Compulsory superannuation in Australia was introduced over 30 years ago and has been a true success story. However, the absence of an objective for the system has brought challenges – especially given it was initially developed in an era when the Australian superannuation industry was very different from what it is today.
The government’s consultation paper on Legislating the Objective of Superannuation, has provided the community with the opportunity to reflect on the past 30 years and look to improve our well-respected retirement income system.
The current proposal is: “The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”
While there is much to like about the proposed, relatively succinct wording, there are some improvements that can be made.
Purpose vs objective
Purpose and objective are related concepts but they have distinct meanings. The main difference between purpose and objective is that purpose refers to the underlying reason or motivation for doing something, while objective refers to a specific and measurable goal that one wants to achieve.
In other words, purpose is the “why” behind a particular action or project, while objective is the “what” that one wants to accomplish.
In the context of superannuation in Australia, “purpose” is a much more appropriate term, particularly as an objective relating to retirement income may vary considerably between individuals.
A range of benefits and services
It’s important the Explanatory Memorandum, which will accompany any legislation to Parliament, recognises that superannuation funds provide a range of benefits and services that go beyond the provision of retirement income benefits.
These include the provision of death and disablement insurance, the provision of financial advice and assistance consistent with the Retirement Income Covenant and the option for most members to receive lump sum benefits at retirement.
Each of these items provide valuable benefits to fund members and should continue. Although there has been no suggestion from the government that legislating the objective of superannuation implies a removal of any of these permitted services, it is important that the Explanatory Memorandum clarifies this position for future reference.
It is suggested the expression “to preserve savings” in the proposed objective be removed to simplify the wording and make the focus on delivering retirement income clearer. This is not to imply preservation is not important – it is a fundamental and well-accepted feature of the current superannuation system and must remain. However, its importance could be highlighted within the Explanatory Memorandum and thereby simplify the wording of the proposed objective.
The legislation should be a stand-alone piece of legislation and not incorporated into an existing piece of legislation, such as the SIS Act. This will enable the legislated objective − or purpose as I recommend − of superannuation to provide a guiding light for future legislative developments relating to superannuation, without the need to revisit the wording in the future.
As mentioned, there is a lot to like about the proposed changes in the government’s consultation paper.
The primary purpose of superannuation is the provision of income during retirement. It’s not just about accumulating dollars. This represents an important shift for both Australia’s superannuation industry and for the members’ funds. Expectations must change.
Retirement benefits from superannuation funds work with many forms of government support to provide Australians with a dignified retirement. These include the Age Pension, Commonwealth Rent Assistance, the Home Equity Access Scheme as well as home care packages and government support of aged care. Superannuation tax concessions are also part of that support and need to be recognised as such.
The retirement system, as a whole, should enable all Australians to have a dignified retirement. This represents a better approach than using terms such as a comfortable retirement or providing an adequate standard of living. Such expressions have different meanings for individuals in different situations. Dignity suggests a respect for the individual, whatever their health or financial circumstances. It also implies the presence of a safety net, which is provided through the Age Pension.
We’re at an important stage in the ongoing evolution of our superannuation system. With the right purpose in place, we have an opportunity to provide more certainty and long-term stability of the system, while also enabling Australians to have a better retirement.
Dr David Knox is senior partner at Mercer.