Julie Sienkowski, Economic Policy
The superannuation guarantee scheme is celebrating 30 years in operation. As the industry matures, and employees with superannuation approach retirement, new challenges and opportunities are emerging. A key change will be the introduction of ‘retirement income covenants’, which are agreements between groups of retirees and superannuation funds about how superannuation assets will be managed and income delivered in retirement. Emerging challenges include ensuring retirees have access to sound financial advice, reviewing superannuation tax concessions and addressing some retirees’ reluctance to spend their superannuation ‘nest eggs’.
The Australian Government has, over time, set out 3 pillars of retirement income – superannuation, the Age Pension and private
savings. This article sets out some major issues in the superannuation system
expected to emerge over the term of the 47th Parliament.
Guarantee (Administration) Act 1992 came into force on 1 July 1992. This
Act created an obligation on employers to pay a proportion of employees’
incomes into superannuation. Superannuation was intended to provide income in
retirement, to supplement or replace reliance on the Age Pension. (There were superannuation
schemes in place before this, but most were created by employers, provided
little flexibility and did not cover the majority of workers.)
Initially, the superannuation guarantee required
employers to contribute an additional 3% of eligible employee income into
superannuation (4% if the employing entity had a payroll of over $1 million).
Over time, the guarantee has risen to 10%, and it will increase to 10.5% on 1
July 2022, 11% on 1 July 2023, 11.5% on 1 July 2024 and 12% on 1 July 2025.
Past Australian parliaments have adjusted the
superannuation settings. For example, during the 46th Parliament, changes were
introduced through the Treasury Laws
Amendment (More Flexible Superannuation) Act 2021, Treasury Laws
Amendment (2021 Measures No. 5) Act 2021 and the Treasury Laws Amendment (Enhancing Superannuation
Outcomes For Australians and Helping Australian Businesses Invest) Act 2022.
Superannuation is now a mature industry, with $3.3
trillion of assets under management as at 30 June 2021 across 95 Australian
Prudential Regulation Authority (APRA)-regulated ‘retirement savings entities’.
These entities are collectively responsible for managing 149 funds with 21.3
million member accounts and received $9.1 billion in fees in the year ending 30
Since compulsory superannuation has been in place
since the early 1990s, a significant number of account holders are now approaching
retirement and will be shifting from the ‘accumulation phase’ to the ‘pension phase’ of their superannuation scheme. During the accumulation phase, people
are still employed and adding to their superannuation account balance. When
they retire, they enter the pension phase, in which they spend down the balance.
Successive governments have been aware of this
coming change and have commissioned reviews to inform policy responses. Two of
the most notable are the Productivity Commission’s Superannuation policy for post-retirement research paper (2015) and Treasury’s Retirement income Review (2020).
Among other topics, the 2015 Productivity
Commission paper looked at data on superannuation drawdown behaviour in
retirement. It investigated concerns that the freedom to make large lump-sum
withdrawals could leave retirees short of future funds – and conversely that ‘individuals
who take their superannuation as an account-based pension draw down their
superannuation “too slowly” or “conservatively”, which in turn lowers their
living standards’ (p. 95). It advised that it was important to consider and
respect ‘the variety of circumstances and motivations of retirees’ that affect
drawdown choices (p. 97), including risk and lifestyle preferences, assets and the
available superannuation balance.
The 2020 review found that people were saving well
for their retirement under the scheme, but that most retirees were not well supported
to manage that investment effectively: ‘misconceptions and low financial
literacy have resulted in people not adequately planning for their retirement
or making the most of their assets when in retirement’ (p. 17). It also found
evidence that retirees were excessively reluctant to spend their superannuation
‘nest eggs’ (see ‘Other emerging superannuation issues’ below).
Retirement income covenants
The 47th Parliament will witness a significant
evolution in the superannuation industry, with the progressive implementation
of the new ‘retirement income covenants’ model.
Collective Investment Vehicle Framework and Other Measures Act 2022 introduced
retirement income covenants into Australian law. These are agreements between
groups of members and their superannuation funds about how funds are to be managed
and income delivered during the pension phase. The Act also set out how
superannuation funds should set them up and report on them.
Superannuation funds are required to design and
explain these financial products to help members optimise their retirement
income. In performing this role, the funds will need to balance the 3
competing objectives of maximising income, managing risk and ensuring their
clients have flexible access to funds in retirement.
