Our great, rudderless retirement boat

It’s the ultimate first world problem. Australia has one of the finest retirement systems going, with mandated regular contributions swelling a superannuation vault now worth $3 trillion and an age pension far better than comparative nations. When it comes to financial provision for retirees, Australia really is the lucky country.

As our retirement system has grown, however, its flaws have become more apparent and impactful. The age pension has convoluted means testing and is overly complex. Debate about the appropriate level of mandated contributions rages. Balances are skewed between genders and a new generation of self-employed workers remain under-served. We don’t have the right pension products in place to service retirees and far too little emphasis is placed on the decumulation phase of superannuation.

These are pressing issue, but at the core lies a greater problem. Our retirement system is fundamentally without direction. It lacks a broad objective that declares its purpose and drives appropriate policy, as well as a framework trustees can rely upon to guide decision making on behalf of fund members.

For all its brilliance, our retirement system is like a big boat with serious leaks and a missing rudder. It’s time to pull anchor and make repairs.

A good problem to have

According to David Knox, senior partner at Mercer, Australians tend to look at our retirement system with blinkers on. “Our system has great features that we tend to undervalue,” he says.

In Mercer’s 2019 Global Pension Index, which Knox authored, Australia ranked third in the world with a total index value of 75.3, behind two wealthy nations that employ defined benefit programs in Denmark on 80.3 and The Netherlands on 81. The average score across the 37 systems covering almost two-thirds of the world’s population was 59.3.

“Look at our age pension,” Knox says. “For a single person it’s 27 or 28 per cent of the average wage. In the US or the UK it’s about 18 or 19 per cent, so that’s pretty good on a global perspective.”

On the superannuation side, Knox continues, we have a tax-friendly compulsory contribution system that encourages consumer prudence and should lead to Australia having the OECD’s lowest public pension cost in about 20 years.

“Put those two together and we have a very good base,” he says. “From a fiscal and sustainability perspective we’re in a really positive position.”

Jeremy Cooper, the chairman of retirement income at Challenger, puts the importance of our system in a broader perspective. “It’s part of the national psyche,” he says. “It’s had all sorts of positive impacts in our society.”

The complex, ‘half-baked’ system

Our retirement system may be first-rate on a comparative scale, but its size amplifies the impact of its flaws.

When the International Centre for Pension Management held its 15th annual discussion forum in Australia in October last year, chair of the working committee that assessed the system, Andre Snellen – an economic psychologist and chair of the Dutch pension fund Pensioenfonds Detailhandel – denounced the complexity of our system, saying it disempowered individuals who struggle to transition from savings to an income stream. Snellen will speak at Professional Planner and Investment Magazine’s annual Retirement Conference in Sydney on March 31 alongside Senator Jane Hume and the Grattan Institute’s John Daley.

There are still tickets available to attend this year’s Retirement Conference, reserve your seat here.

“People are utterly lost going into retirement,” Snellen said in a conversation with Professional Planner‘s sister publication, Top1000. “Pretending people can choose in such a complex situation is fake, even misleading.”

The admonishment is deserved. The assets and means test that underpins Australia’s age pension is notoriously confounding, while the individuals it applies to typically have lower financial literacy levels and are less likely to be able to afford professional advice. It’s a sad conundrum.

Snellen took most umbrage, however, with superannuation and our lack of focus on retirees. Our system focusses too heavily on accumulators, he said, instead of the decumulators struggling with much more complex decisions.

“In Australia retirees are considered to be customers leaving the shop, and not seen as the essence of the system,” Snellen chastised. “Why are you focused on 40-year olds?”

According to Matthew Rady, chief executive at Allianz Retire+, the lack of attention paid to the back end of retirement has led to a common view that our industry is “half-baked”.

“We have a lot of structure and guidance around how to get money into the system, but when it comes to the decumulation phase individuals are left to decide what’s appropriate,” Rady laments. “One would have thought that if you make it a compulsory system you should have a tight degree of guidance around making sure members are in the best position.”

In her maiden speech as the Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume admitted the problem was high on the government’s agenda.

“While efficient accumulation is imperative, there is also work to be done to ensure retirees’ money continues to work hard in the retirement phase,” she said. “Currently, there is very little guidance on how retirees should draw down their savings when they reach retirement.”

Gaps and imbalances

Along with guidance, retirees require an adequate suite of products to choose from. Mercer’s Knox says that while our typical account-based pension arrangement is both popular and flexible, it lacks the security of guaranteed income.

“The better systems out there have a combination where you have some access to capital but you also have an income stream such as an annuity,” he says.

People want both security and the freedom to access capital for a holiday or to build a new deck, Knox explains. “When you’re 85 it’s hard to go to the bank for a loan.”

A further issue – and one that dominates headlines – is the appropriate amount of the collective national wage that should be squirrelled away for retirement. The superannuation guarantee debate is a divisive one, but somewhat blunted by the government’s commitment to a gradual increase from the current 9.5 per cent of salary to 12 per cent by mid-2025.

A more active concern in our retirement system is the disparity of savings between genders. In a report on the ‘superannuation gender gap’ published last year, actuary Rice Warner noted that the average superannuation balance of females fluctuates between 69 per cent and 90 per cent of a males’ during their life due to a combination of lower salaries, lengthy career breaks and periods of part-time work.

In the absence of broader social change, Rice Warner said, the situation could be alleviated by tax offsets, government co-contributions and further SG contributions by employers during maternity leave.

“Despite these initiatives, closing the gender gap is likely to be an issue that will continue to require structural change and community action,” the paper stated.

