While the debate on the superannuation guarantee has raged on in light of the Retirement Income Review, one fund manager has pushed for a new system entirely, proposing a universal pension backed by super.
The government’s probe into the three pillars of retirement income (age pension, compulsory superannuation and voluntary savings) has prompted a variety of responses from industry, with some battling over the already legislated super guarantee increase and others begging for attention to investment allocations made by funds.
ETF provider BetaShares in particular has called for an overhaul of the whole system, propositioning a removal of the current means testing for the age pension, and instead using a universal pension in addition to super.
Currently, an assets test and an income test determine pension entitlements, based on levels of super and other assets, plus income from these and sources such as employment. As the levels increase, pension entitlements are phased out and they cease above certain levels.
But as argued by BetaShares senior investment specialist Dr Roger Cohen, the system can catch consumers with around $350,000 to $600,000 in savings in a “retirement trap”. This is where reductions in income can occur because increases in super are unlikely to generate enough additional income to offset the loss of pension entitlements.
As a result, the analysis noted, retirees are encouraged to spend their additional savings or redirect them towards exempt assets such as their homes, instead of investing to generate income and capital growth.
BetaShares, in its submission to Treasury’s Review, has envisioned a portion of compulsory super contributions funding the pension, through streams into defined benefits schemes. The remaining super would go into defined contribution schemes (similar to those that already exist).
The end goal would be all Australians receiving a minimum basic pension and level of benefits, with the government covering any shortfalls. BetaShares believes this way, the pension is funded by individuals as much as possible, no one is worse off than in the current system and the financial burden on government is reduced.
Dr Cohen said Australia is well positioned to implement a universal pension within its system.
“Where the universal pension has failed elsewhere, that failure has primarily been due to problems around ensuring that it is funded at sustainable levels,” he said.
“Despite this, a full or partial universal pension is a successful part of the retirement system in many countries, including the Netherlands, New Zealand and some Nordic countries.
“With a universal pension in place, an Australian retiree can choose to spend or save additional income or assets based on their personal circumstances, without that choice being distorted by the structure of the system.”
Increased super raises contention
Currently the super guarantee (SG) sits at 9.5 per cent. It will increase by 50 basis points annually from 2021 until it reaches 12 per cent in 2027. Although it is already legislated and ready to go, Liberal backbenchers along with some researchers have contended the need for the increase, instead angling for the SG to be frozen at its current rate.
Grattan Institute continued its push against the legislated increase on Monday, releasing modelling based on 80,000 federal workplace agreements made between 1991 and 2018.
The think tank has said that around 80 per cent of the cost of increases in super would be passed onto workers through lower wage rises within the life of an enterprise agreement, typically two to three years.
Brendan Coates, household finances program director at Grattan said the “trade-off between more superannuation in retirement but lower living standards isn’t worth it for most Australians.”
But is there a trade-off with increased super? Others have hit back at the claim.
The Association of Superannuation Funds of Australia (ASFA) has called for the Retirement Income Review to maintain the role super will play in lifting living standards in retirement.
Industry Super also bashed the doubt cast on the increase, saying the rise to 12 per cent is essential to improve a system already not providing enough savings for consumers going into retirement, particularly women.
Its analysis showed more than 8 million Australians could be worse off in retirement with a lower super guarantee rate, losing more than $14.1 billion in super a year, or around $1,630 a year for the average person.
“For an average 30-year-old couple working full-time, detailed modelling shows cutting the super guarantee increase would deprive them of up to $200,000 in super by the time they retire,” Industry Super Australia stated.
“Pressure on the pension would also be relieved, with independent analysis from Rice Warner showing a 12 per cent super rate will save taxpayers around $13.5 billion a year.”
ASFA chief executive Dr Martin Fahy commented: “Going to 12 per cent SG doesn’t represent an extravagant standard of living for retirees. It’s about getting 50 per cent of Australians to around 70 per cent of average weekly earnings by 2050.”
The organisation, along with Industry Super, has also backed other suggestions, such as adding the SG to parental leave.
Super asset allocation
With the already immense pool of money in super set to grow, the Australian Investment Council (AIC), in its submission to the review has recommended that government give more thought to asset allocation.
Namely, the council has pushed for private capital – saying it wants better support for local businesses through larger amounts of capital invested into the unlisted sector. It has also prescribed a long-term patient capital strategy, looking at how private and long-term patient capital could be key to expanding Aussie businesses.
Further, the AIC has called for consideration around balancing liquidity against long-term investment – saying there has been an increased and “problematic” focus on highly liquid, low-cost investment products in default funds.
“Drivers of this include being able to facilitate the quick transfer of member funds between investment (and fund) options and the motivation to reduce headline fees,” the AIC wrote in its submission.
“This has increased the weighting of superannuation funds to certain asset classes over others – such as listed equities and fixed income.
“However it is questionable whether this strategy supports the objective of maximising long-term retirement outcomes to alleviate the pressure on government spending. Some illiquid assets which require active management, such as private capital, property and infrastructure are not considered ‘low-fee’ but have consistently delivered superior net returns to low-fee and passive asset classes over the long term.”
The AIC also recommended that the government focus on creating policy that centres around net retirement income, rather than zeroing in on costs and fees.
The Retirement Income Review panel will provide its final report to the government by June.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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