Amara Haqqani - Director, Milliman Actuaries
Three pillars of retirement income
Shelley Wettenhall: It’s my pleasure to introduce Amara Haqqani to our Three Pillars of Retirement Forum. Amara is a director at Milliman. Amara is responsible for the data research and insights function. This function generates research and thought leadership in the areas of retirement and related topics such as pensions management, financial services systems and policy issues, financial advice and investments. Amara is a retirement income and pension specialist, having worked most recently in policy research and thought leadership for annuities provider, Challenger. Prior to that, she has extensive experience in compliance and regulatory affairs, product development and client management for global funds management firms. Welcome, Amara.
Amara Haqqani: Thank you very much for having me.
Josh Funder: Amara, it’s great to have you as part of the Third Pillar Forum 2020. And as someone deep inside an actuarial shop, just take us through the high ground of an aging population. People need to plan to live as a couple until one of them reaches 95 years. There are opportunities there. No other generation has ever lived as long in history as the Baby Boomers, but they’re the first to live that long, and there’s some uncertainties about how we walk down that road with our aging Baby Boomers. What are the big issues we need to address in an aging population?
Amara Haqqani: Look, it’s certainly a conversation that happens a lot, which we talk a lot about, the aging population. And I think there is much to be said for refining that debate and really honing in to the key issues. For us at Milliman, we’ve come through a very interesting journey whereby we started with much more of an actuarial bent and pure assessment of life expectancies, how that worked for retirement income products, and we gradually got through to understanding that the information that was available to us was really only as good as understanding what people’s goals were in retirement. Because you can create a whole range of products and solutions and whatnot, but until you actually understand what it is that retirees… What their lived experience is, it doesn’t get you very far. Retirement is such an individualised experience, and even though two people might live to 95, their retirements will each be quite different. So we do talk in quite broad-brush mass population-type scenarios and longevity being the issue that it is. But for us, the more time that we spend in this space, the more we realize that it’s actually quite individualised and that it really does come back down to retiree lifestyles and the data and the information available to us about that.
Josh Funder: And Amara, one of the great things to come from this year’s forum is really exactly the point you said, which is we understand data often in aggregate terms, but we have to deliver that to each retiree, couple and family, in ways that are meaningful to them, but then enable them to plot their own course, which is always different. How have Milliman gone around taking broad industry-wide data and finding ways to deliver it clearly to empower people to go on that journey through retirement into the unknown?
Amara Haqqani: Well, we’ve spent a lot of time in the last few years working particularly with superannuation funds, but other industry participants as well, about actually working through to understand what it is that a member is, but approaching retirement and after retirement as a retiree. And the communication piece is key, but some of that is actually starting at the very beginning and helping people understand what their retirement looks like. So that whole notion of what… In marketing circles, there’s a lot around people like you, and that, for us translates, and is something that’s very important to us. We’ve been able to analyse and really dive deeply into retirement spending data that we’ve had in our stable for a number of years now, and the retiree spending patterns are really fascinating and really interesting when you see it across a wide cohort of Australian retirees. And the picture of what it is that people provide, what information people are provided about their retirement isn’t there, and it really… It’s something that we’re really working towards in getting people to understand, “Hey, I live in a city. I have this kind of lifestyle where I’m interested in travel, and I want… ” Well, maybe not so much now during COVID, of course, but, “I have a range of lifestyle needs that I require to be met. And for people like me that live in a city that are married, that have these sorts of issues, I’m reasonably healthy, all those good sorts of things, this is what my spending profile looks like.” That’s been really key in getting across that broad-brush averages, broad-brush standards. Those sorts of things aren’t necessarily relatable to pre-retirees and retirees coming through, and that… The product selection and design happens after understanding what it is that a retirement could actually look like.
Josh Funder: And Amara, let’s dive into detail on a couple of mentions of exactly that point. The first one is historically, people have seen retirement in three crude phases: Go go years, go slow years, no go years, and I’m not sure that’s a good fit for most retirees. And now that they’re living even longer, I think there’ll be an extended phase of opening up, undertaking new activities, more active expenditure, more active lifestyles. And then take us through both the expectations of phases that are relevant to retirees to be able to navigate individual retirements. But then also spending patterns at two levels: Income that’s necessary to support those different phases, but also capital expenses. People come across needing to repair their home. Travel can be seen as a capital expense. Funding a lung transplant in Australia, even on Medicare, comes with out-of-pocket expenses. How do you help people manage the different phases over a long lifestyle and the need for both income and capital as components of the expenses that Milliman has really uncovered at a much more granular level of detail?
Amara Haqqani: Yeah, and I suppose this is the Holy Grail, isn’t it, of getting retirement to a perfect point. I’ll be honest…
Josh Funder: It might be the Holy Grail, but we haven’t got anybody with coconuts behind us riding the horse.
Amara Haqqani: No.
