(03) 9020 2905PORTFOLIO POINT: How good is Australia’s super/retirement income system? Not as good as we might like to think. And some work is required to bring it up to scratch, an international survey reveals.
Australians have a definite superiority complex about the nation’s retirement system. We generally believe that we have the world’s greatest superannuation regime. And that it’s backed up by a fair safety-net government age pension.
Add the two together and the lucky country should be the world’s best.
I hate to tell you, but we aren’t the gold standard. We’re a long way from it. We don’t even get on the podium in a field that’s only a little over half the size of a typical Melbourne Cup.
That’s right. In a somewhat unusual survey sample of 14 – which includes Brazil, Chile and China – Australia ranks fourth. And we’ve fallen two spots from the ranking of second we achieved last year.
In the 12 months since the first Melbourne Mercer Global Pension Index was completed, not only has Australia’s raw score dropped, but we’ve taken a tumble down the rankings also.
Mercer’s surveyed 14 countries. I’ll list them in the order they were ranked: The Netherlands, Switzerland, Sweden, Australia, Canada, UK, Chile, Brazil, Singapore, USA, France, Germany, Japan and China.
Mercer used a school report card. No-one did well enough to score an A.
The first five scored a B, the next seven scored a C and Asia’s two entrants scored a D. No one got an outright fail (E). Though I’m sure if they widened the net a little …
There’s plenty interesting in the report. But what’s most interesting is what was wrong with Australia, according to the survey. (And it’s important to note that a sponsor was the Victorian Government.)
Australia’s overall score was 72.9%.
Scoring for the survey was broken down into three parts – adequacy, sustainability and integrity. In a weighting sense, they were scored 40%, 35% and 25% respectively.
Australia actually scored 6th of the 14 for adequacy, achieved 2nd for sustainability and 4th for integrity. From the first survey to the second, our adequacy scored was stagnant and our sustainability score rose a fraction of a per cent.
But the “integrity” of Australia’s super system slumped during the year. The integrity section covers regulation, governance, member protection and costs and our score here slipped from 87.8 to 82.4.
Mercer’s international research team found there were five things that Australia could do to “improve” its scoring. They are:
- Raise the level of mandatory contributions to improve the level of benefits whilst also increasing the level of household savings
- Introduce a requirement that part of the retirement benefit must be taken as an income stream.
- Increase the labour force participation rate amongst older workers
- Introduce a mechanism to increase the pension age as life expectancy continues to increase.
- Reduce the costs of the system by encouraging greater efficiency.
If we are to assume that the survey is independent (and there’s no reason to believe it isn’t), then there are a few coincidences to what’s happening in Australia.
Point one: This is Labor Government policy and (a low-key) part of their election platform. If the Government gets its way, the Superannuation Guaranteee will be lifted from 9% to 12% over the next decade.
Point two: Was covered by submissions to the Cooper Super inquiry and was something that we highlighted in this column (Click here for column on 15/7/09)
Point three: That was sort of the point of the Howard/Costello (given the schism, can we still put their names together?) transition to retirement rules. There are significant benefits to continuing to work beyond the age of 55 for so many Australians, through the use of strategies that blend the “transition to retirement” and “salary sacrifice” rules. (Similar criticisms were also made of two of the three countries that were ahead of Australia.)
Point four: The government announced in the 2009 Budget that the government age pension age will eventually rise from 65 to 67. Witness what’s happening in Europe as various countries try to increase the retirement age to something resembling sustainable. The French are literally rioting – they believe it’s a God-given right to retire at 60.
Point five: Some of Cooper’s recommendations to reform Australia’s superannuation system were contentious, but not his plan to reduce the costs of the super system by cleaning up back-office efficiency. It’s highly likely that Cooper’s back-office efficiency plans will be implemented.
*****
Very quietly, on Sunday, the Government released a report into community attitudes on superannuation.
The survey, by research house Colmar Brunton, conducted for the Australian Taxation Office, is dated March 25 this year and was conducted through virtually the worst of the GFC.
The report found a deep-seated anxiety about superannuation amongst young people and, interestingly, guilt about not knowing more about it. Young people are “highly disengaged”, the report said.
The main findings of the report included:
- Most people believe 9% Superannuation Guarantee won’t be enough to get them through retirement.
- Those with a reasonable level of knowledge of super (SMSF trustees, accountants, financial advisers, etc) believe the reduction in the concessional contribution caps are self-defeating for the government it it wants less reliance on the government in the future.
- There is a “great deal of concern” about the degree and incidence of change in superannuation.
- There are deep-seated fears that the age pension will be abolished.
“The perceived frequency of reform generates distrust and unease in planning superannuation strategies over a life-cycle,” the report said.
“Consumers are confused and disenchanted; the superannuation system seems complex enough without having to constantly monitor and understand changes to regulations.
“Perceived regulatory risk has many viewing superannuation not as their primary retirement savings vehicle, Funds are being diverted to other investment classes (such as property or direct share holdings) where people feel a greater degree of control over their money.”
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.