Giving super a purpose

The Financial System Inquiry has recommended defining a purpose for superannuation and a roundtable conducted by Super Review has concluded that the primary objective has to be reducing pressure on the Age Pension while providing people with a comfortable retirement. This is part one of the roundtable.

Mike Taylor, editor, Super Review: I thought we’d kick off with what the Government want us all to talk about, which is the purpose of super. I think we’ve all got our views about what super is all about and why it’s there. But there’s clearly a need to define what the purpose is, and I thought I might kick off with you Glen and what your views are on what sort of a purpose should be explained by the parliament. 

Glen McCrea, chief policy officer, Association of Superannuation Funds of Australia: Look I think the FSI put forward the idea of replacing or supplementing the Aged Pension, and I think it’s probably not a bad start to have that conversation. I think when you look back when superannuation guarantee (SG) was introduced I think that was part of the consideration at the time. So I think, that’s probably not a bad starting point. 

The interesting thing at the moment is in terms of the public discourse. One of the ideas floated out is that it’s to replace the Age Pension, and I think that would be quite a fundamental shift in the system and would effectively mean that people would be taken out of the system and that I don’t think is what the system’s all about. 

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The one thing, and Pauline’s [Vamos] going to speak a little bit more about this later today, is we’ve got the potential objective of replacing or supplementing the aged pension, but should we think about what some of the future costs will be as people get older? You’re going to get between now and 2054-55 a doubling of health and aged care costs. Significant impact on government budgets, and the reality government budgets are tight at the moment. The issue here is well who does the cost fall upon? 

I think as a system we need to have the debate about what our role is going forward, and maybe even more thinking just about income streams - and we’ve obviously had significant movement in recent years, we are talking about super as an income stream. But thinking about what does that income stream buy, and what is the role with the significant ageing of the population and the corresponding health and aged care costs. 

So I think that’s an important debate that I think is a middle ground. I think replace or supplement the aged pension, but I think we need to debate does it need to go further. But then on the flipside I think we need to protect the system from going the other way which is just as a replacement for the Age Pension which I think has all sorts of issues about adequacy, and we can obviously go into that in more depth if we need to. 

MT: Andrew? 

Andrew Boal, managing director, Willis Towers Watson: Yeah I think that last piece is really important, that we are - there’s absolutely no way that the system should be designed to replace the aged pension, it always should be to supplement it. But the two parts that fall beyond that then are that it should be focused on producing an income in retirement, and also providing it in a way that Australians can safely draw on their savings during retirement and live as best a retirement lifestyle as they possibly can with those savings. I think at the moment the system lacks products that allow people to have that safe withdrawal so they feel they cannot just spend the earnings but draw down on the capital safely and they can spend it all. 

I suppose part of that then links in to changing the attitudes of Australians around bequest, that it shouldn’t be a motivation for superannuation savings to have some of it left into your will.  

MT: Russell. 

Russell Mason, partner, Deloitte: I think what Glen and Andrew have said is right, we’ll never replace the Age Pension. But I think in practical terms superannuation can reduce government expenditure on the Age Pension, reduce the number of people that are entitled to the Age Pension, or entitled to the full Age Pension. It’s [superannuation] achieved a lot and it’s got to provide an adequate sustainable income in retirement, I think income is, as Andrew said, a key word, and allow people to retire with dignity and have a reasonable lifestyle in retirement that’s in some way linked or comparable to the lifestyle they led pre-retirement. I think it [superannuation] achieves a lot more than we give it credit for.  

But my personal view is that 9.5 per cent, it’s not going to achieve that as much, the sooner we get it to 12 per cent the better. There’s debate whether it should go beyond 12, but certainly at this stage I would like to see us accelerate towards 12 per cent at a far greater rate than we are to achieve the very aims that Glen and Ian talked about. 

MT: Jocelyn? 

Jocelyn Furlan, Furlan Consulting: I think I completely agree and I think that part of the reason for accelerating to 12 per cent is that the average cap balance really doesn’t give people an opportunity to invest enough of the money to get an income in retirement, and most people would want to pay off their mortgage, or clear any debts that they have upon retirement, and those kind of things, and the average balance now is really only allowing them to do that. 

I think it’s really important that we do accelerate to 12 per cent, and that should be one of the purposes of superannuation - to actually have a system that if people are able to contribute through their working life, will actually make a significant difference and provide a sufficient lump sum to be invested to generate an income. 

I agree with Andrew about having flexibility for the safe draw-downs of the capital sum as well. I think that’s really important. I think the other good thing about having a conversation about the purpose of superannuation is that for some years on the roadsides of politics, there’s been some talk that we need to enshrine the purpose of superannuation to protect it from short-term policy changes and constant tinkering around the edges. 

I think that’s a really worthwhile conversation, because having a defined purpose of superannuation that’s enshrined by the parliament will hopefully prevent all this tinkering that reduces confidence in the system. Because we might have a great superannuation system, but if the community doesn’t believe in it they’re not going to use it to maximise their options in retirement. 

RM: Cynically though I don’t think defining the purpose of super is going to stop politicians tinkering with it, because they’ll simply say the changes we’re making now will better meet the objectives that have been set for superannuation. So it’ll be interesting... 

JF: Yeah, depending on how well they’re prepared to test that. 

RM: Yes exactly. 

MT: Ange? 

Ange Calvitto, Northern Trust: Oh I agree with everything that’s been said I think it would ultimately be great if the system replaced the Age Pension. The reality is we know that that’s not the case, there’s always going to be an element of government funding to support a constituent of the community. I think we need to look at talking about the amount of time that will be spent in retirement going forward, and we’re already seeing it. We’re living longer, so the system needs to be able to support and guide and provide the options and the flexibility for people through 20, 30 maybe 40 years, which is a big part of your life, and provide ways for people to be able to use their super - so the income stream, agree with all of that. But what can you do with your superannuation initially?  

AB: On this aged pension and sustainability et cetera, I think it’s important that if you look at a couple that’s got $1 million and nothing else, so they’ve got their own home, $1 million. They won’t qualify - or from 1 January 2017 when the new Age Pension means test rules kick in, they won’t qualify immediately for any Age Pension. But that’s not the whole story. The whole story is that after several years, they’ll have drawn down some of those assets and at maybe five, six, seven years into retirement they’ll now qualify for a part Age Pension, and as they further draw on their savings they might eventually get on to the full Age Pension when they’re 87. I think that’s a really good part of the Australian system, is having means tests. 

So whilst we might want to have more and more people not qualifying for the Age Pension at all to start with, having them gradually become eligible and then come onto the full pension if they need to late in life is a great system.

Part two: Sharper targeting of super tax concessions

Part three: Super millionaires - more fiction than fact

Part four: Governance and choice - distractions or priorities