The man who has shaped the architecture of Australia’s accumulation system sees great opportunity for further system improvement, challenges industry to illustrate the value of engagement, and questions whether tax incentives on super contributions should remain as strong if consumers are not drawing down on their capital in the retirement phase.
The Super System Review shaped the architecture of Australia’s accumulation system
The Super System Review, chaired by Jeremy Cooper, recently celebrated its 10th anniversary. It contained 177 recommendations and Cooper says that around three quarters were implemented in some form.
Among many contributions this review defined the architecture of Australia’s accumulation system while, through SuperStream, created a more operationally efficient system, saving billions of dollars for members. Not bad for a review with a budget of $2.7m.
The Hon Nick Sherry, announced the review and appointed Cooper. Sherry relayed a story of Cooper and he both reading the behavioural theory book Nudge by Richard Thaler and Cass Sunstein over Christmas break 2008. This developed a shared respect for the importance of well-designed default options. The Review expressed the view that that you shouldn’t have to be engaged to get the most out of their super. The Review used the term ‘libertarian paternalism’ to describe an architecture which had at its foundation a quality, low-cost default (named MySuper), but allowed choice for the engaged. This architecture stands strong today.
… but recommendations not adopted remain unaddressed a decade later
Not every recommendation was implemented. Two that stand out most are auto-consolidation (automatic consolidation of accounts should you open a new super account) and a mandatory retirement solution (Cooper proposed that MySuper be a whole-of-life product).
Unfortunately these issues still remain unaddressed today. Auto-consolidation, originally devised to address multiple accounts, has been conflated with the awarding of default super status by the Productivity Commission, resulting in the ‘best-in-show’ proposal.
Meanwhile retirement solutions, beyond account-based pensions, remain largely absent from the offerings of Australian super funds. The Financial System ‘Murray’ Inquiry subsequently recommended the concept of a CIPR (comprehensive income product for retirement) which was explored in great detail by Treasury who developed the framework for a prescriptive approach. In Episode 1 of Exploring Big Ideas Jane Hume said that the government is exploring a more principles-based approach.
What is the value of engagement?
The Cooper Review took nothing away from the engaged member but provided a stronger foundation for those who were not engaged. Responding to my observation that pretty much every review of Australia’s retirement system placed very little weight on engagement, Cooper responded that it is difficult to value the benefits of engagement.
Ultimately if funds are spending their member’s money on engagement then the accountability sits with the funds to be able to demonstrate the benefits. This is an important reflection in an environment of APRA’s Member Outcomes Assessment Tests (where funds need to be able to clearly articulate and quantify the benefits provided to their members).
Current state of industry plus opportunity to create a proper retirement income system
Asked for his views on the present state of the industry, Cooper was open and frank: while agency issues remain manifest, the advice industry “is in much worse shape than it was in 2010”. Cooper’s reflections on the exit of big banks as providers of advice, given their capital, scale and compliance capabilities, raises questions around the ongoing viability of the advice sector.
A Government with many urgent issues to address at present and a large and growing fiscal debt, may not be a situation for big ideas for a better retirement system. But Cooper adopts a contrarian view, “in times of crisis like this, very interesting things can happen”, pointing to the present example of a national cabinet.
The unfinished business of a proper retirement income system
Cooper observes that for many people retirement is where “wealth management and pensions collide”. Many retirees are trying to live off the income from their savings pool rather than draw down their capital. Cooper reflects that superannuation is deferred wages, tax subsidised and the savings pool is meant to be spent down through retirement. If the system is being used for tax-advantaged inter-generational wealth transfers then the tax subsidies should be reviewed. Until this issue is addressed I think Cooper will always feel like Australia’s retirement system remains incomplete. I can only agree.
