Introduction
Thank you for the introduction, it’s an honour to join you.
This Summit provides an exceptional opportunity to share perspectives and insights from around the world.
On the back of a health and economic crisis that has fostered a global sense of insularity, platforms which enable wide ranging discussion, forward thinking, and cross pollination between nations have perhaps never been more important.
Today, I would like to reflect on Australia's retirement income system including the last 30 years of compulsory superannuation, the challenges we face ahead and some of the significant reforms underway.
Australia’s retirement income system
The hallmark of a civilised society is how it treats its most vulnerable people.
Indeed, investment in our retirement income system, and its success, is a testament to the great value placed on the wellbeing of our older generation.
Australia’s retirement income system is unique and complex.
We were one of the first countries to adopt a retirement income system with three individual pillars. This includes; a Government mandated retirement savings scheme deducted as a percentage of salary ‑ known as superannuation; the publicly funded Age Pension, and; voluntary savings.
Perhaps what is most unusual about our system is the varying degree of interaction between all three pillars so as to smooth consumption between working life and retirement.
In 2019, the Government commissioned the Retirement Income Review to establish an independent fact base on Australia’s retirement income system — how it operates and the outcomes it delivers.
The Review looked at the interaction of all three pillars of our system, and found it to be working quite well, serving most Australians as intended, and would continue to serve retirees well into the future.
Indeed it found that globally, Australia’s system is a front runner, ranking higher than most other international retirement income models.
And throughout this pandemic, we have seen first‑hand that our system is well‑placed ‑ with strong foundations ‑ to handle significant economic volatility, as well as the challenges of an ageing population.
However, as robust and effective as our system is, the Review also confirmed what we already knew ‑ there is room for improvement.
Superannuation
This is particularly true for the compulsory savings ‘superannuation’ pillar, which came to fruition almost thirty years ago, in 1992.
Today, more than 90% of workers are covered by this scheme, and Australia’s superannuation assets currently stand at over AU$3.3 trillion dollars, equivalent to over 150 per cent of Australia’s GDP and larger than the Australian Stock Exchange.
And while it’s a system that wears three decades of alternations and add‑ons of varying quality well ‑ the edges have certainly frayed.
Over the years, investment opacity and compulsion, stemming from the mandated nature of superannuation, has allowed for widespread consumer disengagement ‑ and mission creep from funds.
These have been the primary drivers of inefficiency, and baked in structural inequities have left too many Australians behind.
Indeed, since its inception, our super system has been inflexible for those who have taken career breaks or who work part time.
It has also been inflexible for older Australians, who have not enjoyed the benefits of a mature system, wishing to manage their retirement savings by making voluntary contributions later in life.
The vestiges of a past system that tied retirement savings to workplace relations have endured.
For the past few years, this Government has been chipping away at theses weaknesses ‑ and baked in inefficiencies ‑ in Australia’s compulsory superannuation system. We are focused on ensuring our superannuation system is fit‑for‑purpose for a modern workforce. Not just the workforce of thirty years ago.
We have focused on:
- eliminating unintended multiple accounts that attract multiple sets of administrative fees and insurance premiums,
- exit fees charged to account holders,
- investment opacity, and;
- unnecessary, often unknown, insurance that was tied to member’s accounts. This insurance often went well beyond their needs ‑ such as comprehensive life insurance for a healthy 17 year old with no dependents.
The Your Future, Your Super reforms
Continuing our arc of reforms, the Government’s most recent Your Future, Your Super policy package represents some of the most significant changes to our superannuation system in 30 years.
These reforms include four key measures.
Stapling
First, under this new suite of measures, the Government is ensuring that where an employee has an existing superannuation account, that account will now follow them or be ‘stapled’ to them when they change jobs ‑ minimising the flow of unintended multiple accounts.
Historically, when employees started a new job employers would open a new account. A legacy of superannuation’s origins in the industrial relations system.
Comparison
Second, we have launched the YourSuper comparison tool. This is a free, Government funded, online, consumer facing comparison tool.
This will provide a trusted source where Australians can easily compare superannuation products and easily choose a fund with a high‑performing long‑term investment strategy, which is low‑cost, and meets their needs.
To give you some context, Australian superannuation funds charge some of the highest fees to account holders compared to OECD countries.
Australians spend an estimated $30 billion AUD, or the equivalent of around $20 billion USD each year in superannuation fees, which is more than they spend on energy bills.
Performance
Third, we are holding underperforming super funds to account through an objective annual investment performance test. A bright line test, with no excuses. A fund passes, or it fails.
From 1 July 2021, the first annual performance test was applied to a cohort of superannuation products called ‘MySuper products’ which are the products most employees are defaulted into when starting a new job. The test found 13 superannuation funds containing 1.1 million accounts and $56.2 billion dollars in retirement savings had underperformed.
The funds that fail the test are required to notify members about their underperformance and direct them to the online comparison tool.
Funds that fail for a second consecutive year will be prevented from accepting new members.
Best financial interest
Fourth, super funds can’t readily borrow money so the only money they can spend is Australians’ retirement savings.
