Like most investors around the globe, Australian superannuation funds are experiencing tough times. There’s no escaping the fact that funds have been hard hit by the global financial crisis and retirees – as well as those approaching retirement – are suffering. The combined effect of the market meltdown and historically low interest rates means retirement for more older Australians is a far cry from the worryfree lifestyle that so many of us envisage for our post-working life. In this sort of climate, it’s inevitable that questions are raised as to whether our compulsory super system – long viewed as a trailblazer for other nations around the world – is everything it is cracked up to be.
Some economists have called for a cut in contributions to super funds; others have suggested the system be dismantled in favour of a more voluntary approach. Following decades of slow growth, Australia’s super industry grew at lightning speed with the introduction of compulsory super in 1992. Near -universal coverage has been achieved and – for many Australians – super has grown to be their largest asset outside the family home. For some, superannuation is their only significant financial asset. We know from various studies that Australia is not a nation of savers. Regardless of age or income, most of us do not have the self-discipline or foresight to plan properly for our own retirement.
While other nations have built up billions of dollars in unfunded liabilities from their defined benefit retirement schemes, compulsory superannuation has delivered Australia a national savings pool worth $1.1 trillion. This asset pool not only serves to deliver a better retirement outcome for millions of Australians but also assists in safeguarding our economy by providing much-needed investment capital for Australian businesses including infrastructure investment that is both nation building and job creating. But compulsory super is just part of the retirement equation. Our retirement incomes system is based on three pillars – a means-tested Age Pension, Superannuation Guarantee contributions (currently at 9 per cent) and private savings. Importantly, the Age Pension exists as a safety net, providing those who are eligible with a government guaranteed income stream for life.
Of course, right now, many people are asking whether our superannuation system can provide adequately for the future, given the current economic outlook. According to SuperRatings research, the average ‘balanced’ super fund lost 19.7 per cent in the year to December 2008. While no one would celebrate such a loss, this is significantly better than the performance of the Australian sharemarket, which shed more than 40 per cent during the same period. History suggests that diversification is the best strategy in the long term, which is what superannuation investing is all about.
And it is over the long term that superannuation shows its strengths. The top performing funds (notably the not-for-profit funds) have delivered annual returns in excess of their long term investments objectives (typically CPI plus 3 per cent). So even taking into account the unprecedented downturn of recent times, the best funds are delivering on their promises to members. The real problem currently faced by retirees and older workers is not the superannuation system itself, but the fact these people haven’t been in the system for long enough.
That is not to say that our current system can’t be improved upon. Key reforms on the table this year – many of them initiated by the Minister for Superannuation and Corporate Law, Nick Sherry, and aimed at improving cost efficiencies in the system – include moves to publish fund performance data to make it easier for consumers to make the right choice of fund, the removal of tax barriers to fund mergers, and plans to reunite Australians with their lost superannuation through the use of Tax File Numbers. The not-for-profit sector – in particular its industry fund membership – has also stepped up its calls for the removal of fees and commissions paid to financial advisers on compulsory superannuation.
Such fees add considerable and unwarranted cost to the system. On the important issue of retirement income adequacy and the enormous challenge Australia faces with its rapidly ageing population, the Henry Tax Review is providing the industry with the opportunity to present its case for a lift in superannuation contributions in the medium to long term. Indeed, this is the greatest challenge facing the superannuation industry: to convince working Australians, the Government and employers that – even in these gloomy economic times – it is in all of our interests, and especially those of our children, to put aside more, rather than less, for our retirement. Our super system – with its robust regulatory framework, its sound approach to governance and risk management, its capacity to boost investment in nation-building assets, and – perhaps most importantly – its track record of delivering on its long-term investment objectives – is still the best way for all Australians to do this.