Increase the Super Guarantee? – a big picture perspective

The Superannuation Industry largely says implement the increase to 12% or more.  The Grattan institute says keep at its current 9.5% level. Vested interests, ideologues or sane voices in a confused world?

The level of the super guarantee contribution goes to the heart of delivering good retirement outcomes. 

When a matter is challenging and complicated, it helps to remove the clutter by going back to first principles, establishing a solid factual base around what really matters, and then assessing the situation against those principles. Expanding on the “really matters” for me must include the practical effects or difference an action has or will make, based on real life experience. 

There are 3 key principles I see, where the practical real life effects are strong:

  1. Access – If you’re not in you can’t win.
  2. Adequacy – There’s needs to be sufficient income in retirement.
  3. Reliability – You must have full confidence it’ll be there when you need it.

Access

When I migrated to Australia from Ireland in 1985 as an eager newly qualified actuary, as an industry “insider” I had been in an employer pension / super scheme, but my payout after 5 years was just my share of contributions with some very low level of interest.  It was negligible.   And I was one of the lucky ones who was in a scheme!   My Aunt and Uncle ran a dress making business in rural Ireland that was the only employer of size for many miles around – I helped arrange for them to make some personal super contributions for the first time in their lives in their late 50s – too little too late.  Their employees were grateful for a job but did not have access to superannuation beyond the then government pension.      

So how wonderfully courageous and innovative with long term thinking it was that an Australian Government legislated in 1992 that all employees would have access to their own portable superannuation. 

MySuper design and the system’s portability provides a good base for widening access to self-employed and contractors. However, without changes to policy settings, the rise of the gig economy may mean lower or no superannuation contributions, and lower superannuation balances at retirement for some Australians. 

Achieved?  Substantially Yes close to universal access.

Adequacy

1992 saw an SG of 3% enacted with a vision to build this to long term sustainable level of 12% to be the crock of gold at the end of a person’s working life rainbow – without needing the leprechaun to provide it!  A bump in the road has seen the path falter at the 9% and 9.5% steps.   

In targeting adequacy and determining the contribution rate, we need to be mindful that in real life many workers have breaks in employment by choice or imposed, and a higher rather than lower contribution rate will enable them to get closer to adequacy than otherwise.  Other mechanisms should be used to limit overfunding individuals’ retirements’ related government costs such as the recent contribution caps and balance limit.   

Net investment returns after fees and tax are a critical component of the journey to the end of the rainbow.  There are droughts, storms and floods en route before the rainbow appears.  The industry has mostly delivered notwithstanding some exceptions. 

Achieved?  Not yet.  On track for adequacy of retirement for most if contributions continue to build to plan and investment returns are repeated, but at risk for many if not.

Reliability

Australians are generally suspicious of change, especially when promoted by politicians – witness our referendum record.  As the Melbourne Mercer Global Pension Index shows, Australia’s Superannuation system including its core SG mechanism pillar has been one of the most successful in the world, but our position has slipped from 2nd to 4th in recent years.  But to the average Australian there is a deafening noise of debate, claim and counter claim which raises emotions and saps confidence in what is at its core a sound system centred on dignity in retirement.  Debate is essential, but in so doing, let’s not undermine the confidence and visionary outcomes of the system.  We must stick to the long term vision as the default path and only change where there is strong evidence of deviation from those long term goals.  

Achieved?  No. We risk losing the confidence of members and undermining the long term build to a retirement system that meet the needs of our increasingly long living retirees.  

Delivering on the true superannuation vision

In summary, let’s have the discipline and courage to see the quality and dignity in retirement vision through, while always working to improve that pathway.  The retirement outcomes of members should be at the heart of every decision and it is important to keep this in mind whenever new regulation is proposed.

Sean is Managing Director of McGing Advisory & Actuarial and is currently Deputy Chair of the ASFA Victorian Executive.  These views are his own personal views.

Sean and the team at McGing Advisory & Actuarial provide a wide range of Superannuation support services including administration, investment, insurance, risk, governance and actuarial advice.