Cracking the millennials super case

In the $2 trillion superannuation space, the biggest spotlight has been shining on the $1.6 million pension balance cap and how the latest law changes will impact older Australians at or near their retirement.

Those that have amassed large sums in their super may have to juggle their assets to stay under the cap, or transfer their excess funds into an accumulation account and pay 15 per cent tax on future earnings.

Yet, there's a much bigger problem brewing in the superannuation sector that has huge long-term consequences.

In just eight years' time, millennials – those born between the early 1980s and 2000s and sometimes referred to as Generation Y – will comprise two-thirds of the Australian workforce.

And many are totally disengaged with their savings and superannuation. Why? That's simple really. Retirement is a long way off, and there's more pressing financial needs for those born into the “now generation”.

Right now, there's a mad scramble underway by super funds and financial institutions to reach out to this younger end of the demographic spectrum.

“Survey after survey has found that millennials are uninterested and unengaged with their superannuation,” says Sally Loane, chief executive of the Financial Services Council.

As well as placing a higher emphasis on daily living and on nearer-term goals such as saving for a house deposit, there's also a deficit of trust in the superannuation system generally.

A joint report by the FSC and Deloitte Access Economics released last week found 57 per cent of young adults feel super fees are not transparent enough, and only 23 per cent trust the industry. The inability to see exactly where funds are invested within default industry super funds is widely cited.

A lack of financial education

Education is an area where parents can play a crucial role in helping millennials to build wealth and achieve long-term financial security.

This should include reinforcement of the need to set aside additional funds for superannuation, the importance of asset diversification and ongoing management, and the need to have both shorter-term and longer-term investment objectives.

Financial adviser Bruce Brammall outlines some other education strategies for parents in his article Tell your kids this.

Meanwhile, Loane says young people need to focus on their superannuation from their very first pay packet.

“I have a daughter in her 20s, I have a group of nieces, and if it's one thing I'm really passionate about it's that they understand superannuation and understand the need to put more in, start early, and let the magic of compounding interest do its job.”

The FSC/Deloitte report noted that a key issue is the lack of understanding and knowledge of the superannuation system by millennials, which will have serious financial ramifications down the track.

More than 30 per cent of people under age 29 have more than one super account; and 10 per cent have three or more.

Loane says it's evident even now that many in the younger generation, which will be the first to have guaranteed superannuation through their whole working lives, won't have enough for retirement and the burden will fall on the age pension.

“In other words, the more we allow, and indeed condone apathy and disengagement, the worse off young people will be at the end of their working life, and so will we, the taxpayer.

“Conversely, achieving better engagement will mean a cohort better able to self-fund their retirements.”