Even the architect is calling for a redesign

Paul Keating says the superannuation system he designed needs an overhaul.

Former Prime Minister Paul Keating this week put his weight behind moves for a radical overhaul of Australia’s $1.4 trillion superannuation system.

Insufficient contributions, poor risk management by an industry intent on feathering its own nest and a population that was living far longer than originally planned had contributed to a looming crisis in the system.

“It was never meant as a tack on to the welfare system,“ he told a lunch time audience at a superannuation conference in Sydney this week, claiming that many Australians who thought the system would provide them with a comfortable retirement would be disappointed.

While the Gillard government has announced plans to raise the Compulsory Superannuation Guarantee from the current 9% to 12% by 2020, Mr Keating said it should be raised to 15% immediately while the caps on private contributions for those over 50 should be lifted from the current $25,000 limit to $100,000 a year.

In a wide ranging speech on the funding crisis facing Australian retirees, the former Prime Minister homed in on the issues raised in The Eureka Report’s Save Our Super campaign.

But he voiced suspicions about the fastest growing and now largest segment of the industry, the trend towards self-managed super funds, arguing that a minimum of $600,000 should be required before anyone can establish a DIY fund.

He argued that DIY funds should be mandated to include government bonds and corporate bonds to mitigate downside risk. A recent survey of Eureka Report members, however, highlighted that most were conservative investors and were content to receive lower returns on safer options such as cash than take the risk of higher yields on equities.

His argument ignores the fact that most DIY super trustees have become so disillusioned with the system they felt they feel they have been forced to take matters into their own hands.

Elsewhere, his speech targeted much needed reforms. Rather than receiving a lump sum payout, Mr Keating suggested that at least some super savings be paid into an annuity style system to provide a steady income stream during retirement.

And he hinted that at least some of that extra 3% savings be directed into a government run “longevity insurance fund” that could invest in alternate asset classes such as infrastructure, mortgages and corporate bonds, as he fired off a salvo at superannuation industry’s over-reliance on shares and its grab for fees.

As Eureka has highlighted, the Federal Government’s Future Fund – established to finance the public service superannuation liabilities – has trounced the entire privately run superannuation industry in its first five years of operation largely because of its diversified investment portfolio.

Increased longevity, he said, had created a “completely different profile of when money is needed” compared to when he first formulated the system in 1985.

Rather than workers living for 15 years in retirement to the age of 75, there was a reasonable expectation that men future retirees would live to their mid 90s and women to 100.

“So we have two very different groups, the 60 to 80 group which are all about retirement living and lifestyle and the 80 to 100 group who are more about maintenance and disability, he said.’’

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