Advertising campaigns, football memberships, parties for stakeholders and yoga sessions for members were themes we were seeing balloon rapidly across the industry.
While these may be nice additions, they are unlikely to be fulfilling the overarching purpose of super funds. That is to invest and grow members’ savings to provide income in retirement.
To ensure funds spend their members’ money only to maximise their retirement savings, we have legislated that super funds must act in their members’ best financial interest.
In addition, we have reversed the onus of proof to ensure it is the responsibility of funds to prove they are spending money in a way that is in the financial interest of their members.
Transparency and Portfolio Holdings Disclosure
Increased transparency and accountability in Australia’s compulsory superannuation system is essential — something we value greatly.
We need to safeguard members’ interests but also ensure our system is modern, fit‑for‑purpose and up‑to‑speed with international best practice.
Reforms, such as improved superannuation portfolio holdings disclosure, are needed in Australia to improve systemic transparency and system efficiency ‑ enabling members to choose to engage should they wish to do so.
Currently, we are working to finalise our portfolio holdings disclosure regime so that all market participants — members, researchers, planners and investors — have a clear picture of the investments funds hold on behalf of members.
Benefits
Overall, the Your Future, Your Super reforms will improve the efficiency and competitiveness of the superannuation system — they ensure retirement savings are working harder for every Australian.
The reforms of this system join the pantheon of major Australian financial reforms. Very few levers of Government can deliver so much wealth to so many Australians. In the next 10 years alone, these reforms are estimated see Australians $17.9 billion dollars richer.
Strength of our system
Australia has weathered two financial shocks remarkably well including the GFC and COVID‑19 which in turn has allowed us to enjoy almost 30 years of uninterrupted economic growth.
Our superannuation system contributes to this overall strength, in a very democratic way. Rather than having a singular sovereign wealth fund, superannuation is made up of individuals pooling their savings ‑ allowing Australians to have a material stake in the prosperity of our country.
And, the success of the companies changing our society and economy as we know it ‑ whether that be AfterPay or BHP, is in turn enjoyed by Australians in retirement.
Importantly, while this Government has ensured there is now choice and agency in this stake, because of the compulsory nature of superannuation there is also stability in investment.
The Age Pension
The Government funded Age Pension is another strength of Australia’s retirement income system — and it is far from being just a social safety net. Rather an integral retirement income pillar of its own.
The Age Pension predates compulsory super by over 80 years, and many current (and future) retirees will continue to rely on receiving the Age Pension or the Age Pension in part. Currently, around 71 per cent of Australians over Age Pension eligibility age receive an income support payment.
Importantly, our system enables retirees to access both superannuation and a variable amount of the Age Pension, with the pension scaling up as super balances are drawn down.
The Age Pension plays a number of important roles in people’s retirement plans, serving as a buffer, helping offset potential declines in retirement incomes during market downturns and ‑ in this context most importantly ‑ it also acts as a form of longevity insurance for those who outlive their retirement savings.
Voluntary savings
Perhaps the greatest lesson from the Retirement Income Review was that quality of life in retirement is made up of efficient and effective use of all three pillars of our system.
So no discussion about retirement is complete without acknowledging the role of our third pillar, voluntary savings.
Workers in Australia have the flexibility to make additional, voluntary contributions to their superannuation account and take advantage of the generous tax concessions provided. Indeed, voluntary contributions made up around 40 per cent of total contributions to superannuation between 2017‑2018.
However, 2021, and indeed for some time to come, most household wealth for people aged 65 and over is held outside the superannuation system, with owner‑occupied housing the single largest asset for most retirees.
Pension Loans Scheme
Traditionally Australia’s home ownership rate is one of the highest in the world. But up until recently, the wealth tied up in this asset has been harder for older Australians to access and use to their benefit.
Recognising this, Australia has a Pension Loans Scheme that allows individuals to supplement their income in retirement by borrowing against the equity in their property, assisting older Australians to maintain living standards in retirement.
Scheme debts can be repaid at any time but are generally repaid when the property securing the loan is sold or recovered from the person’s estate.
The scheme was first articulated in 1985. However only recently was it enhanced to cater to retirees more broadly, and not just for pensioners.
This Government has also introduced a No Negative Equity Guarantee to provide certainty that a person’s debt will not exceed the value of their property and we will also allow retirees to access capped advance lump sum payments.
A crucial element to note is that this scheme is entirely voluntary, and borrowing can be stopped at any time. This is not about Government forcing retirees – current or future – to draw down on savings through rigid policy settings or punitive regimes.
Quite the opposite. Retirees savings are their own, and this measure is about giving retirees control of their retirement income no matter what the economic circumstances.
Closing remarks
As the system matures, Australians are retiring with more savings than ever before, which has enabled us to have one of the most sustainable and viable retirement income systems in the world.
Our goal is to make our retirement income system work better for the retirees of today and tomorrow ‑ improving retirement outcomes for all Australians into the future.
And it’s an honour to share some thoughts on its history, how it’s performing and some of the significant reforms underway.
Thank you.