Superannuation is an important sector of the financial system and a major pillar of Australia’s retirement income system.
As the second largest sector of the financial system, superannuation provides a significant and growing source of funding for the economy and long-term capital formation. Superannuation’s large pool of relatively stable and unleveraged assets adds depth and liquidity to financial markets and contributes positively to financial system stability. Superannuation assets total $2.6 trillion (145 per cent of GDP). Retail and industry public offer funds hold a relatively even split of these assets, with large funds having a growing influence in domestic investment markets.
The superannuation sector supports Australians to save for their retirement, underpinned by compulsory contributions for employees. While compulsory superannuation was introduced to boost retirement incomes and reduce full or partial reliance on the Age Pension, over time, the system has grown as a wealth accumulation vehicle. Together with the Age Pension and other sources of savings, superannuation provides an increasingly important source of income in retirement as the system matures. Already, superannuation is the second-largest savings vehicle for Australian households (accounting for 17 per cent of household assets).
Much of the framework of the superannuation system is a product of the incremental policy development from the early days of occupational superannuation in Australia through corporate schemes, life insurers and industrial awards.
With the extension of compulsory superannuation contributions to nearly all employees in 1992, a regulatory framework was introduced in 1993 which sought to ensure superannuation funds were managed prudently and in the best interests of members. The core elements of this framework, with the addition of later enhancements, continue to form the basis for the regulation of the superannuation system today. These elements include:
- The trustee model for managing superannuation entities, including an equal representation governance structure.
- A prudential framework imposing duties and responsibilities and providing monitoring and enforcement powers for the Australian Prudential Regulation Authority (APRA).
- A disclosure framework, overseen by the Australian Securities and Investments Commission (ASIC) covering information and financial advice provided to members about their superannuation.
- Default fund arrangements linked to the industrial relations system, determined via industrial awards or by employer nomination, accompanied by rules designed to allow most employees to choose the fund and investment option in which to save for their retirement (albeit with some restrictions).
Various aspects of the trustee model, the disclosure framework and default fund arrangements have been the focal point for policy development and debate since 2009. These aspects have been characterised as the ‘governance’, ‘transparency’ and ‘efficiency’ of the superannuation system. Policy has been targeted at these three levers of the regulatory framework because they have been seen as essential to achieving a superannuation system that will safeguard members’ interests and is modern, fit-for-purpose and commensurate with international best practice.
Current policy initiatives, including the Member Outcomes and Protecting Your Super legislative packages and the Retirement Income Framework in relation to income stream products, continue to seek to strengthen the superannuation system in these critical areas.
This paper is a summary of major reforms over the past 25 years, focussed primarily on regulatory reforms affecting superannuation funds.