Summary: Australia has come second in a global scorecard of retirement incomes, but some initiatives that won praise from the researchers have already been dumped. Our super system could be improved by better communication with members, increased workforce participation for older workers, and a higher super pension age, the report recommends.
Key take-out: Australia’s superannuation system is among the best in the world – but could be improved by a lift in the superannuation guarantee and a higher minimum pension.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.
Australia has jumped to second in a global ranking of retirement incomes – but could have since tumbled off the podium due to government policy changes.
Denmark was the only country that could beat Australia’s pension system in 2014, with Australia nudging The Netherlands into third place in the Melbourne Mercer Global Pension Index report.
Australia topped the charts for the primary category – and scored the only category “A” from researchers – for having a system with adequate benefits, tax support and design.
But the survey was looking dated even before it was launched this week, with the report singing the praises of two initiatives of the former Labor Government that have already been dumped.
Mercer’s report attributed Australia’s lift in its overall score from 77.8 to 79.9 to two main factors: “the increase in the legislated minimum contribution rate from 9% to 12% and the higher minimum pension”.
Both of those former Labor Government initiatives have effectively been kyboshed by the one-year-old Coalition Government.
The Abbott Government has legislated to push rises in the superannuation guarantee (SG) out to next decade – so far that they would seem unlikely to come into force (see SGC freeze frame).
Under the previous government, the SG rate was due to rise gradually to 12% by 2019. The Coalition has signalled other priorities. The current rate of 9.5% is now on hold until 2021, when it will start rising by 0.5% a year until it hits 12% in 2025.
Also, in this year’s budget, the Coalition detailed plans to reduce the real value of the age pension over time.
Considering income streams
Australia’s ranking has oscillated between second and fourth during the six years of the study, with a consistent claim that Australia could improve its overall score by introducing some form of compulsory income stream from its superannuation system.
In last year’s report, Mercer devoted a lot of space to strong recommendations about forcing compulsory annuities on Australians as a way of improving our system.
As I pointed out in this column (see Why compulsory annuities won’t suit SMSFs), it would be a particularly distasteful scenario for Australia’s growing SMSF army. I pointed out seven reasons why SMSFs would vehemently fight any move to make annuities compulsory.
Trustees start SMSFs largely to gain control over their retirement funds, while a compulsory annuity system would force much investment control back onto fund managers and life offices.
Despite being the main recommendation in last year’s report, there is scarcely a mention of annuities this year.
Making other improvements
Overall, Australia scored a B for its overall system, scoring As in the sub-categories of “adequacy” and “integrity”.
For “sustainability”, our system was only rated a B. The survey, conducted with Mercer and the Australian Centre for Financial Studies, listed four ways Australia could improve its ranking, potentially to get an overall A and get ahead of Denmark.
They included the previously mentioned compulsory income streams, but also suggested increasing the workforce participation rate for older workers, introducing a mechanism to raise the pension age as life expectancy increases and increasing the minimum super pension age to no more than five years from the government age pension age.
Under the current legislation, Australia is scheduled to increase the age pension age from 65 to 67, though there is nothing slated for increasing the current super pension age from 60. The Coalition Government has indicated a preference to eventually lift the age pension age to 70.
While Denmark scored an A and Australia and The Netherlands scored B-pluses, they were followed with Bs by Finland, Switzerland, Sweden, Canada, Chile, Britain and Singapore.
At the bottom, scoring Ds, were India, South Korea, Japan, Indonesia and China.
Given it’s a global survey, one of the more interesting points was how much individual countries’ scores changed from one year to the next.
One of the greatest complaints about Australia’s retirement income system is the consistency of change, particularly to our super laws. Turns out we’re not the only ones who suffer unending change to the system that is designed to be our longest investment – generally something that is with us, and planned for, throughout our working lives.
The report states that the transparency of retirement savings systems is a global failure. The best way to fix this is through better communication with pension fund members, the report says.
Globally, governments are moving further away from relying on state-funded pensions and employer-backed defined-benefit schemes. This is leaving more power, control and responsibility with the members, who often have low levels of financial literacy.
“That represents a significant challenge for an industry that has often been a little opaque,” the report says. “There is now no alternative. The pension industry must develop efficient methods to be transparent in meaningful and relevant ways to all stakeholders.”
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
- Accounting firm H&R Block has warned SMSF members to be careful when completing their fund’s tax return. Only expenses incurred to keep an investment property in a good state of repair, not improvements, can be claimed as a tax deduction, while income derived from shares and rental property must remain in the SMSF account, the firm warns.
- The Australian Taxation Office has warned SMSFs to beware of high-pressure sales tactics designed to lure investors into risky investments. Concerns have been raised with the ATO about the way some assets such as artwork and collectables are being valued, and the ATO encourages trustees to get a second opinion when buying assets such as artwork.
- The SMSF profession is a significant professional career pathway for young people, says SMSF Professionals’ Association of Australia CEO Andrea Slattery. “This profession is providing exciting opportunities for those who have accounting, legal, tax and financial services backgrounds, for example, and are now extending their skills and training to become specialist SMSF advisors,” she said.