Context

Australia’s retirement income system

The architecture of the retirement income system, which includes the superannuation system, has considerable strengths. Australia’s Future Tax System Review endorsed Australia’s three-pillar retirement income system (Figure 4.1).1 Submissions identify the following strengths of the system:

  • Increasing retirement incomes — the system is improving retirement incomes for many people. It has provided positive real returns over time2 although during the global financial crisis (GFC) many members nearing retirement were affected by significant declines in wealth. Returns reflect the investment risk borne by members as a result of large allocations to higher-growth but riskier assets.
  • Choice — the superannuation system delivers significant choice and diversity of fund structure. This includes investment options for those who want them and default options for the less engaged.
  • Funding Australia’s economy — the superannuation sector is a major source of funding for the rest of the economy, including banks and non-financial corporates. Given the long-term nature of its funds, the superannuation sector provides diversity, depth and stability to the financial system. The Financial Services Council (FSC) notes: “By maximising returns to superannuation fund members as required by legislation trustees of superannuation funds are also maximising returns to the Australian economy”.3

The 2013 Melbourne Mercer Global Pension Index ranked Australia’s pension system third out of 20 countries. Australia’s system was categorised as having “a sound structure, with many good features, but ... some areas for improvement”.4 Mercer notes that a major area for improvement relates to the retirement phase, which is addressed in the Retirement incomes chapter.5

The vast majority of superannuation accounts are held in defined contribution schemes. These schemes, unlike employer-sponsored defined benefit schemes that were popular in the past, insulate members from the risks of potential fund insolvency arising from employer bankruptcy. However, they expose individuals to other risks, including investment, inflation and longevity risks.

Figure 4.1: Australia’s three-pillar retirement income system

This figure describes the three pillars of Australia’s retirement income system, comprising the Age Pension (a universal mean-tested publicly funded pension), the Superannuation Guarantee (compulsory, fully funded private savings), and voluntary savings (voluntary private savings).

Objectives of the retirement income system

There is no legislative or formal statement of the guiding objectives for the retirement income system. However, Australia’s Future Tax System Review proposed the following objectives:

  • Broad and adequate — to protect those unable to save against poverty in their old age and provide the means by which individuals must or can save for their retirement.
  • Acceptable —to consider the income needs of individuals, both before and after retirement, to be equitable and not to bias saving decisions inappropriately.
  • Robust — to deal appropriately with investment, inflation and longevity risk.
  • Simple and approachable — to allow individuals to make decisions that are in their best interests.
  • Sustainable — to be financially sound into the future and detract as little as possible from economic growth.6

Major changes since the Wallis Inquiry

Superannuation assets are around six times their level in 1997 and are now over $1.8 trillion.7, 8 Australia has the fourth largest pool of superannuation assets in the world and is one of only a few countries with pension assets worth more than annual Gross Domestic Product (GDP).9 Superannuation is the financial system’s second largest sector after banking and is growing rapidly, principally due to Government policy settings.

The superannuation sector’s landscape has changed markedly since the Wallis Inquiry (see Chart 1.2 in the Overview chapter). Between June 1997 and March 2014, the number of funds regulated by Australian Prudential Regulation Authority (APRA), excluding small APRA funds (SAFs), fell from more than 4,700 to 299.10, 11 This consolidation has largely been driven by the decline in the number of corporate funds.

Assets held in self-managed superannuation funds (SMSFs) have expanded rapidly relative to the rest of the superannuation system. They are now more than 15 times their level in 1997 and have more than one million members.12, 13, 14 SMSFs currently account for around one-third of total superannuation assets, or $559 billion, compared to 11 per cent of assets in the superannuation system in 1997.15, 16


1 Commonwealth of Australia 2009, Australia’s Future Tax System— The retirement income system: Report on strategic issues, Commonwealth of Australia, Canberra.2 Australian Prudential Regulation Authority (APRA) data of large funds shows the average rate of return, net of all expenses and taxes, was 5.4 per cent per annum over the 17 years to June 2013. Association of Superannuation Funds of Australia (ASFA) shows returns after taxes and fees were 6 per cent per annum over the 15 years to June 2013 (3.1 per cent above Consumer Price Index (CPI)) and 7.2 per cent over 20 years (4.5 per cent above CPI) for funds which are representative of the average default investment arrangement. APRA 2013, Annual Superannuation Bulletin, June ed., revised February 2014, APRA, Sydney; APRA 2011, Annual Superannuation Bulletin, June ed., APRA, Sydney; and ASFA 2014, First round submission to the Financial System Inquiry.

3 Financial Services Council (FSC), First round submission to the Financial System Inquiry, Chapter 1, page 17.

4 Mercer 2013, Melbourne Mercer Global Pension Index, Australian Centre for Financial Studies, Melbourne.

5 Mercer 2013, Melbourne Mercer Global Pension Index, Australian Centre for Financial Studies, Melbourne.

6 Commonwealth of Australia 2009, Australia’s Future Tax System Review, The retirement income system: Report on strategic issues, Commonwealth of Australia, Canberra.

7 Australian Prudential Regulation Authority (APRA) 2007, Insight: Celebrating 10 years of superannuation data collection 1996–2006, Issue 2, Special Ed., APRA, Sydney.

8 Australian Prudential Regulation Authority (APRA) 2014, Statistics: Quarterly superannuation performance (interim edition), March ed., APRA, Sydney.

9 Towers Watson 2014, Global Pension Asset Study, January, viewed 24 June 2014, page 5. Note: refers to 2012 data, in absolute terms.

10 Australian Prudential Regulation Authority (APRA) 2007, Insight: Celebrating 10 years of superannuation data collection 1996-2006, Issue 2, Special Ed., APRA, Sydney.

11 Australian Prudential Regulation Authority (APRA) 2014, Statistics: Quarterly superannuation performance (interim edition), March ed., APRA, Sydney.

12 Note: ‘Small funds’ is used as a proxy for SMSFs in 1997. Australian Prudential Regulation Authority (APRA) 2007, Insight: Celebrating 10 years of superannuation data collection 1996–2006, Issue 2, Special Ed., APRA, Sydney; Australian Prudential Regulation Authority 2014, Statistics: Quarterly superannuation performance (interim edition), March, APRA, Sydney.

13 Australian Prudential Regulation Authority 2014, Statistics: Quarterly superannuation performance (interim edition), March ed., APRA, Sydney.

14 Australian Taxation Office (ATO) 2014, Self-managed super fund statistical report — March 2014, ATO, viewed 25 June 2014.

15 Australian Prudential Regulation Authority (APRA) 2007, Insight: Celebrating 10 years of superannuation data collection 1996–2006, Issue 2, Special Ed., APRA, Sydney; Australian Prudential Regulation Authority 2014, Statistics: Quarterly superannuation performance (interim edition), March ed., APRA, Sydney.

16 Australian Prudential Regulation Authority (APRA) 2014, Statistics: Quarterly superannuation performance (interim edition), March ed., APRA, Sydney.