premiums of other people and when a claim is made the pool’s resources are there to pay the claimant. Why not use the same approach to insure the uncertainty of longevity risk?

When longevity risk is insured, it means payments for each retiree will last for life. It provides better security and, depending on how it is set up, can still allow retirees to have investment choice and an opportunity to have exposure to growth assets. Investment in higher-growth assets provides the opportunity to achieve higher returns and can be more likely to produce an income that can keep pace with long term inflation.

Extending purchasing power

The following range of likely income charts, produced by Optimum Pensions, show the benefits of investing in a (pooled) investment-linked lifetime pension versus a standard account-based pension product (drawing the minimum age-based percentage).

The charts show the results of 1,000 simulated projections of investment returns (above CPI) over the next 50 years and assume a 66-year old female who is in good health with $200,000 in a conservative-balanced superannuation option (50 per cent allocation to growth assets). There is an estimated 90 per cent chance that her retirement income will be somewhere within the green shaded area each year of her life with a 5 per cent chance it will fall below or 5 per cent above the green shaded area. The red line in the middle of the shaded area shows the median. The dotted line is the probability of being alive and any given age.

Projected income from an account-based pension

Optimum-Graph

Projected income from a pooled longevity product (investment-linked)

Optimum-Graphs

The pooled product is based on the design being considered by some of Australia’s largest superannuation funds. The rates used assume the same administration and investment management fee assumptions for both charts, with an additional fee of 0.5 per cent per annum of assets for the longevity insurance provided by a global reinsurer.

Pooling investments have been used for a long time by the superannuation industry. Members’ investments are pooled together, and many funds also use pooled investment vehicles. This has been done to minimise risk by gaining greater diversification and achieving higher returns. Funds also use pooled arrangements for providing insurance benefits for their accumulation members. In retirement, pooling continues to be used for investments. More importantly, pooling can also be used to provide longevity protection for a retiree. This will ensure retirees will have an income for life and higher returns by delivering investments in growth assets without the fear of the retirees running out of money.

 

Picture of By David Orford and Peter Rowe, Optimum Pensions

By David Orford and Peter Rowe, Optimum Pensions

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Derek Thompson

Via live link

Best Selling Author, Podcast Host of 'Plain English'

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Keynote 8 – Navigating the energy transition: opportunities, investor strategies and policy needs

Few speakers can match Derek Thompson‘s ability to synthesize mega-trends in society, labor, economics, technology, and politics. Put another way: Derek trawls the data sets and does the forecasting and deep reporting necessary to help us better understand how we live, how we vote, how we spend, and how we work.

In his paradigm-shifting #1 New York Times bestseller, Abundance (co-written with Ezra Klein), this award-winning journalist reveals how our policies and culture have pushed us into a world of scarcity (not enough housing, workers, or progress)—and offers a radical new path towards a world where housing is affordable, energy is plentiful, and innovation flourishes across industries.

He shares a compelling vision of a future where we have more than enough for everybody, and a practical, actionable roadmap for how to get there. It starts with taking more risks, building more expansively, and recognizing that we all have the power to create a world of abundance. “Everything’s utopian until it’s reality,” he says.

Carmen Beverley-Smith

Executive Director - Superannuation, Life & Private Health Insurance, APRA

Sessions

Keynote 8 – Navigating the energy transition: opportunities, investor strategies and policy needs

Carmen joined APRA in March 2023 and holds the role of Executive Director, Life and Private Health Insurance and Superannuation.  

She has had an esteemed career in financial services, spanning over 25 years. She has held diverse leadership roles at Westpac and Commonwealth Bank of Australia, including across risk, transformation and change, product and portfolio development, and sales and service. 

Prior to joining APRA, she held the role of General Manager, Risk Transformation Delivery Integration at Westpac. This involved leading the group-wide implementation of a suite of solutions to uplift risk management capability and develop data, analytics and reporting. 

Carmen leads with a values-driven approach and a particular interest in developing and mentoring talent. 

She holds a Bachelor of Commerce and Accounting, is a certified Chartered Accountant and a Graduate of the Australian Institute of Company Directors. 

Amy C. Edmondson

Novartis Professor of Leadership and Management, Harvard Business School

Sessions

Keynote 8 – Navigating the energy transition: opportunities, investor strategies and policy needs

Amy C. Edmondson is the Novartis Professor of Leadership and Management at the Harvard Business School, a chair established to support the study of human interactions that lead to the creation of successful enterprises that contribute to the betterment of society.

Edmondson has been recognized by the biannual Thinkers50 global ranking of management thinkers since 2011, and most recently was ranked #1 in 2021 and 2023; she also received that organization’s Breakthrough Idea Award in 2019, and Talent Award in 2017.  She studies teaming, psychological safety, and organisational learning, and her articles have been published in numerous academic and management outlets, including Administrative Science Quarterly, Academy of Management Journal, Harvard Business Review and California Management Review. Her 2019 book, The Fearless Organization: Creating Psychological Safety in the Workplace for Learning, Innovation and Growth (Wiley), has been translated into 15 languages. Her prior books – Teaming: How organizations learn, innovate and compete in the knowledge economy (Jossey-Bass, 2012), Teaming to Innovate (Jossey-Bass, 2013) and Extreme Teaming (Emerald, 2017) – explore teamwork in dynamic organisational environments. In Building the future: Big teaming for audacious innovation (Berrett-Koehler, 2016), she examines the challenges and opportunities of teaming across industries to build smart cities. 

Edmondson’s latest book, Right Kind of Wrong (Atria), builds on her prior work on psychological safety and teaming to provide a framework for thinking about, discussing, and practicing the science of failing well. First published in the US and the UK in September, 2023, the book is due to be translated into 24 additional languages, and was selected for the Financial Times and Schroders Best Business Book of the Year award.

Before her academic career, she was Director of Research at Pecos River Learning Centers, where she worked on transformational change in large companies. In the early 1980s, she worked as Chief Engineer for architect/inventor Buckminster Fuller, and her book A Fuller Explanation: The Synergetic Geometry of R. Buckminster Fuller (Birkauser Boston, 1987) clarifies Fuller’s mathematical contributions for a non-technical audience. Edmondson received her PhD in organisational behavior, AM in psychology, and AB in engineering and design from Harvard University.

 

Daniel Mulino MP

Assistant Treasurer and Minister for Financial Services

Sessions

Keynote 8 – Navigating the energy transition: opportunities, investor strategies and policy needs

Born in Brindisi, Italy, Daniel was a young child when he moved with his family to Australia. He grew up in Canberra and completed his first degrees – arts and law – at the ANU. He then completed a Master of Economics (University of Sydney) and a PhD in economics from Yale.

He lectured at Monash University, was an economic adviser in the Gillard government and was a Victorian MP from 2014 to 2018. As Parliamentary Secretary to the Treasurer of Victoria, Daniel helped deliver major infrastructure projects and developed innovative financing structures for community projects.

In 2018 he was preselected for the new federal seat of Fraser and became its first MP at the 2019 election, re-elected in 2022 and 2025. From 2022 to 2025, Daniel was chair of the House of Representatives’ Standing Economics Committee in which he chaired inquiries; economic dynamism, competition and business formation and insurers’ responses to 2022 major floods claims.

In 2025, he became the Assistant Treasurer and Minister for Financial Services.

In August 2022, Daniel published ‘Safety Net: The Future of Welfare in Australia’, which aims to explore the ways in which an insurance approach can improve the effectiveness of government service delivery.