Australia has held plenty of official 'reviews' which have included superannuation in recent years, such as the Financial Systems Inquiry, the Productivity Commission reports and the Financial Services Royal Commission. Last week, Treasurer Josh Frydenberg commissioned a more-focussed ‘Retirement Income Review’, but with a relatively unambitious aim to “provide a fact base to inform policy development”. The Terms of Reference do not require any formal recommendations, and it will certainly have nothing like Kenneth Hayne’s interrogation powers.
While the Review is welcome, let’s not expect it to suddenly settle debates the superannuation industry has fought for many years. There are two significant questions:
- To what extent can a ‘fact base’ without recommendations push the Government to meaningful action?
- How can a ‘Review’ establish a set of definitive facts that everyone will accept as a framework for the future?
Superannuation and its strong vested interests
Industry funds, retail funds and SMSFs are strong competitors, and they protect their turf in every superannuation debate, supported by peak bodies, consultants, media and a bevy of experts. It is noble aspiration that an independent body will develop a fact base, but the early indications of universal acceptance are not encouraging. There have already been calls for the appointment of Deborah Ralston to the Review panel to be reconsidered due to her lobbying for certain policies in her previous roles.
Disagreements among retirement income experts are a weekly event. In Firstlinks recently, for example, Mercer and Grattan reached opposite conclusions on living standards in retirement. Mercer said, “Grattan’s got it wrong” while Grattan said “Mercer misses the mark”. These arguments will not stop due to the Review’s fact base.
Yet the bar is already raised high on what the Review will achieve. It’s as if some undiscovered silver bullet for retirement income will be revealed by putting three eminent people in a room together for nine months.
The aspirations for the Review
Writing in The Australian of 28 September 2019, Treasurer Josh Frydenberg identified three reasons for the Review:
- To inform Australians about the operation of the retirement system and empower them to make better decisions.
- To better understand the impact of a changing landscape, especially demographic shifts.
- To ensure the fiscal sustainability of our retirement income system.
Given Deborah Ralston has stood aside from her role as Chair of the SMSF Association, where she was also spokesperson for the Alliance for a Fairer Retirement System, it’s worth knowing the five issues they highlight for the Review:
- How can the retirement income system ensure incentives are in place to encourage those who can save for an independent retirement to do so and avoid disincentives?
- What is an adequate level of retirement income commensurate with their pre-retirement standard of living that older Australians should seek to attain?
- What are the defined objectives of superannuation and the age pension and how should these two pillars work together to ensure intergenerational equity and the sustainability of the retirement income system?
- How can retirement income policy settings ensure the maximum degree of certainty for those planning for retirement over decades?
- Where are there gaps or issues that indicate a lack of fairness in terms of either horizontal (between people with similar circumstances) or vertical (between different generations) equity in the existing three-pillar retirement system?
Examples of contentious issues
Superannuation is intensely politicised and subject to regular rule-changing, and its complexity creates opportunities for both sides of an argument to present coherent cases. It’s not hard to find contentious issues that the Review will highlight, even ignoring the elephant in the room of the exclusion of the family home from the pension assets test.
The best example is whether the already-legislated move in the super guarantee (SG) from the current 9.5% to 12% should go ahead. Parties with a vested interest in the larger size of super assets argue that future age pension costs can be reduced by superannuation funding more people in retirement. They cite the Intergenerational Report which shows that 40 years ago, there were 7.3 people of working age for every person aged over 65, but by 2045, this will fall to 2.7 people. Who will pay the taxes for age pensions, health, education, defence? The superannuation system must push people away from social welfare.
On the other hand, opponents of the SG increase argue super takes money out of the pockets of workers, places future consumption above current needs and is a drag on spending in the economy. They cite evidence that most retirees have a higher standard of living than when they were working without the need to go to 12%.
Another example of a divide is whether superannuation should be voluntary for lower income earners. Or the operation of the pension ‘taper rate’ where retirees have lower incomes when they have more assets, giving incentives that encourage retirees to spend money on their house or holidays to retain or gain access to the age pension.
It’s a major issue since it is estimated that the net present value of the age pension is about $800,000 for a couple currently in their 60s. However, if they own their own home and have $870,000 in other assets in retirement, they are not eligible for the age pension and related benefits.
The superannuation industry cannot even agree on the definition of a ‘growth’ or ‘defensive’ asset, although these words are used in almost every piece of member correspondence. Some major super funds place assets such as infrastructure or other alternatives in a defensive allocation, which makes their funds seem balanced. Others say these are growth because their value is likely to move with the market, even if they are revalued infrequently.
It makes comparison of fund performance difficult. A fund may be ‘underperforming’ in the short term because it is protecting capital, but the trustees may believe this is in the best long-term interests of its members. The fund is criticised for bottom-quartile performance numbers when equity markets are strong, which may turn around completely in the face of a market fall. The industry is deeply divided on these definitions and the Review should try to resolve.
It’s not a superannuation review
Some media commentators describe the Terms of Reference as ‘narrow’, but a wide range of issues is on the table due to the Government referencing the interaction of the following three pillars of the retirement income system:
- a means-tested age pension
- compulsory superannuation, and
- voluntary savings, including home ownership.
These guidelines are far wider than superannuation, opening the door for the Government to step back from SG increases and recognise that non-super can also fund a retirement.
The fact that home ownership is specifically mentioned will prompt the Review to consider other ways home ownership affects retirement. Far fewer retirees will own their home in future, or at least enter retirement with a large mortgage, but the assumption of ownership is critical to the adequacy of the age pension with modest superannuation savings.
Market and demographic realities
Nothing in the Review's fact base will alter market and demographic realities, and building or retaining a retirement income is especially tricky at the moment due to:
- Investing in secure cash, deposits or bonds produces negative real returns. A portfolio cannot grow without taking risk, and most retirees are more concerned about protecting capital. This risk/return trade off is a major retirement income dilemma.
- Nobody knows how long they will live and their future cash needs, and so Treasurer Frydenberg’s hope that the Review will allow Australians to “better determine how much they will need in retirement and how to make the most of their savings over their retirement” is wishful thinking. There are plenty of planning tools already available which make guesses on a range of variables but no amount of Review work removes the fact that they are guesses.
- Future market returns and volatilities are unknown. Investment markets are in unprecedented conditions, with $17 trillion of bonds at negative interest rates, globally uncertain experiments with monetary policies, geopolitical tensions including trade wars, and in the background, climate change and technology making comparisons with history fraught. The assumed returns built into retirement planning forecasts of around 7% are now highly optimistic, especially when defensive portfolios include bonds which could offer little protection as rates rise.
If it is possible to achieve, a common set of accepted facts would allow Australians to better discuss retirement income policies from an informed base. The inclusion of the three pillars should show how changing one parameter will affect others, and we need to better understand the interchange between the superannuation system, aged care, social welfare and home ownership.
Beyond the simple requirement for 9.5% of salaries to be paid into a fund to finance retirement, the superannuation system has become incredibly complex. I have attended many conferences for SMSF and super experts, and the audience of market professionals is often bamboozled as case studies are presented. More must be done to improve simplicity and certainty.
If there’s one ‘fact’ everyone must accept, it is that the retirement income system should be designed for the best interests of members and clients, not the superannuation industry.
Graham Hand is Managing Editor of Cuffelinks. This article is general information and does not consider the circumstances of any person.