“The superannuation system is one of the most highly regarded private pension systems in the world, but there is always room for improvement to ensure that it is sustainable and provides the best retirement outcomes for all Australians.”
The above comments were made the CEO of the Association of Superannuation Funds Australia (ASFA) in response to the Federal Government’s acceptance of all but one of the recommendations made in the Financial Systems Inquiry report.
“There is a large amount of detail in the government’s response with many of the 44 responses impacting directly and indirectly on superannuation,” said Ms Vamos.
What FSI recommendations relate to superannuation?
The following FSI recommendations, accepted by the Federal Government, impact on Australia’s superannuation system.
- Objectives of the superannuation system: Seek broad political agreement for, and enshrine in legislation, the objectives of the superannuation system and report publicly on how policy proposals are consistent with achieving these objectives over the long term.
- Improving efficiency during accumulation: Introduce a formal competitive process to allocate new default fund members to MySuper products, unless a review by 2020 concludes that the Stronger Super reforms have been effective in significantly improving competition and efficiency in the superannuation system.
- The retirement phase of superannuation: Require superannuation trustees to pre-select a comprehensive income product for members’ retirement. The product would commence on the member’s instruction, or the member may choose to take their benefits in another way. Impediments to product development should be removed.
- Choice of fund: Provide all employees with the ability to choose the fund into which their Superannuation Guarantee contributions are paid.
- Governance of superannuation funds: Mandate a majority of independent directors on the board of corporate trustees of public offer superannuation funds, including an independent chair; align the director penalty regime with managed investment schemes; and strengthen the conflict of interest requirements.
- Align the interests of financial firms and consumers: Better align the interests of financial firms with those of consumers by raising industry standards, enhancing the power to ban individuals from management and ensuring remuneration structures in life insurance and stockbroking do not affect the quality of financial advice.
- Impact investment: Explore ways to facilitate development of the impact investment market and encourage innovation in funding social service delivery. Provide guidance to superannuation trustees on the appropriateness of impact investment.
- Superannuation member engagement: Publish retirement income projections on member statements from defined contribution superannuation schemes using Australian Securities and Investments Commission (ASIC) regulatory guidance. Facilitate access to consolidated superannuation information from the Australian Taxation Office to use with ASIC’s and superannuation funds’ retirement income projection calculators.
What does superannuation success look like?
According to ASFA, a successful superannuation system entails meeting the following benchmarks by 2050:
- Less than 20% of retired Australians relying solely or almost exclusively on the Age Pension
- Age Pension expenditure and tax expenditure on superannuation of less than six per cent of GDP
- Australians retiring with an income replacement rate in retirement in excess of 65%
- At least 50% of Australians able to cover their expenditure in retirement and have a ‘comfortable’ retirement lifestyle.
“As the superannuation system grows and we mature as an industry, we have become more focused on developing measures of success as we are accountable to the whole community,” said Ms Vamos.
Vanguard’s Head of Market Strategy, Robin Bowerman, also welcomed the focus on improving the performance of the superannuation system within the Federal Government’s response to the Financial System Inquiry.
“The Federal Government has identified the need to put more downward pressure on fees, and improve after-fee returns for fund members. The Australian superannuation system ranks in the top three retirement systems in the world but one area where it has failed fund members has been in terms of capturing the benefits of $2 trillion in scale and sharing those benefits with members via lower fees,” he said.
“Over a lifetime of work and ongoing contributions, small fee differences can have a major impact on the final account balance that a person has to fund their retirement. The challenge facing the industry is how to drive fees down faster, so the Government’s response will hopefully keep a focus on fees across the entire superannuation system.”
Vanguard also welcomed the intention to enshrine the objectives of the super system in legislation along with the acceptance of the need for the development of comprehensive income products.
“One of the key objectives of the super system is to deliver income for people in retirement yet this remains an area of the system where much more work needs to be done to help investors achieve the best possible outcomes in terms of product choices and ability to manage risk in the retirement years,” Mr Bowerman said.