Superannuation after 30 years

Julie Sienkowski, Economic Policy

Key issue

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.


The Superannuation 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.

Industry maturity and pensions

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 June 2021.

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.

The Corporate 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 covenants

The Australian 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 assessment)

Update business plan to reflect retirement income strategy

Take reasonable steps to gather the information necessary to inform the strategy

From1 July 2022

Retirement income strategy in place and summary published on website

Regular monitoring of outcomes against retirement income strategy

2022–2023 (and annually)

Undertake annual outcomes assessment of retirement income products

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 strategy (proposed)

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.

Financial advice

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.

Many 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 into superannuation.

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 in retirement.

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 retirees.

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.


Further reading

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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