The evolution of super - where to now?

14 September 2009

In 2001, Assistant Treasurer Rod Kemp said, "superannuation is one of Australia's great growth industries, with a bright future". Is this still the case? Jarrod Brown, Bennelong Funds Management's Chief Executive Officer, shares his views on the state of superannuation (super) in Australia.

Our industry is currently under the microscope, with the Government undertaking a number of related assessments: a review of the Australian Taxation Office's administration of the Superannuation Guarantee, as well as a review of the governance, efficiency, structure and operation of our super system.

As industry players, the underlying question should be: what do we want super to become? But before we can reach any real conclusions, let's briefly reflect on where it is we've come from. Yes, super is plagued by constant change, but let's not forget how far we've come in our relatively short history.

Age Pension age

The Commonwealth Government first established the Age Pension in 1909, when 65 year olds and over accounted for a mere 4% of the Australian population. The average life expectancy for females born in 1909 was 60, and for males 56. In other words, it was never anticipated that many would live long enough to enjoy the Age Pension.

But by 2001, around 15% of Australians were 65 or over, with the number said to increase to 25% by 2047 - amounting to a total of 7.2million Australians.

Back in the 1900s, even if you succeeded in reaching the venerable age of 65, there was a myriad of exclusions to overcome - your morals were a consideration (one had "to be of good character"), as was your nationality (exclusions extending to "overseas born 'asiatics', and 'aboriginal natives' of Australia, Africa, The Pacific Islands or New Zealand") - it was literally decades before many of these restrictions were lifted.

Changes to our superannuation regime are inevitable... and can be for the better.

While not sought after, the recent announcement that access to the Age Pension will change from 65 to 67 should not have come as a surprise - after all, we've been reading about our aging population for years.

Our challenge as an industry will be to attain a balance between the Government doing what's best for the "greater good", versus allowing people to feel a sense of ownership and control over their super investments. If this is continuously eroded, the ongoing apathy towards super (as indicated by more than $500 million in lost super) will continue.

The introduction of super

In many ways, the super industry is still in its youth but unlike its investment counterparts, it is also loaded with the responsibility of providing for people's retirement. Add to this the rapidly changing demographic makeup and a Global Financial Crisis to boot, and you begin to appreciate the task ahead.

Super was introduced in Australia in the mid 1800s as a benefit to high-ranking employees in select public service sectors and some large corporations. But it didn't affect the majority of Australians until the mid-1980s when Award Superannuation was introduced (providing a 3% employer super contribution in lieu of a 3% wage increase).

In many ways, super didn't enter the market with any real clout until the Superannuation Guarantee Charge was instated in 1992 (just 17 years ago) - at that time, compulsory employer contributions were a mere 3%. 

 While in hindsight, such a low percentage seems utterly inadequate, it is likely that today's 9% will seem equally laughable in another decade. According to Mercer research, 69% of working Australians already support an increase to 12% or even 15%. It doesn't take a crystal ball to envision a time in the not so distant future, when our current 9% will seem as blatantly insufficient as the 3% of yesteryear.

Global Financial Crisis (GFC)

The GFC has had a debilitating impact on the financial security of investors around the world. The perceived safe haven of super, which had until recently enjoyed an extended period of positive performance, made the dramatic decreases in people's super account balances even less palatable.

How has the industry suffered? Contributions to super fell 24% from the peak when Better Super changes were introduced. While this was an artificially induced spike (peppered with time-specific incentives), and not representative of the gradual biological growth of super, nor can we overlook the longer-term impact this made. The timing couldn't have been much worse, with people taking up the incentive to make a non-concessional contribution of up to one million dollars only to see this figure diminish in a number of months.

Fees, which were previously inconspicuously lost within healthy returns outlined in annual statements, are suddenly a bug bear with investors. But likewise, with dropping profit margins, can asset managers afford to reduce these fees? Unlikely and certainly not a sustainable choice.

During the boom times, people were comfortable with the concept of ‘investment risk'; easily done when volatility was minimal and (generally speaking) fund returns continued to outperform year on year. But their attitude was tested when volatility came home to roost.

In the fallout of the GFC, investors have become increasingly risk averse, tossing aside good investment principles (such as retaining a long-term investment strategy for retirement) and reactively moving to perceived safe havens.

According to CoreData, the financial crisis scared Australian investors into heavily overweighting in cash, resulting in total retail deposits sitting at $484 billion - $105 billion above the historical growth rate of this asset class.

While investment markets will recover, regaining people's confidence in super may take longer. Having said that, investment behaviour is cyclical and, to a large extent, predictably follows the ebb and flow of the economic cycle.

Room for improvement

At its core, superannuation aims to not only ensure we save for our retirement, but also safeguard us from burning through these savings at a rate that far exceeds our remaining golden years. But knowing we should do so isn't enough; tax-related incentives will need to remain in place to justify locking away these funds. Simply knowing we should do so, isn't enough.

Demystifying the complex and ever changing investment tool that is super should be every industry player's goal - via education and clear communication.

"Clear, concise and effective" is the coveted aim - but how often do we achieve this? A recent Morningstar report saw the US receive an ‘A' in the areas of prospectuses and investor reports, while Australia received a ‘C'. The research showed that transparency in prospectuses and reports had been the main areas where Australia did not stack up.

Clearly, there is room for improvement. We need to shift negative perceptions and reposition super as the preferred choice for retirement savings. But while trust is easily lost, it is much more difficult to recover. It certainly cannot be bought through an expensive advertising campaign that cries out: "trust us".

Many challenges lie ahead for our industry, but likewise so do the rewards... if we get it right.


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