Fit for purpose? The super story so far...
We’ve come a long way since the mandatory superannuation guarantee was introduced in the early 1990s.
Australia’s super system is now the world’s fourth largest private pension industry, with $2.1trn under management at June 2016.
But the super system is still immature. It took 20 years for SG to reach 9.5%, and will take until 2025 to get to 12%, assuming policy continuity. So it will be well into the 2030s before Australians have spent their full working lives with SG coverage of at least 9% of their salaries.
This means that for most of today’s retirees, the age pension continues to be the main source of retirement income, with approximately 80% coverage. But future retirees will be much more dependent on their own super savings, with social security falling back to more of a ‘safety net’ function over time.
And this profound change in the dynamics of the super system is happening faster than many people expected.
From wealth accumulators to income generators
Until now, the primary focus for wealth providers has been maximising net investment returns through the accumulation phase. But things are changing, driven by the wave of baby boomers entering retirement.
Some stark numbers from the Government’s most recent Inter-Generational Report highlight the issues:
- Longevity continues to increase, with male life expectancy at birth now 91.5 and female 93.6, with this projected to rise to 95.1 and 96.6 by 2055.
- The ratio of workers to retirees continues to decrease, from 7.3 to 1 in 1975 to 4.5 to 1 in 2015 and a projected 2.7 to 1 in 2055.
These changes are leading to a greater focus on fiscal sustainability of the super system, exemplified by a number of recent policy changes.
- Increased preservation age (from 55 to 60) and age pension eligibility (from 65 to 67).
- Tightening of age pension means tests.
- Various measures to rein in super tax concessions in the 2016 Federal Budget.
- Promotion of longer workforce participation.
So as the super system matures and the population ages, the Government is looking to shift the industry’s focus from accumulating capital to generating income, from maximising returns to managing liabilities and from building wealth to drawing down.
Key changes emanating from the Financial System (Murray) Inquiry and other policy reviews are now poised to produce policy outcomes that will transform the retirement product landscape in Australia.
ABPs dominate the current scene
Currently, retirement product selection is almost entirely driven by the tax-free status of eligible retirement income streams from age 60.
However, there is only a very limited range of products that qualify, with the vast majority of these (around 95%) being account-based pensions (ABPs). While these offer great flexibility, investment choice, access to capital and bequest benefits, they expose investors to investment, longevity and sequencing risks.
Some recent research also suggests that ABPs often lead to unnecessarily frugal drawdown behaviours, with retirees being anxious about the risk of outliving their savings. At an overall system level, the Government contends that super assets are not being efficiently converted into retirement incomes due to a lack of risk pooling and over-reliance on individual ABPs.
So the government has recently expanded the definition of products that can qualify for tax-concessions in the retirement drawdown phase, and is planning to introduce Comprehensive Income Products for Retirement (CIPRs), as laid out in the long-awaited discussion paper released at the end of last year.
Like to know more?
I often wonder how the experience of Australian retirees (and those about to retire) compares with their counterparts in similar countries. A recent Vanguard research paper examines this in detail—take a look here. It makes for interesting reading.
Paul Murphy
08 March 2017
www.vanguardinvestments.com.au
Hot Issues
- ATO encourages trustees to use voluntary disclosure service
- Beware of terminal illness payout time frame
- Capital losses can help reduce NALI
- Investment and economic outlook, August 2024
- What the Reserve Bank’s rates stance means for property borrowers
- How investing regularly can propel your returns
- Super sector in ASIC’s sights
- Most Popular Operating Systems 1999 - 2022
- Our investment and economic outlook, July 2024
- Striking a balance in the new financial year
- The five reasons why the $A is likely to rise further - if recession is avoided
- What super fund members should know when comparing returns
- Insurance inside super has tax advantages
- It’s never too early to start talking about aged care with clients
- Capacity doubts now more common
- Most Gold Medals in Summer Olympic Games (1896-2024)
- SMSF assets reach record levels amid share market rally
- Many Australians have a fear of running out
- How to get into the retirement comfort zone
- NALE bill passed by parliament
- Compliance focus impacts wind-ups
- LRBA interest rates increase for 2025
- Income-free areas set to increase from 1 July
- Most Spoken Languages in the World
- Middle-to-higher incomes boosting SMSF growth
- Investment and economic outlook, May 2024
- Transitioning into retirement: What you should know
- Plan now to take advantage of stage 3 tax cuts
- Deeming freeze a win for Age Pensioners
- Downsizer contributions can be time critical
Article archive
- April - June 2024
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
- January - March 2015
- October - December 2014
April - June 2017 archive
- ‘Bank-like heists’ make way for new wave of cyber crime
- Give your children a saving and investing edge - for life
- Women still in the dark about finances
- Lessons learnt - often the hard way
- Australian population figures
- ATO poised to ramp up focus on key compliance area
- Benefit payments rise dramatically ahead of July 1 super changes
- There's no magic pudding when it comes to super
- ATO guidance provides clarity on death benefit confusion
- Beyond super: Our other personal investment market
- The three core pillars of this year's budget
- Federal Budget - 2017-18 - Overview
- Federal Budget - 2017-18 - Budget documents
- Global economy synchronised and thriving
- Life's financial turning points: good and not-so-good
- 2011 Census - what was the make up of your area?
- ATO set to release guidance targeted for SMSF clients
- More withdrawals from 'the bank of mum and dad'
- Tax headache relief: Here’s more help with pension assets changes
- Most Aussies shun super advice
- Australia in a nutshell
- ATO finalises guidance on transfer balance cap
- Fit for purpose? The super story so far...
- SMSFs urged to review segregation clauses in trust deed
- Big insto addresses CGT misconceptions
- Dollar-cost averaging for millennial investors