Australia’s superannuation industry lacks a clearly defined purpose, with multiple objectives that are sometimes in contradiction to each other, said Liberal MP Tim Wilson, arguing “many other reforms” were needed to the system.

In a debate with economist Saul Eslake, Wilson said the purpose of superannuation should be to enable Australians to be able to retire with dignity, and aim to displace (but not abolish) the pension.

“In the end, if you don’t have a clear purpose about what the objective is, then you’ll have a compromise, and people trying to achieve lots of different things in the process,” Wilson said, speaking on a podcast conversation for Investment Magazine.

The massive growth in assets under management to around $3.1 trillion today had failed to significantly reduce the demand on the pension, Wilson said, arguing against increasing the compulsory contribution rate further.

The “social engineering” of the superannuation system had created a “perverse” scenario where superannuation funds were using working-age peoples’ savings to buy housing, he said. In buying their first home, which will be a major part of their retirement portfolio, people are “competing against their own superannuation funds” with the help of first-home buyer grants and other incentives.

System transparency

The federal government’s Your Future, Your Super legislation will bring necessary transparency to the system, eliminate the wasteful phenomena of members having multiple accounts and duplicated fees, and increase members’ financial engagement, he said, pointing out that it was only recently that funds even had to hold annual general meetings to report back to members.

Transparency, in particular, was important to ensure members’ money was not being used for frivolous marketing expenses. “About half a billion dollars was spent in the past five years on advertising and marketing for a compulsory product,” Wilson said.

But while Eslake and Wilson appeared to largely agree on the issue of keeping the compulsory contribution rate where it is rather than raising it to 12 per cent as system architect Paul Keating had originally planned, Eslake suggested political motives were muddying the government’s credibility on superannuation.

On Wilson’s stated objective of what Australia’s compulsory superannuation system should aim to do, Eslake said the system “has served that objective pretty well” for people who work and earn average weekly earnings throughout their working lives. It had also likely played a role in Australia’s consistent current account surpluses, and had built up a significant volume of international equity assets which reduce the risks associated with Australia’s large foreign debt.

He said the current system doesn’t deliver an adequate income in retirement for a significant proportion of women, but increasing the compulsory contribution rate further isn’t the solution to this. Increasing compulsory contributions will come at the expense of wage increases, and might lead to the situation where many people would be earning more in retirement than when they were working.

Marketing expenses

But on other views stated by Wilson, Eslake didn’t pull his punches. On the issue of marketing expenses, he said: “I note in passing that the taxes I pay are compulsory but that doesn’t stop the government from spending a lot of those tax dollars on marketing exercises.”

The Your Future, Your Super provision that would have allowed the Treasurer to direct superannuation funds’ investments was an “unconscionable interference in private investment decisions for a party that professes a belief in small government”, and he was glad it was removed, he said.

And he questioned why superannuation funds were being “singled out for special treatment” when health insurance funds, which also receive “de-facto compulsory” contributions, spend a lot of money on marketing without asking their members for permission.

“I’ve thought for almost all my life that I’ve been a member of a health insurance fund that it’s a lousy product,” Eslake said. “No one in the government is saying that there ought to be greater accountability by health insurance funds for what they do with their members’ money. And you know, no one is talking about reforming the product which they offer.”

The government’s focus on the superannuation industry “would be more credible if there was a bit of consistency across the spectrum,” he said.

Join the discussion