The Federal Government has announced its inquiry into retirement income. It’s a heady mix of big numbers and politics and will, among other things, address the core question of whether the mandatory superannuation system that has now been central to the Australian landscape for over a quarter century is actually achieving what it’s supposed to.
It’s an interesting question, coming as it does right on the heels of a debate over defining the purpose of superannuation in legislation. The subject has been well canvassed and the Prime Minister, Scott Morrison, has made it clear that the purpose of super is, for most people, to supplement the government age pension in providing retirement income.
Remember, superannuation commenced as a trade-off for reduced wage increases in the prices and income accord struck by the Hawke-Keating government with trade unions in 1983. The upside for working Australians was greater financial security and dignity in retirement. However, the deal focused primarily on how the system, with its mandatory contributions, would be designed and evolve through the accumulation phase. At that stage, few Australians employed outside the public sector carried any superannuation benefits into retirement.
Visionary as it was, there were few who could have foreseen the colossal financial behemoth that the Australian superannuation system has become, with nearly $3 trillion invested on behalf of over 13 million people.
Unfortunately, relatively little attention was paid to what and how the system would deliver retirement income as the first real beneficiaries of the new system, the baby boomers, entered retirement. The overarching sole purpose test enshrined in the regulations governing superannuation funds is a reflection of this and this proposes that it is now constraining the effectiveness with which funds can help members transition into and manage retirement.
The primary focus of the sole purpose test is to ensure that money invested in funds and the associated expenses of doing that are all aligned to the purpose of maximising retirement income for members.
Where the sole purpose test pulls up short for looking after members entering retirement is that it fails to acknowledge that members are free to do what they want with their money once they retire. Although very few do, it is absolutely within a member’s right to cash in their super on retirement and binge the lot in a short space of time before falling back on the age pension to sustain them for the rest of their lives.
It is this that makes a mockery of the sole purpose test as relevant to retired members, yet it still overlays and constrains super funds trying to help members to plan holistically for retirement.
This is the lifestage at which the partition between super the daily financial life of members dissolves. On retirement, super is activated and becomes part of the broader mix of personal finance. It becomes a fundamental and dynamic part of the members’ personal balance sheet, cashflow and profit and loss.
The problem is that superannuation funds only deal with two dimensions of their members’ finances - income, the positive cashflow through retirement, and the provision of a tax-free investment haven within superannuation pension accounts.
Constraints around advice and the extent of conversations they can have with members make it very challenging to talk in other than the broadest terms on the two top-of-mind questions for members approaching retirement - how much income and retirement savings do I need and how long will my money last? In a time of increasing demand for personally relevant service and support, generic responses to these questions just do not cut the mustard.
Hello, financial advice. Heading into retirement is when everyone should consider getting professional financial advice. The scale of it will depend absolutely on the complexity of a person’s circumstances inside and outside of super. Advice on how to deploy that mix of super-enriched income and assets effectively over 20 or 30 years of retirement can make a huge difference to the life a person will lead and sustain in retirement.
It’s one reason that it’s a shame that the financial planning sector’s reputation has been so tarnished by its failure to manage conflicted interest and remuneration models. Financial planning is the logical place to which people should turn to help optimise their retirement finances.
Super funds have with varying success incorporated financial advice into their offering - either internally or in partnership with financial advice networks. Some have transitioned from the former to the latter, as they have realised their inability to provide the geographic coverage and broader advice demands of their growing retiree cohorts.
However, these solutions still leave two of the biggest elements of the cost side of the retirement equation too far removed from discussions - health and aged accommodation. In the latter stages of retirement, these are the two areas most likely to blow up the retirement plan and the challenge for planners is that these are two of the areas members are least comfortable with contemplating.
Why is this important to think about?
It is because with an ageing population, the cost of the age pension, health services and aged accommodation are three primary areas negatively impacting on federal and state budgets. The Federal Government’s inquiry into retirement income will examine the effectiveness of the superannuation system in reducing pressure on the age pension.
The scope of this inquiry is symptomatic of silo thinking across government. Pushing and pulling on the single lever of how the superannuation system delivers retirement income will not resolve the broader budgetary issues created by an ageing demographic.
At some point, a visionary politician or bureaucrat will recognise that retirement solutions at a community level must bring together the cash inflows and outflows in the equation.
When this happens, the purpose of super funds could be redefined for retired members, with their operations evolving into specialist retirement management businesses. Call it a dual purpose test if you like - transitioning as members move from accumulation to retirement phase.
These businesses would create product solutions that join the dots on the retiree’s roadmap, providing greater self-determination and confidence for retirees. It could also offer the prospect of shifting more responsibility for sustaining the older population away from the state and the proportionally diminished cohort of younger taxpayers having to support it.
Such a product would include elements of traditional account-based super, annuities and, most likely, some sort of group insurance pool, which may well aggregate with health insurance cover for retirees. It’s a long way off and there will be plenty out there who’ll find reasons to discredit the holistic retirement solution idea. But don’t put it past a future government to float it.