How super is our Super system?

Our Superannuation industry has changed somewhat from its initial design and continues to change rapidly. It is safe to say that the growth is surpassing all expectations, with over 2 Trillion Dollars tucked away for people’s retirement. That figure looks like this - $2,000,000,000,000

One piece of data that is still the most telling, is that Self-Managed Super Funds continue to hold the majority share of all the monies inside the system, being almost one third.

This is only going to grow, as technology and education is making SMSF's more accessible to mainstream "Mum & Dad" investors and families.

We have long been preaching about the benefits and flexibility of SMSF's, but it now seems that the rest of the country has realised it too and has jumped on board.

Note: They won't suit everyone's circumstances, however they continue to be the Ferrari of Super Funds.

On 19 October 2015, it was announced that Australia had the third best superannuation system in the world. This powerful endorsement in the 2015 Melbourne Mercer Global Pension Index report, highlighted the considerable achievements of our nation in preparing for an aging population. However, coming so soon on the back of the Murray Inquiry into Australian’s financial services system, the report also raised questions about future regulatory reform to enhance our national superannuation system.

In this edition of Investor Insights, we review the history and status of Australia’s superannuation system. We also consider some of the key reform proposals suggested both by the Mercer review and the Murray Inquiry.

History of superannuation in Australia

There are a number of oddities about the Australian superannuation system – not least of which is the name. What we in Australia call superannuation, most of the rest of the world refers to as their pension system.

However, retirement income and superannuation, however described, have been significant themes for the Commonwealth Government since Australia’s federation in 1901. Indeed, the first government pension pre-dates federation, with first NSW, then Victoria and Queensland introducing a means- tested age pension in 1900.

In the decades that followed, various governments introduced a range of schemes intended to fund the retirements of Australians. However, by 1972 only 32% of workers were covered by any sort of superannuation, with the remainder entirely reliant on the aged pension.

The move towards a comprehensive superannuation system really gained momentum from 1983, with the Hawke Government and union “Accord” agreements. Many of the key industry superannuation funds were founded in the mid-1980s. By December 1990, 64% of workers had superannuation coverage and in 1991, Treasurer John Kerin announced the introduction of a “Superannuation Guarantee”. This system required employers to make contributions on behalf of their employees, commencing at 3% and building to 9% in 2002.

Through the 1990s, additional measures were passed, including government co-contributions and ‘choice of fund’ legislation, which allowed employees the opportunity to pick their own superannuation fund. By June 2000, the pool of assets in the superannuation system had grown to $484.2 billion, or 63% of GDP.

The superannuation system today

Today, Australia’s superannuation system is the envy of most the rest of the world. Over the twelve months to 30 June 2015, there was a 9.9% increase in total superannuation assets, which are now an astonishing $2.02 trillion, or 127% of GDP.

Just as interestingly, the composition of the superannuation system is far different to what was envisaged in the early 1990s. Self-managed superannuation funds (SMSFs) – once maligned and virtually unknown outside a very small circle of investors, have become the largest single sector of the system, surpassing even the union-linked industry funds and the largely bank-owned retail sector. Former Treasurer and Prime Minister, Paul Keating, one of the key architects of the current system, has frankly acknowledged that no one involved in the establishment of Australia’s modern superannuation system foresaw how popular the ‘DIY’ option would become.

Source: APRA

Melbourne Mercer Global Pension Index

Against that background, it was no surprise to see Australia faring well in the 2015 Melbourne Mercer Global Pension Index. Indeed, of the 25 countries reviewed for the index, Australia came third, marginally behind Denmark and the Netherlands, who were first and second respectively. In their report, which summarised the findings of the review, Mercer reported that Australia’s rating actually fell marginally in 2015 (by 0.3 of a percentage point) for largely statistical reasons. Broadly, however, our system rated strongly for Adequacy, Sustainability and Integrity – the three key measures on which the various systems were rated.


So where could we do better? Mercer pointed to a number of measures that Australia could take – in particular to ensure that the system becomes more sustainable. These include:

  • Requiring that at least some of the retirement benefit be taken as an income stream;
  • Increasing labour force participation for older workers;
  • Linking the pension age explicitly to average life expectancy; and
  • Increasing the minimum access age to receive benefits.

None of those suggested reforms would be a surprise to those who have followed the national debate on superannuation. However, some are controversial and will require a government willing to expend significant political capital in order to have them implemented. At present, the prevailing view appears to be that member choice is a fundamental and necessary value of the system. After all, the argument goes, if a government is going to require citizens to lock some of their income up for forty years or more, it must allow those investors to have the freedom to choose how those funds are disposed.

The Murray Inquiry Recommendations

This view appears to have played an important role in the Murray Inquiry and its recommendations in relation to the superannuation system. Murray’s recommendations eschew the use of mandatory income requirements and instead focus on establishing basic principles of competition and good governance. Thus, for example, Murray recommends that:

  • The objectives of the superannuation system be agreed upon and enshrined in legislation to ensure that policy proposals remain consistent with those objectives;
  • Require superannuation trustees to have a ‘default’ comprehensive income product for members, similar to the ‘MySuper’ default option for members in the accumulation phase;
  • Ensure that all employees have the ability to choose their own fund (there are provisions in the current Superannuation Guarantee (Administration) Act 1992 that deny some employees the ability to choose the fund under some enterprise agreements and awards; and
  • Ensure that a majority of directors on the boards of corporate trustees are independent and free of conflicts of interest.

What does this mean for SMSFs?

As we have previously written, many of the key criticisms of the SMSF have revolved around alleged over-exposures to property, limited recourse borrowing arrangements (LRBAs – also known as SMSF loans) and under-exposure to overseas assets. Indeed, the Murray Report recommended that LRBAs be prohibited going forward to reduce risk in the system – a recommendation that was rejected by the Government

As we have seen, however, the statistics kept by the Australian Taxation Office simply do not support the argument that SMSFs are unduly exposed to risk on these grounds. Indeed, the more salient topic of discussion for SMSFs is whether they are over-exposed to cash, which – whilst low risk and capital stable, is paying low or negative real returns.

Source: RBA

Areas to watch

So what are the areas to watch in superannuation for investors? Most pertinently, there is continual debate about whether superannuation benefits should be restricted. Comments from the new Treasurer, Scott Morrison, that the superannuation system is for funding retirements, not estate planning, show that this issue is in the Government’s mind. Investors may remember the previous Labour Government’s proposal that the first $100,000 in superannuation income per person (indexed) be tax free and the rest taxed at 15%. Whilst there were a host of administrative difficulties with the specific proposal, the issue has stayed on the table and Opposition Leader Bill Shorten’s current proposal is essentially the same, but with the tax-free threshold lowered to $75,000.

More specifically to SMSFs, the Federal Government has indicated that it will return to review and revisit the issue of LRBAs in three years’ time. Should LRBA numbers grow dramatically, or should system issues of poor conduct by the industry be revealed, further prudential regulatory measures may be adopted.

Australia has much to be proud of in our superannuation system. But that does not mean we can be complacent. Debate about the objectives, governance and regulation of our superannuation is invaluable, but it is critical to ensure that all policy proposals are subject to searching factual and statistical review.

Chris Andrews

Vice President

CIO Latrobe Financial

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