Superannuation: wealth accumulation achieved, now time to focus on retirement outcomes
The most important and far-reaching developments often come in seemingly innocuous guises. This week saw one such event in the superannuation industry – one which could have a major influence on all aspects of the sector.
On the surface, a Government consultation paper with the aim of developing legislation to enshrine the objective of superannuation does not seem dramatic. But it could lead to super funds having to change their business models, operating processes and information systems.
From the outset, it should be made clear that this is a wholly worthy initiative. The industry has been calling out for the objective of super to be enshrined in legislation and KPMG called for this to happen as part of its submission to the Financial System Inquiry (FSI). Achieving bipartisan support – therefore making the retirement system less of a political football – would be a major step forward for the super industry. It would be disappointing if, in pre-election excitement, either major party tried to score points on this.
The government paper proposes that “superannuation is meant to help fund a person’s retirement: it is not for unlimited wealth accumulation”. Assistant Treasurer Kelly O’Dwyer reiterated the message that super is there to provide income in retirement to substitute or supplement the Age Pension. It is not meant to be predominantly about estate planning.
Such an agreed objective, enshrined in legislation, would provide a mechanism for evaluating the performance of the system and proposed policy reforms, and, I believe, will enhance confidence and stability in our globally recognised superannuation system. Amending existing pension law rather than introducing new primary legislation is a sensible approach, to avoid duplication and unnecessary red tape.
Crucially, this should continue to add momentum for the development of additional retirement products and services to retirees. The real issue for the industry is the fundamental change of emphasis that is needed from the accumulation phase to retirement incomes. It should be remembered that the compulsory occupational super system was born as a part of the Accord in the early 1990s and so is still relatively immature. Funds have understandably been more concerned with wealth accumulation. But it is now time – with $2.3tn of funds under management – for this to change.
Super funds need to consider first and foremost the needs of the member – which changes radically when they move from the first phase to the second. The transition from accumulation to retirement has, until now, been inefficient.
The FSI recommended trustees should have to provide a Comprehensive Income Product for Retirement (CIPR) for retirees, which would certainly spark innovation and development of the retirement income market. But this will take time and with hundreds of thousands of people retiring each year, funds really need to up their focus on providing suitable retirement frameworks for members. KPMG supports a principles-based approach around the general themes of longevity pooling and provision of regular income. We believe that the trustee must take into account the characteristics of its membership base in designing the CIPR.
This will require funds to change the way they operate, and upgrade systems and processes for gathering and analysing information. Fund staff will need up-skilling. Market-leading funds are already making headway in terms of retaining members. But many have a long way to go.
Such a fundamental review of the purpose of super funds will no doubt spark other questions – such as compulsion or tax. I think we should think very carefully before changing the compulsory nature of super contributions. Of course there is a respectable argument – as I often heard in my union days – that low paid workers would rather have the freedom to spend that money as they wished.
But given that many lower-paid workers do not stay in that bracket, it is difficult to come up with a suitable definition of those who should be allowed to ‘opt-out’. And with Australia’s system the envy of most of the world we should be wary of undermining it. A move to a 12 percent Super Guarantee should not be kicked further into the long grass by Government.
As for tax, establishing the objectives of super should help put some boundaries around super tax policy. We would also suggest that the government, as part of its tax reform deliberations, consider life time caps on non-concessional contributions and superannuation balances.
Present policy settings often result in fund members consciously drawing minimal income from their superannuation entitlements, for fear that the monies may not last for the remainder of their lives. The tax settings are clearly part of the cause, in particular, the unavailability of the 0 percent tax rate to deferred annuities, that is annuities that commence at a future date, such as at age 85.
As my tax colleague Ross Stephens points out, there are potential implications for the Self-Managed Superannuation Fund (SMSF) sector. If members’ balances run down in retirement, just as they ran up during members’ working lives, would not many SMSFs reach the point at which the remaining balance was below the threshold for cost effectiveness? Could we then see a reversal of members rolling out of large funds into SMSFs? And how does a SMSF invested in real property or other lumpy assets run down its balance, without at some point being required to sell these assets?
There are likely to be major implications for every sector of the superannuation industry, and every participant in the industry, from a long term shift in the focus of policy setting to retirement incomes rather than wealth accumulation. But this is what needs to happen, and this week has kick-started that necessary process.
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