A wake-up call for governments worldwide on the need to tackle a looming shortfall in retirement savings has been made by the Global CFA Institute.
Using research taken from the Melbourne Mercer Global Pension Index, a CFA report entitled An Ideal Retirement System calls for a more sustainable and equitable distribution of tax breaks as a means of improving retirement savings for those on lower incomes.
Anthony Serhan, president of CFA Society of Sydney, said that the threat of a retirement savings shortfall for large sections of the Australian population, as well as in other developed nations, meant this issue was bigger than any political loyalties.
“There is some politicking that can happen in the short term, but over the medium term the size of the issue means the politicians are going to have to come up with real workable solutions,” he said.
The report sets out 10 principles for pension systems that are likely to deliver adequate benefits (see below).
David Knox, senior partner at Mercer, who helped author the report, felt three of these principles should be urgently addressed by the Australian government, in particular principle number eight, which calls for tax breaks to be done in an “equitable and sustainable way”.
Knox favours the $300,000 annual pay threshold for earners paying a 30 per cent tax rate on superannuation contributions to be lowered to the top tax rate band and for the restoration of the low income superannuation contribution.
“There is certainly recognition that the current system does favour high income earners…some low income earners will pay more tax on their SGC than high earners, which is not desirable or fair,” he said.
However, he also favours greater flexibility in annual contributions, to allow those who do not exercise the $30,000 annual one year allowance, to have the unused part of this concession carried over.
The report also calls for the Australian government to establish clear objectives for the whole retirement system, including the superannuation system, the age pension, voluntary super contributions and for the use of other wealth for retirement income provision.
“We need to know the purpose(s) of each pillar and how they fit together,” said Knox.
Thirdly, the report advocates the benefits provided from the system should have an income focus, but permit some capital payments or withdrawals during retirement of between 20-40 per cent.
The recommendations come as the government considers its response to the Financial System Inquiry – a response that has delayed the results of the government’s consultation into new retirement income products.
The ten principles of an ideal retirement system
- Clear objectives for the whole retirement system, including the complementary roles of each pillar of income or financial support
- A minimum level of funding should be made into a pension system for all workers with contributions by employers, employees and the self-employed
- Cost-effective and attractive default arrangements before and after retirement
- Administration and investment costs should be disclosed with some competition present to encourage fair pricing
- Flexibility as individuals’ personal and financial circumstances vary, and retirement will occur at different ages and in different ways across the population
- Benefits provided during retirement should have an income focus but permit some capital payments, without adversely affecting overall adequacy
- Contributions (or accrued benefits) at the required minimum level must have immediate vesting. These benefits should be accessible only under certain conditions, such as retirement, death, or permanent disability.
- Taxation support from the Government in an equitable and sustainable way, providing incentives for voluntary savings and compensating individuals for the lack of access to their pension savings.
- The governance of pension plans should be independent from the government and any employer control.
- Appropriate regulation, including prudential regulation of pension plans and some protection for pension scheme members.
