The Inquiry sees significant scope for the superannuation system to meet the needs of superannuation fund members better and provide broader benefits to the financial system and the economy. Specifically, the Inquiry believes action can be taken in the following three areas:
- Set clear objectives for the superannuation system. A clear statement of the system’s objectives is necessary to target policy settings better and make them more stable. Clearly articulated objectives that have broad community support would help to align policy settings, industry initiatives and community expectations.
- Improve operational efficiency during accumulation. Subject to the outcome of a review, a formal competitive process may be needed to allocate new default fund members to MySuper products.A formal competitive process would extend competitive pressures from the wholesale default fund market to the broader default fund market and improve after-fee returns.5 It would also reduce costs for funds and compliance costs for employers, who would no longer be required to select default funds for employees.
This recommendation should only be implemented subject to the outcome of a review of the superannuation system’s efficiency and competitiveness. This caveat acknowledges it is too early to assess the effectiveness of the Stronger Super reforms, although the Inquiry has reservations about whether these reforms alone will significantly improve system efficiency and member outcomes.
- Improve efficiency in retirement. Greater use of risk pooling could significantly increase retirement incomes generated from accumulated balances. This could allow individuals to allocate consumption throughout their lives better (greater dynamic efficiency) by reducing the savings required to achieve a target level of income in retirement. This could be achieved by:
- Removing barriers to new product development.
- Using behavioural biases to encourage rather than discourage the use of products that provide longevity risk protection.
This recommendation would involve trustees pre-selecting a comprehensive income product for retirement (CIPR) option for their members. Pre-selected options have been demonstrated to influence behaviour but do not limit personal choice and freedom. They would bring the policy philosophy at retirement closer to that of the accumulation phase.
Managing longevity risk through effective pooling in a CIPR could significantly increase private incomes for many Australians in retirement and provide retirees with the peace of mind that their income will endure throughout retirement, while still allowing them to retain some flexibility to meet unexpected expenses. An enduring income stream would give retirees the confidence to spend in retirement, which would help to sustain economic growth as the population ages and reduce the extent to which longevity risk falls on the taxpayer.
To support and complement these recommendations:
- All employees should be able to choose the superannuation fund that receives their Superannuation Guarantee (SG) contributions.
- Superannuation funds should provide retirement income projections on member statements to improve member engagement (recommended in Appendix 1: Significant matters).
- The Tax White Paper should consider the removal of tax barriers to a seamless transition to retirement and target superannuation tax concessions to the superannuation system’s objectives. Adjustments to tax settings and efforts to improve equity have been major contributors to superannuation policy change in the past. The Inquiry believes community concerns about these issues need to be addressed to achieve greater policy stability and long-term confidence and trust in the system.
The package of superannuation measures, including introducing a formal competitive process to allocate new default fund members to MySuper products, would deliver better outcomes and a more seamless experience for superannuation members throughout their lives (illustrated for default fund members in Figure 6: The superannuation system for default fund members). This package has the potential to increase retirement income for a male on average weekly ordinary-time earnings by 25–40 per cent in retirement (excluding the Age Pension).6 While these estimates are illustrative and based on models which cannot fully reflect the unique circumstances of different individuals, the Inquiry is confident that significant increases in retirement incomes can be achieved. The package would also move the system’s focus away from employers, towards individuals.
Figure 6: The superannuation system for default fund members
The Inquiry has also made recommendations to improve the resilience of, and confidence in, the superannuation system, including:
- Improving governance by requiring a majority of independent directors on superannuation trustee boards and aligning penalties for director misconduct with those of managed investment schemes (MISs).
- Improving the quality of financial advice and empowering consumers through improved disclosure and transparency (recommended in Chapter 4: Consumer outcomes).
- Restoring the prohibition on direct borrowing in superannuation funds to preserve an important strength of the superannuation system, which was demonstrated during the GFC (recommended in Chapter 1: Resilience).
5 The wholesale default fund market refers to large corporations tendering for a default superannuation fund for their employees. Lower fees reflect the buying power of a large corporation and lower member acquisition costs for funds. Many award superannuation fund members similarly receive wholesale benefits through lower fees as a result of lower member acquisition costs.
6 Estimates were prepared using Australian Government Actuary modelling and input from Treasury models. The benefits of lower superannuation fees and savings from maintaining a single superannuation account over a person’s working life (discussed in Recommendation 10: Improving efficiency during accumulation) account for more than 10 percentage points, and the remaining portion reflects the use of a CIPR. The models compare retirement income from an account-based pension, drawn down at minimum rates, to the results from a CIPR. Increased income and improved risk management comes at a cost of reduced flexibility and smaller bequests from superannuation. Further details are provided in Recommendation 11: The retirement phase of superannuation. The combined effects over 37 years of work would be that annual retirement income (excluding the Age Pension) would increase from $26,000 to between $33,000 and $38,000.