Let’s face it, defined benefit super – that is, indexed pensions provided by employees – is not coming back. And having introduced the most recent set of reforms this government is reformed out: it’s only interested in the cash. So it’s up to the industry to take the next step, and that requires focusing on super’s main purpose.
Superannuation isn’t just a tax avoidance vehicle, or even a savings vehicle, although it’s definitely those things. Its main purpose is risk management – that is, to alleviate the risk of a destitute dotage.
And the problem with super in this country is not that it’s taxed too much, or that people have lost confidence in the tax regime. Yes, there’s been some tax tinkering, but it’s still a very good way of not paying tax. The problem is that it’s a lousy risk management tool.
Retirement is more risky for individuals now than it ever was before 1992, when the Keating Labor government introduced the compulsory super guarantee system instead of a 3 per cent national pay rise. Actually the rot had already begun before that with the mass desertion by Australian companies and life offices from the business of providing employees with defined benefit, indexed, retirement pensions. As a result it is now much less risky for companies and governments.
The government continued to provide some indexed pensions, especially to politicians, and American companies continued to do it as well, eventually sending many of them broke, but Australian companies stopped, en masse. The decline in bond yields after 1982 made the capital requirement prohibitive and the 1987 stock market crash sealed it.
Defined benefit super, where individuals know what they’ll get when they retire, is gone and never coming back. Companies aren’t going to offer it to employees – and with unemployment above 5 per cent they don’t have to.
If unemployment got back to 1 per cent or less, as it was in the golden days of indexed pensions, maybe they would offer it again to attract staff, but that’s not going to happen either. Central banks, the Labor Party and even unions have embraced the idea of a pool of unemployed to keep down inflation and protect the value of the money.
And anyway, didn’t the government take it off their hands with the so-called 'three pillars' system of retirement savings – the old age pension, compulsory private savings and voluntary savings encouraged by tax deductions. No place, or need, for the corporate sector to get involved any more, beyond sending the 9 per cent of salary off to the chosen super fund account.
In any case the corporate defined benefit pension system discriminated against the self-employed and small businesses and sent big companies broke (General Motors for one ended up with more people on retirement benefits than on its workforce).
But I am saying that the current system of defined contribution, or accumulation, super suits nobody but the super industry.
It costs the government a fortune and not only are the customers exposed to market risk and longevity risk, neither of which they understand, most people don’t know what their savings will amount to and how that will integrate with the old age pension. In other words, not only is their risk not really being managed, the whole thing is a mystery.
It’s not really the industry’s fault either. Investment markets are impossible to predict beyond extrapolating past averages, and actuaries can only deal in average life expectancy, knowing that half the population will live longer and therefore have a more expensive retirement, possibly much more.
And as I understand it, a number of super funds are trying to come up with solutions that look a bit like defined benefit schemes, but aren’t because they don’t have any capital with which to support them. But perhaps there are ways to structure savings plans so they provide more certainty and less risk.
Some people I’ve spoken to say that the government should step in and provide some kind of pension guarantee, but I don’t think that’s realistic either, what with a National Disability Insurance Scheme apparently coming plus a whole lot of extra money for schools.
What to do? Well a good start might be a requirement where, say, half of any retirement lump sum needs to be taken as a pension or annuity in order to be tax-free. At the moment retirees get given a tax free lottery win if they’re over 60 which they then have to give to someone else to invest for them until it’s all gone. The fervent hope is that this doesn’t happen until after they die.
That would at least remove some of the longevity risk and encourage the return of capital to an industry now virtually moribund, apart from Challenger Financial Services and some of the life offices – that is, lifetime annuities.
Market risk could be alleviated to some extent by introducing targeted saving and greater focus on 'time of life' asset allocation. Some super funds are already going down this path.
But the main thing is that there is too much focus on the taxation of super and not enough on what it’s really about – retirement risk management.
And the industry is largely to blame for that. Any suggestion of an increase in tax (or a reduction in concessions) is greeted with frenzied lobbying and PR by the industry, but they are thinking about the wrong thing. It should be about their customers, not the tax.
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