Is superannuation reform just getting started?

One of the biggest challenges confronting superannuation funds in 2013 will be bedding down policy changes – but this will not necessarily spell the end of change for the industry, as Damon Taylor reports.

When it comes to the legislative change that Australia’s super industry always seems to have in abundance, the hope is that it both aligns with and achieves social policy.

In 2013, SuperStream and MySuper clearly has the industry focused on efficiency and the disengaged member, but for Danielle Press, chief executive officer of Equipsuper, the interesting question is whether at least some of these objectives would have been achieved without reform.

“Look, I think that the principle policy objective of MySuper, being to create a simple low-cost superannuation solution – we may actually have achieved that without the legislative change,” she said.

VIEW ALL

View all

“Unfortunately, I think the MySuper option really will have little discernible benefit for the industry’s profit-for-member members.

“On the other hand, what it has potentially done is made moves towards more competition, lower fees, less bells-and-whistles product quicker for retail funds,” Press continued.

“So I think that piece will be achieved; I’m just not sure that we needed the legislation to get it.”

Adding to Press’ comments, Geoff Brooks, executive officer, strategic marketing and communications for Equipsuper, said that the key question was whether re-badged default investment products was part of the Government’s original intent.

“Or were they indeed expecting standalone MySuper products?” he asked.

“And because most funds are going down the path of a simple re-badging exercise, there’s a question there as to what the Government thought they were doing and whether they thought that would be the outcome.”

Press said that she expected that the real theory behind MySuper may have been around removing some of the industry’s higher cost superannuation options.

“So perhaps [it was] removing those options and looking to bring superannuation products back to what it is that needs to be delivered to members,” she said.

“But my chief concern with the legislation is that it starts to associate low cost with value and I don’t necessarily think that linkage is right.

“It becomes a dangerous precedent to say that just because it’s low cost, that means its better – low cost and value are two very different things.”

Yet on the topic of SuperStream, Press said that developing common data standards and data communication protocols was long overdue.

“The intent behind SuperStream is to align the industry with a common way of talking to each other and that, I think, is right,” she said.

“It’s very difficult to argue the merits of standardising data but I think the challenge with SuperStream, as it stands, is the implementation and the governance of it.

“And as an industry, I think we still have a lot of work to do to actually get that done,” Press added. “So my concern is probably more around timing than intent.

“I also think that if people are expecting it to reduce costs in the superannuation system in the immediate term, it won’t – costs will go up because it will take time for these measures to gain traction.”

Reiterating many of Press’ concerns, Pauline Vamos, chief executive officer of the Association of Superannuation Funds of Australia (ASFA), said that though SuperStream and MySuper were key industry reforms, there were a number of outstanding issues related to implementation.

“And its effectiveness in delivering (on its objectives) to fund members will depend on how well a lot of these issues are resolved,” she said. “As always, the devil is in the detail.

“In particular, there are implementation issues right across MySuper,” Vamos continued.

“For example, the inequity created by not being able to apply caps; there’s notice periods that are inappropriate; there’s extra work required in notifying members when all you’re doing is re-badging current investment options; there’s still a requirement to manually flip a member into a higher fee MySuper product.

“All of these are unintended consequences but they need to be dealt with if these reforms are to be successful.”

John Brogden, chief executive officer of the Financial Services Council, said that the long-standing concern remained that MySuper would deal with disengagement by entrenching it rather than seeking to engage people.

“However, these reforms have been significantly improved through extensive industry consultation,” he said.

“Consumers will benefit through cost savings and Australia will have a more efficient and cost effective industry with simplified account consolidation and new, mandated data and payment standards.”

So what then are the policy pieces missing? Reform has become a constant in an ever-evolving and ever-improving superannuation industry but according Press, adequacy has to be the next area of focus.

“The reality is that placing a $25,000 cap on contributions into super makes it quite difficult to have adequate retirement savings, particularly when you run that across all age groups,” she said.

“So I think adequacy is one of the big questions that we have outstanding.

“But questions of adequacy lead into the funding of an ageing population and how much it’s going to cost people to manage their health in later years as well,” Press continued.

“Yes, we’ve got longevity risk, the risk that people will outlive their super and that’s obviously a basic adequacy issue, but we also have big question marks around how we fund the medical component of an aging population.

