Sometimes the simple things in life can be the most elusive. Take the recommendations of the Financial System Inquiry chaired by David Murray that the federal government responded to by accepting the majority of them.
From the batch of initiatives impacting investors and our superannuation system, two appeal for their simplicity and potential impact:
- The acknowledgment by the Government that super is "fragmented, complex, costly and suffers from a lack of member engagement" and that more needs to be done to reduce fees and improve after-fee outcomes for members.
- The concept of enshrining in legislation the objectives of our superannuation system.
Both are simple and powerful objectives that, if achieved, will deliver clear benefits to Australian super fund members and their quality of life in retirement.
Yet the path to achieving them looks far from simple.
The idea of enshrining the super system objectives in legislation frankly was a miss at the time by the system’s architects, including then Treasurer Paul Keating. To be fair, the system has been anchored around the concept of the sole purpose test since the super guarantee was established in 1992. The system’s core objective has been broadly debated over the years, but without consensus emerging, different sectors of the super industry have evolved competing ideas of what the system is trying to achieve.
The move to legislate the objectives is off to a good start as the Shadow Treasurer, Chris Bowen, has been supportive publicly of the concept soon following the Murray Report’s release.
The tough bit will be nailing down a form of words to capture the system’s objectives. Should it, as Murray has suggested, simply be to provide retirement income?
That is a good place to start, but is unlikely to be where it ends up – the new Assistant Treasurer Kelly O’Dwyer has suggested as much. Some alternative suggestions, for example, target the replacement of all or part of the age pension system.
It is a simple thing, but getting agreement around the objectives could conceivably be the most long-lasting impact that the Financial System Inquiry has on our superannuation system.
That said, the objective of capturing the scale benefits of the system – today around $2 trillion in savings but projected to be almost $5 trillion by 2025 – could be what delivers the most direct benefit to individual fund members.
It is true that overall fees have been trending down since the introduction of the homogenised default MySuper. The challenge for the superannuation system is how does it capture the benefits of scale more effectively and pass them on to members faster.
Superannuation is the ultimate in long-term investing when you consider someone entering the workforce today with their working career ahead of them. Small differences in fees can make a substantial difference to someone’s final account balance at retirement.
Arguably the biggest challenge coming out of the federal government’s response to the FSI is the one handed to the Productivity Commission. The challenge is to design a mechanism that delivers competitive pressure/price signals that will deliver cost savings to fund members.
In its response to the FSI the government has arguably gone further – or at least decided to move sooner – that what was recommended.
That ought to be welcomed by all fund members. Costs matter – a lot. Particularly when you are looking out long-term. So initiatives that help take cost out of the system will ultimately deliver better retirement outcomes for members.
Simple.
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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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