The risk of members outliving their retirement savings presents a significant challenge for retirees and superannuation funds alike. With the Retirement Income Covenant set to come into force on 1 July 2022, super funds need to consider more innovative investment options to deliver greater income confidence to retired members.

Longevity risk, or the uncertainty about how long an individual will live, is foremost in many retirees’ minds as they worry about outliving their savings. Three quarters of retirees surveyed by Allianz Retire+ did not know how long their money would last in retirement; half said they did not feel financially secure; and two thirds said that they were only buying necessities.¹

It’s also a key issue for superannuation funds, grappling with the implications of the imminent Retirement Income Covenant legislation. Originally, scheduled for July 2020, and now postponed to July 2022, the covenant will require Superannuation Trustees to consider the needs and preferences of retiree members, and ensure they have greater choice in how they access their superannuation benefits in retirement.

The delay in implementation of the covenant has provided the industry with some welcome breathing room. But with just over a year to go, funds need to be considering how they will meet the covenant’s imperative to deliver a greater range of options to retiree members.

The risk of a long retirement

While no two retirees are the same, it’s safe to say that most share a common goal: to generate enough money so they can enjoy life after work. It’s therefore no surprise that many retirees worry their savings won’t last the distance. In fact, research shows that around 60% of Australians aged between 50 and 70 share this concern to some degree.²

One of the reasons behind this fear is that we’re living longer (although of course, this has a definite upside too). In 1960, for instance, the average life expectancy for a 65-year-old Australian man was 78 and for an Australian woman it was 81. Fast forward 60 years and, with ever increasing mortality improvements, the life expectancy for 65-year-old Australians is now 85 for men and 87 for women. And for a 65-year-old couple, there is more than a 1 in 3 chance that one of them will be alive at age 95.³

So, for someone who’s just turned 65 and is about to retire, they’ll want to make sure their retirement savings will last at least 20 years. That’s a significant jump on the 13–16-year retirement that a person leaving the workforce in 1960 could expect. And for women in particular, who tend to retire with less money but live longer than men, the prospect of a lengthy retirement can be especially daunting.

Traditional approaches no longer apply

A further challenge is that the current persistent low-interest rate environment is rendering traditional retirement investment models less effective over the longer term. To earn a sufficient return to sustain their increasing lifespans, retirees need to hold more growth assets (equities) and fewer defensive assets (cash and fixed interest) than in years gone by, with the traditional 50/50 split between equities and cash or fixed interest no longer able to deliver comfortable retirements for most.

The result is that retirees are having to take on more equity exposure at a time of heightened share market volatility. Callan Associates research⁴ found portfolios must contend with six times as much volatility (standard deviation) to earn the same returns as 20 years ago.

Consider how this affects retirees. Low returns on defensive assets mean they need to own more growth assets to earn a sufficient return. But with that comes higher risk given the share market volatility and occasional wild swings in wealth that terrify many and don’t promote a sense of confidence in drawdown behaviour.

So instead, retirees are adjusting to ever-lower income returns on their savings, having poorer standards of living, and unnecessarily preserving too much of their capital. The Government’s Retirement Income Review, released in 2020, found that many retirees are living frugally, drawing down super minimums and dying with high percentages of super balances.

This disconnect between their fear of running out of money – and the reality of dying with large super balances, suggests that current income models are failing to provide adequate confidence for many retirees. It also points to an under-served opportunity to develop better investment choices for retirees – for example, protected equity products, that enable retirees to fully or partly hedge their equities exposure in a cost-effective, convenient way.

‘It’s about achieving a balance. And about helping retirees tactically use their capital when rates are low, through innovative protection strategies that are long overdue in this market.’

Innovating for better outcomes

The Retirement Income Covenant is expected to require trustees assist members to meet their retirement income objectives throughout retirement, by developing a retirement income strategy for members.

As such, the covenant has become an important catalyst for the industry to reconsider its retirement investment options and start thinking outside the square. In the past, superannuation has been focused on the accumulation phase – now attention is turning to the drawdown phase. As a result, it is hoped that super funds will be able to offer future retirees a portfolio of retirement income products to better align to differing preferences and income needs.

Already, discussion is taking place on the development of innovative approaches and products for the retiree market. Ideas being explored include:

  • whether longevity protection can be purchased through ongoing premiums, rather than a lump sum premium payment, such as for the acquisition of a deferred lifetime annuity
  • if satisfaction with the longevity protection component for Comprehensive Income Products for Retirement (CIPRs) can be improved by utilising non-superannuation savings vehicles
  • how variable investment returns from capital can be leveraged to support a lifetime retirement income stream.⁵ 

In any case, the introduction of the covenant should herald a period of intense innovation and focus on retiree investment options. For those in the industry, it’s a great opportunity to provide compelling offerings to attract and retain the large superannuation balances held by retirees. And for retirees themselves, it’s a chance to face retirement with greater confidence about the years ahead.

Partner with Allianz Retire+

As Australia approaches a major demographic shift, trustees are faced with the ultimate investment challenge – meeting the demand for sustainable, consistent income streams, while preparing and protecting their members from a complex web of investment risk.

Allianz Retire+ creates bespoke retirement income solutions to help trustees offer secure retirement incomes to their members. To learn more about partnering with Allianz Retire+ visit

1Based on Allianz Retire+ survey in March and April 2020 of 1,007 current and prospective retirees.
2National Seniors Australia, Feeling financially comfortable, 2019.
3Australian Bureau of Statistics, Life tables, states, territories and Australia, 2016–18.
4Callan Associates, “Risky Business”, 2019.
5Financial Services Council, FSC Retirement Income Covenant Submission, 2019