Keep up-to-date with the latest improvements to all of our Retirement Income Simulator products
In earlier posts we discussed ASIC's pending requirement to discount all future values at 2.5% pa. Recently, an amendment to this regulation was released, exempting superannuation and retirement calculators from this requirement until July 2018. Our hope is that ASIC will use this extension to come up with a solution that provides both a level of standardisation between calculators, as well as an allowance for improvements in living standards.
In the meantime, we have developed a new feature that allows the user to control the improvement in living standards as well as the level of price inflation. Look for the Change inflation rates control on the Assumptions panel.
A couple of parameter updates have been released for Australia:
The rest of the Budget 2016 legislation is still being drafted and it could be a few months until it passes. We’ll keep our clients informed.
In the latest release, we have also moved the chart options from the View menu to below the chart to give them some more visibility.
We recently welcomed Westpac NZ Staff Scheme as a RIS client and will shortly launch a RIS for Goldman Sachs and JBWere Superannuation Fund.
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.
Today we released the updated Retirement Income Simulator for the 2016-17 financial year. There were no changes to the calculations, just parameter updates as follows:
Depending on the outcome of the election and how far the Coalition super package gets, we may need another legislation-driven release in the next few months.
The one other thing we changed in this release was the living standards improvement margin. This is the amount added to price inflation to give:
We have reduced this margin to 1%, so that our long-term estimate of community wage growth is now 3.5% p.a. This is consistent with Mercer Investment Consulting research into wage expectations. The visible outcome of this change in the RIS is that estimates of future super amounts are now higher in today’s dollars than they were before. In recent times our expectations of investment returns have been falling as well; this change brings wage growth into line with expected returns.
There was a lot in the Federal Budget about super. In case you haven’t seen it, here’s Mercer’s analysis.
Our Apps Team is frequently in a limbo between policy announcements and what has actually been legislated, and we rarely include any policy measure in the simulator if it has not been legislated. In this case however, the changes are so broad that we have done a special Budget Edition simulator to help you see the impact on your super of some of the measures announced in the Budget. Using the scenario feature in the RIS we have considered the following measures:
The simulator uses the Summary -> Compare screen to show which Budget measures might affect your situation.
Other Budget measures we have not included relate to the incentives for spouse contributions, the ability to make deductible contributions independent of salary, the restrictions on transition to retirement income streams and the carry-over of unused concessional caps for five years.
We hope you find it useful. The link is: https://supercalcs.com.au/ris9budget