The superannuation system is under scrutiny on two fronts – its high costs and the ability to deliver income in the all-important retirement years.
The Assistant Treasurer, Josh Frydenburg, highlighted both challenges at a recent speech in Canberra to a seminar organised by the newly-formed Committee for Sustainable Retirement Incomes.
Frydenburg referred to the Financial System Inquiry (FSI) finding that while assets within the system have risen to about $2 trillion and average fund size increased from $260 million in 2003 to $3.3 billion in 2013, average fees have only fallen 20 bps over the same time period.
Clearly he shares the view of the FSI that the industry is not efficiently capturing the scale benefits of its growth and passing those benefits through to super fund members via lower fees.
The challenge on the retirement income front, Frydenburg acknowledges, is to do with the drawdown phase being underdeveloped when compared to the accumulation part of the system which logically was the focus as the system was being established and gaining maturity.
It is obvious the pressure for better, more flexible income and longevity solutions will build quickly in the retirement income space because around 30% of the assets are now in the drawdown phase and that will only increase. Income stream payments have already increased from $7.1 billion to $38 billion a year between 2003 and 2013.
However, while Frydenburg has ruled out a comprehensive review of the retirement incomes component of the super system, he has flagged various areas where changes are possible – indeed likely.
The two main areas where changes may emerge are from the Government’s tax white paper process and a separate Treasury review of minimum drawdown rules. Frydenburg says he is hopeful of making an announcement on the drawdown rules "in the not too distant future" with the aim of allowing the development of more innovative retirement products.
To be clear, increasing drawdown rates is not under consideration, according to the Assistant Treasurer.
The other element which Frydenburg has lent support to is the FSI recommendation that a clear objective be established – hopefully on a bi-partisan basis – for the superannuation system.
What Frydenburg has called out is that the tax concessions provided for superannuation are "intended to encourage and support an individual’s retirement income – not to accumulate savings that can be passed on to future generations".
"Capital is supposed to be depleted over one’s retirement rather than being preserved as a bequest," Frydenburg said.
What would not be a good policy outcome would be to make people draw down too much of their super early in retirement and then risk them running out of money and being forced back on the age pension.
This might seem obvious, but it really does go to the heart of what the super system is trying to achieve.
The good news for the immediate future is that the Government has recommitted to "not making any adverse or unexpected changes to superannuation in this term of government".
But clearly some of the issues under consideration will have wider ramifications in the longer term for some of the financial planning strategies used around super.
In particular SMSF trustees and their advisers will need to be vigilant as the political debate unfolds.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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