For our Australian clients:
In my January post I referred to a change in the regulation of calculators such as the Retirement Income Simulator. The consultation came and went and ASIC delivered a largely unchanged set of regulations. Except for one thing.
We all know that future dollars are not worth the same as current dollars, that is they don’t buy as much. People familiar with projection calculators will know that to get from future dollars (your super at retirement for instance) to current dollars you need to take out the effect of inflation between now and then. And for the purposes of modelling super, we assume inflation is a level rate.
But there are different measures of inflation. The rate most calculators use is based on wage inflation, which is generally higher than price inflation. The difference between wage and price inflation is often referred to as the improvement in standards of living. So if your salary goes up 3.5% and prices have gone up 2.5%, you can afford 1% more (or better) goods than you could last year – an improvement in your living standard. By discounting with wage inflation the Simulator applies a ‘tougher’ standard to your retirement savings, by measuring the value of your super against your future standard of living and in proportion to your future salary.
Now ASIC has stipulated that from 1 April 2017, all generic calculators (such as the RIS) must show future values discounted at price inflation at all times, and has set price inflation at 2.5%. This means that our default wage-based discounting will no longer comply and there is no allowance for improvements in living standards factored in. It also means that if the user changes the inflation rate to some other value, we still need to show the 2.5% discounted amount (as well).
ASIC recognises that there is value in allowing consumers to model improvements in living standards, and its regulatory guide on the matter points out that the ASIC MoneySmart calculators allow you to do this. However the ASIC calculators do not (yet) comply with the requirement to show the 2.5% discounted value at all times. So there’s a bit wait-and-see around the industry to observe how ASIC will implement its own regulations. A contact has assured me ASIC will lead on this well ahead of April 2017.
We are currently working on a feature to allow the user to set the rate of improvement in living standards. Regardless of what ASIC does, we will take whatever action is necessary to ensure that the Retirement Income Simulator continues to comply with regulations.