“You would assume that it’s going to come out of peoples’ savings which, at the moment, is superannuation but as life expectancy improves, medical costs are going to go up substantially and so adequacy needs to encompass that as well.”

According to Brogden, with life expectancy now 79 years for men and 84 years for women (as compared to 72 for men and 79 for women in 1992 when the superannuation guarantee was introduced), it was now also time to consider whether a superannuation preservation age of 60 was appropriate.

“To achieve the dual aim of reducing longevity risk in superannuation and increasing labour force participation of older workers to drive economic growth, Australia needs to debate the appropriate preservation age for superannuation,” he said.

“For example, increasing the preservation age to 62 would make a direct contribution to reducing the gap and would increase retirement savings in three ways.

“It would mean two additional years of contributions at 12 per cent; two additional years of asset growth on the entire accumulated balance; and two less years of consumption in retirement,” Brogden explained.

“This would reduce the superannuation savings gap by $400 billion where it is currently $836 billion.”

For Vamos, though raising the superannuation guarantee from 9 per cent to 12 per cent would undoubtedly assist, the number of Australians still playing catch-up with their super was a definite concern.

“We know that the increase in the SG (superannuation guarantee) will give many people a modest standard of living over the longer term,” she said.

“But what we still have to remember is that there are a lot of people who need to catch up.”

“Long term, we’re okay; with the combination of the increase in SG and security in the system, people will put in those voluntary contributions and then I’m not worried,” Vamos continued.

“What I am worried about is that we have an ageing bubble, particularly women, who have been without the benefit of compulsory contributions for much of their working lives – and they’re way behind.”

Of course, the answer pointed to most often in this space is deferred annuities and yet for Vamos, the viability of such options would be severely compromised until their tax treatment was altered. 

“This has been part of our submissions for many years now,” she said.

“I mean, the fact that APRA (the Australian Prudential Regulation Authority) and the ATO (the Australian Taxation Office) interpret legislation differently in this area – it means providers cannot confidently develop a product,” she said.

“But the fact that the definition of what is an income stream product is so narrow – the reality of the tax ruling – it all just serves to stifle innovation further.

“We really need to be able to look at bundling and unbundling products but, more than that, we’ve got to start to remove at least some of these short-term impediments.”

Yet if adequacy is a key issue for the superannuation industry, then voluntary saving must provide at least part of the solution, particularly in the three-pillar retirement system Australia aspires to.

And while the Government’s tweaking of concessional contribution limits has been a source of frustration for many, Vamos believes members’ voluntary savings for retirement cannot help but improve.

“Look, I think that with the market the way it is, voluntary savings will continue to go up,” she said.

“Voluntary savings have been reduced in recent times for two reasons; one, the market has been so volatile and two, there has been a lot of uncertainty in the economy.

“So as we have an ageing population, interest rates stay down, employment steadies, I think we’ll see an increase in voluntary contributions again.”

According to Press, how much or how little Australians contribute to their superannuation above and beyond the superannuation guarantee was again linked to adequacy.

“It feeds into adequacy because if you’re looking to put an extra $25,000 per annum into your super, by the time you’re actually earning enough to achieve that figure, it’s just not going to give you an adequate retirement,” she said.

“And that’s particularly the case if you live past 85 and are in the majority of middle-income people.”

“So realistically, you’ve got to do one of two things; you’ve either got to create some benefit to saving outside of super or you need to allow that saving to come into super,” Press continued.

“And I think the problem with putting more savings into super comes down to the rules constantly changing and the fact that you can’t actually access it if you need it.”

However for Brogden, the equally important factor is confidence in the system.

“Recent declines in discretionary contributions clearly reflect lower confidence in the system at present,” he said. “This has been made worse by low contribution thresholds and continued tinkering with the rules and tax.

“The Government should act in the 2013-14 Budget to lock in higher concessional caps and promise no further tinkering with the tax rates in order to bolster confidence and improve discretionary contributions,” Brogden continued.

“Because the $836 billion retirement savings gap shows that without discretionary contributions, the superannuation system will fall short of providing adequate incomes in retirement for middle Australia.”

Just as adamant, Vamos said that constant tinkering with would always be a huge disincentive.

“People often say that they will stop or have already stopped voluntary contributions because of uncertainty around the system,” she said.

