The Australian superannuation system, the fourth-largest pool of retirement savings in the world, has been through the ringer (as Australians would say). After The Productivity Commission completed three years of investigation, its final report on super was made public in January and received much criticism from the industry.
Australia’s retirement system, which is compulsory for all working Australians, is lauded as one of the best. To many industry observers, however, the PC missed an opportunity to provide an evidence-based set of improvements.
Michael Rice, chief executive of Australia-based actuarial and consulting firm Rice Warner, provides his thoughts on the PC’s recommendations.
In 2016, the Productivity Commission launched an inquiry into the Australian superannuation market. The inquiry consisted of three stages and attempted to develop criteria for assessing efficiency and competitiveness, develop models for allocating default members, and then review the efficiency and competitiveness of the system using criteria developed in stage one.
The PC made its final report public in January. Although the report has been the subject of several uncomplimentary observations from many superannuation experts, the analysis made a major contribution to identifying areas of the system that can and should be improved.
Objectives the PC identified include:
- removing unnecessary multiple accounts
- removing poorly targeted life insurance
- developing good retirement products and strategies
- eliminating funds with persistently poor investment strategies
- addressing those funds with fees that are excessive for the services they offer
- addressing the remaining trail commissions on superannuation accounts.
While the proposed budget changes in 2018, and the Australian Prudential Regulation Authority’s new outcomes tests, address these areas well, there are some issues with the PC’s recommendations and conclusions. These are outlined below.
In the early stages of the inquiry, the PC took the view that the current system was inefficient. It came up with four alternate systems to capture contributions from new entrants. In doing so, it incorrectly assumed that the current structure was broken and could not be remedied with targeted improvements. This was a fundamental flaw, as the PC has ended up recommending a system worse than the current one. Flaws in the PC’s final report included:
- The best-in-show method:
- The PC suggested a list of 10 funds that can accept contributions from new entrants. This is an arbitrary number and would lead to severe disruption to the system as oligopolies formed over time, competition was reduced, and systematic risk increased.
- When the list is reviewed every four years subjectively by non-experts (as they cannot come from the industry), funds would drop out and re-enter the top 10 list. What happens to the members of a fund that dropped out?
Fortunately, no Parliament will pass this deeply flawed recommendation.
- The statement that a person in a poorly performing fund would be A$660,000($470,000) worse off at retirement than a person in a well-performing fund is implausible and suggests that a poor fund would survive for a member’s full career without any intervention from the regulator (and that the member would not notice and change funds).
One of the strangest comments from the PC was the recommendation that the government hold a full inquiry into national savings and retirement before the superannuation guarantee (SG) rises from 9.5 per cent to 12 per cent, which is scheduled for June 2021. The PC’s three years of work provide no insight into the reasoning for this recommendation.
Rice Warner modelling shows that the legislated increase in the SG will not have much impact on the age pension for many years but will reduce it by about 0.1 per cent of GDP in the second half of this century on current means-testing settings (though without the SG, it would rise).
The tax concessions from the increase are more immediate and they will average about 0.22 per cent of GDP throughout this century.
This seems to have been the main reason for the repeated delays to increases to SG but tax concessions are a small cost to pay for the improvement in retirement incomes the SG increase would deliver. We should point out that these values (age pension costs and personal tax concessions) do not need to equate; it is desirable to give tax concessions for those who save and lose access to their funds until they retire.
Research gave the PC the opportunity to define the agenda with a cohesive, evidence-based package of recommendations. Sadly, the growing disconnect between the PC’s analysis and its recommendations means that this opportunity has been lost.
Michael Rice is chief executive of Rice Warner, an Australian-based actuarial and consulting firm. He heads up Rice Warner’s public policy work and has undertaken pioneering research into age pension dependency and trends. He sits on the board of the Australian super fund StatePlus.