Superannuation is an integral part of Australia’s retirement income system: It forms the second and third pillars of the system, benefiting households and the wider economy. But it continues to evolve. Policymakers are looking at ways to improve efficiency and are developing measures for a retirement income framework in which individuals will be better able to manage risks in retirement.
It represents one of the largest such accumulations in the world and is expected to get larger: Funds under management have grown to $2.7t or 150% of GDP; projections see these grow to 200% of GDP by 2035. It complements housing assets which are larger in value but represent an illiquid form of saving.
Recent reviews are coming to a head: Attention has moved away from superannuation tax issues. Instead, challenges relating to market structure, product offer, and consumer behaviour during both accumulation and decumulation phases of super are taking centre stage. So far, the system has resulted in high fees during accumulation and low risk intermediation in retirement.
Competitive structures can inhibit competition and innovation: Industry funds enjoy default status under the industrial relations system while retail funds dominate the choice sector, historically controlled by the big five financial services firms. Low competition in both sectors can result in inferior outcomes for members.
Consumers find it difficult to make choices: Three strategies may help: (1) supporting choice by regulated information provision and improving financial skills; (2) guiding choice with the right advice at the right time; and (3) intervening in the absence of choice with well-designed defaults. Current ways of providing information are found to be lacking, financial advice continues to be conflicted, and defaults are not always well-designed.
Balances have grown but women continue to face a superannuation gender gap: Super balances have grown to an average of $214,000 at age 60-64 in 2016 (median of $68,000). Women’s superannuation balances are 64% lower than men's, but the gap has almost halved over the decade. Of concern are lower balances of single women, but the system compensates this via the Age Pension (on average, women receive $2,000 p.a. more). The solution is to close the gap in working life, but parental leave contributions are poorly targeted.
Raising compulsory contributions to 12% will increase retirement incomes: The vast majority would see higher retirement incomes, enjoy a diversification of assets away from housing, and greater liquidity in retirement. But younger, low-earning renters are likely to experience greater financial stress as a result.
Accumulation structures are part of a live debate: Super accumulation receives considerable attention, and there is a high-profile debate about how to improve defaults and lower costs.
Decumulation policy is also evolving: Current settings fail to turn assets into income, leaving retirement risks with consumers, who appear to hold on to assets as a form of self-insurance. The solutions include: (1) encouraging private market provision of risk-pooled products (e.g., aligning tax-and-benefit and regulatory rules); (2) intervention in the market to directly provide products or supporting instruments (e.g., tail end insurance or longevity bonds); and (3) enhancing the decumulation information and choice architecture (e.g., targeting education, information, compulsion, incentives, and defaults for those that don’t choose).
Policymakers have been reluctant to embrace decumulation defaults: A policy is under development to require fund trustees to offer risk-pooling products to members. There is a danger that the inefficiencies that have plagued the accumulation phase could also translate to inefficiencies in the retirement product market. The preferred option is to prescribe a standard product that combines the flexibility of an account-based pension with the insurance of a deferred annuity. Policies decided in the next few years will determine the future of superannuation decumulation in Australia, which is leading the world in policy that attempts to combine flexibility and paternalism.
In addition, this research brief summarises research on financial behaviour, financial literacy and information, financial advice, defaults, drawdown behaviour and decumulation design, optimal annuitisation, actuarial insights about longevity risk and risk management, and pension taxation.
Centre of Excellence in Population Ageing Research (CEPAR), UNSW 2018