“And that is a huge issue in and of itself.

“This system has to be designed in such a way that people will put in voluntary contributions, they will purchase longevity risk insurance and understand that the system and its structure is there to stay and that they can safely invest in it.”

Naturally, this very issue of consistency, the balancing act between changing government agendas and bipartisan support of policy positions, is the industry’s constant challenge.

And though this sort of status quo seems inevitable, Press said that it was nonetheless something that both industry and governments should be trying to improve.

“I think we should be and can be aiming for bipartisan support for a lot of these positions,” she said.

“But I also think that it’s an inevitability that superannuation will continue to be a thing that governments of all persuasions will tinker with because it is such an important public policy.

“The feedback that we get from our members is ‘why is this so complex and why does it keep changing?’” Press explained.

“So while it might be an inevitability, it sure doesn’t help the engagement of your members when it keeps changing.

“But at the end of the day, this is the price we pay for 9 per cent going to 12 per cent, that guaranteed cash flow and the tax benefit that it gets – the compromise to that is that it’s always going to be part of Government policy and so will always be subject to change.”

Brooks said that the current contribution cap of $25,000 was a perfect example of the Government ‘short termism’ that was so often a source of frustration.

“The people who need that $25,000 cap the most are those who are in the last 10 years of their work, those approaching retirement,” he said.

“We’re facing a situation where we’re going to have fewer and fewer people funding more and more people in retirement and so you’ve got a classic situation where you may well be resolving a short-term budgeting problem but you may also be creating a much more serious long-term problem instead.

“Long term, perhaps looking out 20 or 30 years, $25,000 might be alright,” Brooks continued. “For people who have been able to contribute to their superannuation from Day 1, that cap may well be sufficient.

“But there’s still a bunch of people out there who haven’t contributed for the whole of their working lives and the danger is that they will be retiring underfunded.”

Indeed for Vamos, if any policy piece was missing it was tamper-proofing the system.

“A retirement system designed to deliver incomes in retirement and take pressure off the public purse is, in many countries, a non-political issue,” she said.

“This is about delivering infrastructure in terms of post retirement and the idea is to make it an issue where the general public say ‘hold on, this is our system, it’s about delivering our retirement, keep your hands off.’

“Sound public policy isn’t political,” Vamos continued. “You talk to any politician and they will say that.

“And so we have to design the system in such a way that it has bipartisan support, in such a way that it isn’t used for short term revenue gain by any government, and in such a way that it’s non-political.”

But while the super industry may hope for and seek consistency in superannuation structure, the reality is that legislative and regulatory change has become a constant.

The hope is therefore that both industry and Government are at least getting better at delivering on policy objectives and for Vamos, the improvement on that front is significant.

“I think we are. We have a lot of visionaries across this industry and I think a lot of people know what the industry should look like and what the system should look like,” she said.

“But unfortunately, what we will still struggle against is vested and commercial interests and existing structures and you can’t just wave a magic wand to make that disappear.

“It’s 20 years now since compulsory superannuation – and that’s a long time for an industry,” Vamos continued.

“As it stands, we are one of the most sophisticated industries in the world; we are seen globally as a leader when it comes to the retirement system. Some of the risk management strategies and investment strategies and communication strategies and advice strategies set by some funds are world class.

“We’re now a big industry and so we have to act like a big industry.”

For Press, though it has been 20 years since the introduction of the superannuation guarantee, the industry as a whole is still learning and evolving.

“I think that the consultation around MySuper and SuperStream has actually been quite good,” she said.

“But again, continual reform to the system isn’t necessarily a good thing and it certainly doesn’t build confidence in the system, which is what we ultimately need for it to be able to deliver what it needs to deliver.

“So are we getting better at it? Yes, I think we are,” Press continued. “We’re still a young industry, one that’s only really 20 years old but one that’s undoubtedly had magnificent growth.

“And so I think the reality is that we’re still going through some teething problems.”

Indeed for Brooks, a common understanding of the challenges at hand may prove invaluable.

“The one thing that’s really working in favour of industry/government collaboration is a joint recognition of the problems,” he said.

“Ageing population, adequacy, equity – I think it’s important that we’re at least on the same starting blocks.

“And that’s a sign of an industry that’s maturing in that it’s recognised that it has a role to play, a significant role, as a part of social policy.”