For example, the product might allow the retiree to
have access to some of their funds and receive a regular pension, while other
funds continue to be invested and earn non-taxable income, so that the superannuation
balance is stable or continues to grow during retirement.
Retirement income covenant design
The interaction between the 3 pillars of
retirement income – superannuation, the Age Pension and private savings – will
be an important part of the design of retirement income covenants. A range of pension
phase superannuation products will be required, because different groups of
retirees will have different levels of superannuation savings, different levels
of savings outside superannuation and different retirement aspirations.
One way of tailoring retirement income covenants to
suit different groups is based on superannuation balances. Those with very low
superannuation balances, who will immediately gain access to the full Age
Pension, might be well served by taking a lump sum payment. A lump-sum can be
accessed whenever the retiree wishes, and while it only earns bank interest after
it is withdrawn from under the superannuation fund’s management, there are no
management fees. The Productivity Commission’s Superannuation
policy for post-retirement paper reported that the average amount
withdrawn as a lump-sum was $20,000 (p. 16).
Those with high levels of savings outside
superannuation and little likelihood of being eligible for the Age Pension may
be more inclined towards smaller drawdowns and riskier investments in the first
stage of retirement.
Those in the middle – above the bottom 30% and
below the top 20% of savers – will be a diverse group. Differences will include
whether retirees own their own home, the assets they hold outside of
superannuation, whether they have a partner (which impacts on longevity
planning, as partners are likely to be of different ages), their health status and
their retirement aspirations. In the initial phase of retirement income
covenant planning, superannuation funds have been tasked with collecting data
to help them better target these products to different groups of retirees.
Given that a variety of retirement income covenant
models will be available, and retirees will need to make an informed choice
between them, many retirees will want to seek financial advice. There are also likely
to be some disengaged retirees who are unable or unwilling to make a choice. In
commenting on an exposure
draft of retirement income covenant legislation, the Australian
Institute of Superannuation Trustees (AIST) stressed the need for a default
option for this group.
The pathway to achieving retirement income
Securities and Investments Commission (ASIC) and APRA have circulated
advice to superannuation funds on the implementation of retirement income covenants,
which includes the implementation pathway set out in Table 1.
Table 1 Indicative
implementation pathway for retirement income covenants, 2022–2025
By 1 July 2022
Prepare retirement income strategies
Assess the outcomes of existing products and assistance
offered to members (in business performance review and annual outcomes
Update business plan to reflect retirement income
Take reasonable steps to gather the information necessary
to inform the strategy
From1 July 2022
Retirement income strategy in place and summary published
Regular monitoring of outcomes against retirement income
2022–2023 (and annually)
Undertake annual outcomes assessment of retirement income
Assess initial impact of retirement income strategy as
part of business performance review
Capture annual review findings in business plan
By 30 June 2025
Complete first triennial review of the retirement income
Source: Australian Prudential Regulation
Authority (APRA) and Australian Securities and Investments Commission (ASIC), ‘Implementation
of the Retirement Income Covenant’, Letter to retirement savings entity
licensees (7 March 2022), 2.
Although the superannuation industry itself is
mature, the arrival of a significant number of retirees to the pension phase is
relatively new. There are likely to be changes to retirement income covenants
as the industry gains experience and retirees discover what works best for
them. Reporting is supposed to be transparent and enable a comparison between
the performance levels of different retirement income covenant products.
Other emerging superannuation issues
Other emerging issues are retirees’ growing requirement
for trusted financial advice, the taxation of superannuation, and the emerging
reluctance of retirees to actually spend down their superannuation balances as
the original policy envisaged.
Following the 2008
collapse of Australian stock broker Opes Prime and other financial scandals
in the early 2000s, many Australians lost
confidence in financial planning. Rules about the qualifications and
remuneration of financial advisers were tightened, resulting in many former financial
advisers leaving the industry.
As reported by ASIC in its October 2016 report Financial
advice: fees for no service, some consumers remain sceptical of financial
advice provided by people directly employed by financial services businesses
such as banks, who could have conflicts of interest. Similar scepticism is
likely to attach to retirement income advice provided by people directly
employed by superannuation funds (see the Treasury’s Retirement
income review, p. 58).