Amara Haqqani: Well, it’s funny because what I love about your question is that you’ve really honed in on two things, is income and capital. We have been very, very focused on retirement income, and at the expense of capital, to be honest, I think. And the holistic nature of your question and the holistic nature of the problem, hence your question, means that, I go back to that notion of individuality, how you get somebody to plan for these things really comes down to their individual experiences. And I go back, unfortunately, to the best way to do this is under advice. Now regardless of where we stand in terms of the current advice regime in this country and where unmet advice needs exist, I think in general, the more time I personally spend in the area of retirement and retirement planning, the more I feel reticent to actually answer that type of a question in as broad a term as it suggests because I think there is… The very key requirement that in order to understand people’s income and capital requirements, we need to understand them and their life style personally, and the best way to do that is through an advice process. Now, regardless again, of whether or not we think it’s the advice landscape as it stands, or hopefully something that takes its place that’s much more dynamic and contemporary in the near future is my hope, I think that there is very much… Balancing out that income and capital is something we can do under advice. The range of products that would be available to you in order to do that would be best sought after by an advisor. And this is where one of the key things for me is getting super funds to understand the role that they play in advice and guidance because I don’t use necessarily advice in the same way… The word the same way that, say, it is regulated. But for me, advice and guidance is the main way that we get people to understand that trade-off between income requirements and capital requirements, the various products that you’d need as a result of that, and how all of that looks against their picture of their goals and needs for retirement.
Josh Funder: Well, I think there’s been a broad consensus amongst the forum this year that not enough people get financial advice. But before we set out expectations for guidance and advice, there needs to be a comprehensive decluttering and simplification. Complexity needs to be stripped of the system so that people can understand their future and specifically meet their own bespoke needs with some understanding in a lower complexity environment to make the right decisions for them. You don’t want an advice industry that meets the needs of 20% of people and is designed to get around complexity that’s artificially created, that’s not the solution.
Amara Haqqani: Agree.
Josh Funder:But it brings me to my next theme and question really that I think your work and Milliman’s work can inform. We’ve had a retirement income review in Australia, the results of which are yet to be released. But for the first time globally, that review set out an updated view of the three pillars of retirement funding, the first being the government pension, the second being compulsory savings, which in Australia is a defined contribution superannuation system, and the third pillar being savings, including home ownership, which for the vast majority of people is the majority of their savings and is the only component of their third pillar. Now already we’ve heard at this forum that those three components are poorly integrated. The policy settings around those three add undue complexity and don’t come together. So how do we help retirees and how do we help the system deliver all three pillars of retirement funding so that people can understand them, draw on them, and make choices with confidence to plot their own course without ongoing expensive and unavailable advice?
Amara Haqqani: Look, simplification of the system is key. Bringing together those pieces is key. One of the things I found really fascinating about the retirement income review is the fact that it’s called out housing as part of that review, which to me is quite fascinating. I think for me, the house has been the cornerstone of retirement planning.The more time I spend in this space, the more I know that the house is where it starts, and it starts in a number of different ways. Not only is it your store of wealth, it’s the roof over your head, it is the way that you access the most amount of aged pension that you can, and it may be a future bequest for your children, it may be a range of things that most of the way that the Australian cultural set up is around home ownership really comes to the fore in retirement. And that has really been called out by the review, and that’s something that I think is really great because it encourages us to cohesively look at these things. But in doing so, it also calls out what hasn’t been called out. Aged care, you touched on in another conversation, and I think that that’s one of the things that I personally lament that this industry spends a lot of time in financial mindset and product mindset and aged care is another industry’s problem, but a retiree doesn’t look at it that way. And the other thing I found fascinating was, again, the more time we spend in time in retirement data, on retiree spending analysis, the more we realize… And yes, I take your point about the lung transplant issue, but for the vast majority of Australians, Medicare really behaves as yet another pillar of retirement, and we are lucky relative to other countries, for example, the States, where their retirement spending patterns operate in a U-shape, otherwise known as the “retirement smile,” and our spending patterns don’t look like that thanks to Medicare, our spending patterns generally decline. Medicare is for me a pillar that hasn’t been called out in this process, but nevertheless, I’m really excited to see that we are starting to look at these things a lot more holistically than we have in the past. And I think that, incrementally, is key to ensuring that once we as providers and policy makers and thinkers in this space, once we get our heads around the holistic nature of this problem, then we can in turn bring retirees along with us for that journey.
Josh Funder: Amara, I’ve got time for one last question. You put yourself in the shoes of a retiree, what are the three simplest things they can do to navigate the next 30 years of their life?
Amara Haqqani: Understand their spending. You’re paying yourself a paycheck now in retirement, it really… We are shocking in general. I talked to the average girlfriend of mine about whether or not they understand where their money is going, and all of us are kind of in the same boat, but we have the benefit of understanding that next month or the next fortnight we get another paycheck, so we get make it work. That doesn’t work in retirement. You really do need to know where your money is going, and that kind of awareness, self-awareness, financial self-awareness, is key in retirement.
Amara Haqqani: The second thing that we’ve learned from the retirement data is that a social life is key. One of the things that we’ve noticed is the decline in leisure spending that happens with age, and a lot of that is very much down to your social circles. And if we could take anything away from the data that we know, it’s to make sure you have friends, make sure you have a community around you. And the third thing, and this is some work that other retirement luminaries in the industry have done, people like [16:06] ____ Rubenstein and what not, which goes to the fact that, you know what? Your mental health, your health, your non-financial aspects in the end matter much more than the money aspect of things, and the key to a successful retirement is that community, is that health, is all those things, and hopefully you’re financially set up in a way that makes the most of those other aspects.
Josh Funder: Amara, solid advice. I think it wraps up in to find the ways that you can be happy and confident and navigate retirement. We see huge differences and outcomes with people who are confident in all those things you just mentioned, and those who are worried about them through retirement. We need to wrap it up there, but Amara thank you for your contribution to our sector, the data you’re bringing to bear for policy makers, for people in the industry, but also over time, ultimately for retirees to make their lives better and their journeys more understood. Thank you again for your contribution to the 2020 Third Pillar Forum.
Amara Haqqani: Thanks for having me.
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