As society evolves to place due importance on equality, it also changes shape in the way people are employed. Here, our system is currently behind in accounting for a workforce that is increasingly self-employed and/or working as part of the ‘gig economy’.

But this, like the gender gap and our decumulation ‘blind spot’, is just another symptom of a deeper problem within our retirement ecosystem, one that sits at the core of its operations.

That one policy nucleus

Many of the flaws in Australia’s retirement system can be traced back to its lack of a stated objective, which would drive a consistent policy agenda and make clear what it is trying to achieve.

The ship was never fitted out with a rudder. We almost got one as part of the government’s Superannuation Reform Package, but the Superannuation (Objective Act) 2016 lapsed three years later after being kicked around with little enthusiasm or bi-partisan support.

“It went off to a parliamentary committee and all the usual suspects made submissions but the major parties couldn’t agree,” recalls Challenger’s Cooper.

Since that failure, the proposal has stalled. “We’re slightly aimless,” says Knox, who adds that Mercer’s submission to the current Retirement Income Review contained a central question: ‘What are we trying to deliver?’

The failed 2016 Bill contained a simple assertion that answered Mercer’s question; “The primary objective of the superannuation system is to provide income in retirement to substitute or supplement the age pension.”

As innocuous as it may seem, most agree that a bedrock statement like this – or anything deemed appropriate – would provide a platform for our retirement system from which policy could spring with certainty.

“It would at least clarify what we’re trying to do,” says John Daley, chief executive of The Grattan Institute.

Allianz’s Rady agrees that a lack of purpose is holding our system back from reaching its potential. “It’s that one policy nucleus we need,” he says.

David Bell, the Conexus Institute’s executive director, is more pointed: “Having a stated objective would provide a lens to help resolve policy debates and deliver towards better outcomes,” he says. “It would then drill down to financial services industry participants, who would know what they have to deliver. Everyone would see much clearer.”

There is some hope the current Retirement Income Review – which was recommended by the 2018 Productivity Commission report – will address our system’s lack of a stated purpose. According to Treasury, however, the review will instead focus on people’s incentives to self-fund, fiscal sustainability and the role of the three pillars (the age pension, superannuation and savings) in retirement.

There is a remote chance the Review panel could say its purview is pointless without a retirement objective statement, which would put pressure back on the government to reignite legislative action. But this is a long shot.

Until then, a stated purpose for our $3 trillion retirement system is likely to remain, as Rady says, the one policy nucleus we need.

The missing framework

Exacerbating the retirement system’s lack of direction is a dearth of guidance for superannuation trustees.

The government recognised this in the wake of the 2014 Financial System inquiry, announcing a Retirement Income Framework discussion paper for consultation in 2016, which eventually led to a Retirement Income Covenant position paper in May 2018.

The covenant was to be embedded in the SIS Act and form the first stage of the framework, with its stated purpose being to “codify the requirements and obligations for superannuation trustees to improve retirement outcomes for individuals”. In other words, it would guide trustees on how to best shepherd their fund members in retirement.

Challenger’s Cooper believes the covenant would have “some really tangible benefits” to a retirement sector approaching $1 trillion in assets. Among them would be a reduction in the need for constant “inquiries and reforms and changes,” he says. “In the US they only change their system once in a decade,” he adds.

The framework had further goals, such as the formulation of standardised disclosures for retirement products and better retirement projection arrangements, but it never got that far. Almost two years later, the program remains on the shelf.

Compounding the framework’s lack of progress is the failure of Treasury and industry to agree on the definition of a Comprehensive Income Retirement Product (CIPR).

A CIPR, in simple terms, is essentially what Mercer’s Knox referred to in his sketch of an ideal retirement product that provides both secure income and access to a portion of capital. CIPR guidance would be a key step to upgrading the retirement system, and a vital plank of the Framework.

Yet the CIPR’s formation, like the framework’s covenant, remains without progress, hampered by a lack of agreement on terms as well as a log-jam of legislative reform stemming from the Hayne royal commission.

“Everyone agrees that there is a gap that needs to be filled, but the legal pipeline for this year is just so dominated by the royal commission,” Cooper says.

Cooper reckons the legislative bottleneck caused by the implementation of Hayne’s reforms is more of a block to getting the framework through than any lack of agreement between stakeholders.

“It might be a bit reductive to blame partisan squabbling,” he says. “[The government] made a commitment to get things done by a concrete deadline and they’ve been pretty circumspect about making further promises on the retirement income framework which is understandable. It’s still on the reform agenda but behind the royal commission stuff.”

The framework will eventually have its day, Cooper reckons. “My gut feeling is that sometime in the future it will be revisited,” he says.

Big, choppy seas

If a stated objective for the retirement system would provide a single foundation from which policy could grow, then the eventual ratification of the Retirement Income Framework would provide the architecture for it to grow in the right direction.

Both are sitting in the too-hard basket for now, but their importance is acknowledged. Moreover, the danger of not having them in place has been too.

The notion that they could be pushed through together as twin-policy proposals has been raised, but Cooper believes the stakes are too high. “You can’t combine them,” he says. “Once you pass these things they become important statements on how things will be run,” he says.

Perhaps their importance, then, is what holds them back. Put in perspective, though, these two problems are far easier to solve than gender inequality or a broken decumulation system. They would make comparatively quick and easy wins.

Without them, the Australian retirement ‘boat’ will continue to navigate bigger and choppier seas without a working rudder. And Australia can only ride its luck so long.