Chapter 2: Superannuation and retirement incomes

Australia needs an efficient superannuation system given the system’s size and growth, the role it plays in funding the economy and its importance in delivering retirement incomes. The superannuation system is large by international standards and has grown rapidly since the Wallis Inquiry in 1997. It is the second largest part of the financial sector and, according to some forecasts, could have assets that exceed those of Australia’s banking system within the next 20 years.1

Australia’s superannuation system has considerable strengths.2 It plays an important role in providing long-term funding for economic activity in Australia — both directly and indirectly through funding financial institutions — and it contributed to the stability of the financial system and the economy during the global financial crisis (GFC).

Superannuation is also critical to help Australia meet the economic and fiscal challenges of an ageing population. Life expectancy in Australia is the fourth longest of any country, and is projected to continue to increase.3,4 There will be economic benefits if the growing proportion of older people can sustain their level of consumption in retirement.

The Inquiry sees scope to improve the efficiency of the superannuation system in a number of areas. The superannuation system is not operationally efficient due to a lack of strong price-based competition and, as a result, the benefits of its scale are not being fully realised. Substantially higher superannuation balances and fund consolidation over the past decade have not delivered the benefits that would have been expected; these benefits have been offset by higher costs elsewhere in the system rather than being reflected in lower fees. Other design features also contribute to inefficiencies, leading to higher costs and sub-optimal outcomes for members, such as the proliferation of multiple accounts.

Superannuation assets are not being efficiently converted into retirement incomes due to a lack of risk pooling and an over-reliance on account-based pensions. This contributes to a lower standard of living for Australians in retirement and, for some, during working life — meaning people may have to save more than they did previously to reach the same level of retirement income.

Tax concessions in the superannuation system are not well targeted at improving retirement incomes, which has a number of consequences. It increases the cost of the superannuation system to taxpayers; it increases distortions due to higher levels of taxation elsewhere in the economy and due to the differences in the way other savings vehicles are taxed; and it contributes to the broader problem of policy instability, which imposes unnecessary costs on superannuation funds and their members and undermines long-term confidence in the system.

In looking at superannuation policy settings from a financial system perspective, the Inquiry has also considered the associated social policy objectives. However, the Inquiry has not explicitly considered social policy settings, such as whether retirement incomes are adequate, or Age Pension policy settings, because these are outside the Inquiry’s terms of reference. The Inquiry has also made observations about the effects of taxation policy on the superannuation system and has referred them to the Tax White Paper.


1 Industry Super Australia, using information from Deloitte, forecasts superannuation assets will exceed those of the banking system by the early 2030s. Industry Super Australia 2014, First round submission to the Financial System Inquiry, page 117.

2 For example, the 2014 Melbourne Mercer Global Pension Index ranks Australia’s superannuation system second out of 25 countries. Its rating of ‘B+’ describes “… a system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system”. Mercer 2014, Melbourne Mercer Global Pension Index, Australian Centre for Financial Studies, Melbourne, page 7.

3 United Nations 2013, World Population Prospects: The 2012 Revision, United Nations, viewed 12 November 2014.

4 Commonwealth of Australia 2009, Australian Life Tables 2005–07, Canberra, page 17.