Understandably, as average superannuation balances
grow over time, people on the cusp of retirement will want independent and
reliable financial advice. The Explanatory
Memorandum accompanying the Corporate
Collective Investment Vehicle Framework and Other Measures Bill 2021 explained
that the Government had rejected the idea of trying to give individual advice
to every retiree as too expensive. In their submission to Treasury’s exposure
draft of the legislation, AIST reached the same conclusion. They suggested those seeking individual advice
could be referred to the Government’s Financial
Information Service, and that this may need to be expanded.
The Treasury has commissioned a Quality of Advice
Review, which is due to report in December 2022. The terms
of reference state that the review ‘will consider how the regulatory
framework could better enable the provision of high quality, accessible and
affordable financial advice for retail clients’.
Taxation of superannuation
A key feature of the superannuation scheme to date has
been the concessional taxation of contributions to superannuation, and of the profits
of superannuation funds.
Money entering superannuation funds is taxed at a concessional
rate of 15%. Profits on investments made by superannuation funds are also taxed
at a concessional rate. Taxes do not apply either to funds withdrawn by account
holders after the ‘preservation
age’ (generally, when the account holder is aged 60 years or above) or to
any profits made on the investment of the account holder’s capital during the retirement
phase. In 2021, superannuation tax concessions amounted to $45 billion,
comprising $20.5 billion of concessions on contributions, $22.6 billion in
concessions on earnings and $2.6 billion in capital gains tax concessions.
commentators criticise this foregone revenue, and question whether the Government
can afford to continue to treat superannuation so generously. It has also been
observed that people on higher incomes receive a greater tax concession than
those who earn less. For example, the concessional gain on taxable income in
the highest income tax bracket is 30 percentage points (45% less 15%), but it
is just 4 percentage points (19% less 15%) in the lowest tax bracket.
In its 2022 pre-election policy paper Fixing
super tax concessions, Mercer (a multinational finance firm) suggested that
one way of making the system fairer would be to give a 15% marginal tax concession
to superannuation contributions, instead of the current blanket rate of 15%. For
the highest tax bracket, this would mean a concessional superannuation tax rate
of 30% and a personal gain on taxable income of 15 percentage points (45% less
30%), with no change for the lower bracket. As well as reducing foregone
revenue, this would help to retain the progressive nature of income tax in
Australia as those earning more would still pay more tax on contributions going
There is a maximum amount that can be accrued in
superannuation accounts, known as the ‘transfer balance cap’. This is indexed
to inflation, and it is currently $1.7 million. Under previous regulations,
some people managed to place much larger amounts into superannuation – and thus
out of the normal income tax regime. Mercer has further suggested a
grandfathering arrangement so that people could withdraw funds over the cap
without penalty. This would place these amounts back in the normal tax system,
while still allowing the account owners to enjoy a substantial tax-free income
Retirees’ reluctance to spend their nest egg
As at 30 June 2021, the average superannuation account
balance was $106,162 overall, $93,809 for women and $117,429 for men. These
balances will become more substantial over time, potentially increasing the
perceived importance of this ‘nest egg’ for retirees. Economic uncertainty,
especially inflation, is also likely to encourage more frugal spending by
The Treasury’s 2022 Retirement
income review found that some retirees were reluctant to spend their
superannuation, as they had become accustomed to thinking of it as a nest egg (p.
415). The review warned:
Incentives to draw
down assets to finance living standards in retirement are not effective. The
majority of people are not using their superannuation balances and other
savings effectively to maintain their living standards in retirement. If they
did so, they could achieve the same retirement outcome with a lower level of
saving and higher standard of living in their working life.
The review also found that people were keen to hold
on to this nest egg to pay for aged care if later required, and as a form of
insurance to cover large out-of-pocket medical expenses. The incoming Albanese
Government made a promise to support a substantial wage rise for staff working
in aged care. Clear guidance about how this will affect the cost of aged care would
potentially help retirees’ financial planning.
A related issue is the interaction with Age Pension
eligibility. Commenting on the exposure draft of
the retirement income covenant legislation, both Mercer and the Actuaries
Institute urged the Government to make a clear statement about the future
of the Age Pension and current levels of means testing, to give retirees more
confidence to spend their superannuation money. The Grattan Institute also
considered trade-offs between Age Pension eligibility and incentivising private
saving and superannuation growth in its submission to the Retirement income
review and in its Orange
book published prior to the 2022 election.
Michael Callaghan, Deborah Ralston and Carolyn Kay, Retirement Income Review (Canberra: The Treasury, 2020).
Productivity Commission, Superannuation Policy for Post-Retirement, Research paper (Canberra: Productivity Commission, 2015).
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