Knox, a senior partner at the consulting group Mercer, ranks among Australia’s best-regarded superannuation policy thinkers. He sees the Australian Government’s recent move to increase super guarantee payments – from 9 per cent to 12 per cent – as a sign that maturation has started to happen.
The rise in payments is just one of several ways the system has been growing up. Over the past year, the Federal Government has passed its MySuper legislation, which will see the introduction of simple, standardised, low-cost super products to replace existing default funds. And the Government has toughened the regulation of self-managed funds, which will impose greater responsibilities on trustees and their advisers.
While it is rewarding to watch the development of a teenager, it can also be frustrating. In the case of the super system, commentators – including the IPA – have called for a move away from the payment of lump sum benefits to wider use of super pensions and annuities. They want the Government to increase the age at which people can gain access to their retirement benefits and they want to see more incentives to encourage older people to stay in the workforce.
Many are also keen to see trustees address shortcomings in their asset-allocation strategies. Australian super funds hold more growth assets than pension funds in any other national system, exposing them to great volatility.
An ‘A’ rating within reach
On balance, Australia’s system of public pensions and private pensions (super) rates very well. In the latest Melbourne Mercer Global Pension Index, published last October, the overall Australian pension system received a rating of B+. That means it is “a system that has a sound structure with many good features but has some areas for improvement”. Among the 18 countries surveyed, only Denmark received an A, while the Netherlands was the only other country to receive a B+.
The index looks at pension adequacy – the number of people covered by the system and the level of income likely to be provided in retirement. It looks at the governance of the system and other integrity issues, and it looks at sustainability.
For Australia, an A rating may be in sight. Knox, who wrote the Mercer report, says the latest rating did not take into account the increase in super guarantee payments, which should enhance the Australian system’s rating. Compulsory employer payments will start to rise from July, when the rate goes up to 9.5 per cent of salary, and will reach 12 per cent in the 2019/20 financial year.
The consultancy Enterprise Metrics modelled the likely impact of these changes for the Australian Institute of Superannuation Trustees. In a report published last July, it says that of today’s 20-somethings (who work until retirement at age 65), about three-quarters can expect to achieve a replacement rate of
65 per cent of pre-retirement income. Most retirement income studies work on a target replacement rate of 60–65 per cent of pre-retirement income as a reasonable level of financial adequacy in retirement.
The need for income streams
The Mercer report says the Australian system could be improved by introducing a requirement that part of the retirement benefit must be taken as an income stream.
It recommends increasing the labour force participation rate among older people. It would also like to see the introduction of mechanisms to increase the pension age as life expectancy continues to rise, as well as an increase in the minimum access age for receiving benefits from private pension plans, so that retirement benefits are not available more than five years before the pension eligibility age.
The IPA supports the view that there should be compulsory conversion of some super benefits into income streams. Its senior policy adviser for super and financial services, Reece Agland, says the IPA’s pre-Budget submission argues that it should be compulsory for about 75 per cent of the benefits of a MySuper account to be converted to a super pension or annuity.
“We see evidence that people are increasing their level of debt before retirement, using their lump sums to pay off the debt and then applying for an age pension,” says Agland.
