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Getting a fix on superannuation contributions

There's one critical reason that lifting compulsory super contributions from 9 per cent to 12 per cent is a good idea. Left to our own devices, most of us simply wouldn't save for retirement ourselves.

There's one critical reason that lifting compulsory super contributions from 9 per cent to 12 per cent is a good idea. Left to our own devices, most of us simply wouldn't save for retirement ourselves.

Humans are creatures of instant gratification. Given a choice between a good lifestyle in our old age and a good lifestyle now, most would unquestionably take the latter. That's not totally irrational - who knows whether we'll be here, or in shape, to enjoy it later?

But take the decision out of our hands and we feel rather good, indeed virtuous, about saving for retirement. Rationally, we know it's something we should be doing even if we wouldn't do it voluntarily.

That's why, despite super funds having earned less than 1 per cent for the past five years thanks to turmoil on the world's financial markets, survey after survey has shown support for increasing compulsory super contributions.

Both the major super bodies, the Association of Superannuation Funds and the Australian Institute of Superannuation Trustees, released research this week showing high levels of community support for the increase - 67 per cent and 70 per cent respectively.

The research was timed to coincide with the tabling of legislation to bring about the increase and is subject to the usual accusations of industry groups commissioning research to push their own barrow.

But this is by no means a manufactured finding. Over the past years, survey after survey has turned up the same result. They might not always be happy with their funds but they like the idea of compulsory savings.

It's true that Australia's super system isn't perfect. It is still highly inequitable in giving bigger tax breaks to higher earners than those on low incomes (and to those who can salary-sacrifice or make their own tax-deductible contributions than to those who can't).

As we've seen recently, the "balanced" funds most of us belong to are heavily reliant on world sharemarkets to generate the return needed for our comfy retirement.

But that means it is members, not the government or the fund managers, who wear the risk from these investments - often without having actively decided to do so.

Our super system still focuses almost exclusively on building retirement savings, rather than making them last once you retire. And there have been instances where super investors have lost their savings (notably Astarra/Trio).

There are still way too many corporate snouts in the trough charging questionable fees on our savings. Unless you're one of the minority who has actually taken a conscious decision about where your super is invested, the question of whether you've got a good fund or a dud depends exclusively on the choice your employer has made for you.

And if you do want to take a greater interest in your super, it is far too difficult to do even the basics such as comparing funds' fees and returns. But there are positives, too.

While it won't solve the equity problem, the legislative package includes a new low-income super contribution, which will effectively refund the 15 per cent contributions tax payable on concessional contributions for low-income earners. It will return a maximum of $500 to those earning up to $37,000, ensuring those who don't currently get a tax benefit from super (as the 15 per cent contributions tax is the same as their personal tax rate) will be able to receive pre-tax super contributions tax-free.

It's also no coincidence that this windfall for the super industry has been accompanied by extensive reforms to both the super industry and financial planners. Both have resisted some of the reforms (and in regards to financial planning, the war is still raging) but the government appears to at least be making progress in its efforts to make super simpler, more cost-efficient and more accountable to members.

Like all reforms, there will be inevitable compromises. But if MySuper achieves nothing more than to put the focus squarely on providing a better deal for fund members, it will be worth all the angst. A tougher goal will be to force funds to fully disclose critical issues such as total fees and investment returns so that consumers can make informed decisions which, while difficult, is not impossible.

It should also not be overlooked that while much of the super industry is dominated by big financial institutions, super also has a healthy not-for-profit sector.

Indeed the success of the not-for-profit funds is so strong, it has forced some of the big for-profit players to launch cheaper, better products. The level of competition is set to ratchet up if MySuper is enacted as only funds that meet the legislated requirements will qualify as default funds for employers.

And while there's plenty of grumbling about the low returns generated by balanced funds, no one was complaining that the returns were too high during the pre-GFC boom.

Perhaps the biggest problem with super is that the same inertia that results in fund members favouring compulsory super also results in them taking little interest in how their money is managed and holding their funds to account. This encourages a mindset where organisations and individuals start to think of it as an income stream for their benefit, rather than precious savings for the future of members.

Most people would like their super to grow faster and a recent OECD report indicates they need it. The Pensions at a Glance report found the gross replacement rate in Australia from the combination of age pension and 9 per cent super was just 47.3 per cent for the average worker, below the OECD average of 57.3 per cent and the commonly used ideal of 60 per cent to 70 per cent.

The question isn't whether we should be increasing super savings, but how to further ensure that the people who own those savings get the best retirement possible. That's not just a job for government and industry. Consumers need to ask more questions and vote with their feet when funds are not delivering.

Twitter: @sampsonsmh


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