Australia has a three-pillar retirement system consisting of a universal age pension, compulsory employer superannuation contributions, and voluntary contributions. The superannuation system is large at over $1.8 trillion AUD but most assets are in defined contribution accounts that may provide an inadequate level of retirement income. The system has wide coverage due to mandatory contributions but faces challenges in providing sufficient retirement incomes and transitioning to post-retirement financial products. Improving outcomes will require cooperation between the government, regulators, and pension industry.

1. THE ACTUARY • July 2014
www.theactuary.com
26
Pensions
Australia superannuation
features@theactuary.com
Discussions about retirement systems often
look to Australia. It is the world’s fourth largest
system at over A$1.8trn (£1trn), 105% of GDP and
is expected to quadruple in size within 25 years.
Figure 1 shows both historical and projected total
assets under management.
Australia has a three-pillar retirement system:
1. Age Pension is a universal means-tested
pension provided by the Federal Government
and paid from consolidated tax revenue each
year. Currently the pension commences at age
65 – eligibility age will gradually increase to
70 in 2035.
2. Compulsory superannuation contributions
are made by employers, currently at the rate
of 9.25% of salary. This rate will gradually be
increased to 12% by 2022.
3. Voluntary superannuation contributions
can be a mixture of pre-tax (salary sacrifice)
and post-tax contributions.
As the system is mandatory, with no opt-out
provision, coverage is very high. Over 98% of all
employed Australians are covered by
superannuation and 75% of self-employed.
However, the vast majority of assets are in
defined contribution schemes where members
receive a lump sum at retirement. This means
that having a superannuation account does not
imply an adequate level of retirement income.
The superannuation industry is far from
homogenous with a number of distinct segments
chasing the money (see Figure 2). The industry
and self-managed superannuation funds may be
the least familiar to readers in the UK.
The government decided not to establish a
government-run scheme and so industry funds
were established as an alternative to bank and
insurance company options. They usually focus
on particular industry sectors such as teaching,
construction, health and public sector to name a
few, and some of the funds position themselves
as multi-industry. These funds are not-for-profit
and the trustee boards consist of equal
representation from union and industry groups.
Self-managed superannuation funds
(SMSFs) represent the fasted growing segment.
An SMSF must have fewer than five members
and all members are also trustees. These are
very much DIY superannuation funds and
there are more than half a million of them.
Australia’s system of
superannuation has
wide coverage but often
provides an inadequate
level of retirement
income. Stephen
Huppert says that
government, regulators
and the pension industry
need to work together to
improve the situation
Can the tide turn
for Oz pensions?
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2. STEPHEN HUPPERT
is a partner at
Deloitte Australia
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
A$bn
1997 2002 2007 2012 2017 2022 2027 2032
Source:AustralianPrudentialRegulationAuthority,DeloitteActuaries&Consultants
Corporate4%
Industry20%
Self-managed
fund16%
Corporate32%
Retail28%
Source:AustralianPRA,DeloitteActuaries&Consultants
Figure 2:Shareofsuperannuationassets,31July2013
Figure 1:Historicalandprojectedtotalassetsundermanagement(A$)
July 2014 • THE ACTUARY
www.theactuary.com
27
“We are world-class at getting money
into the system, but there is significant
work to be done at the other end”
earners. There is heated debate about the
equity and effectiveness of these concessions.
Despite the compulsory contributions and
tax concessions, only 20% of Australians are
completely self-sufficient in retirement and,
of this group, only half manage to stay
self-sufficient with the balance eventually
relying on the government age pension.
The other 80% receive full or part pensions
from the Commonwealth Government.
Most projections do not see the overall
percentage changing significantly though
the proportion receiving full pension is likely
to decrease.
Politics and self-interest
It is not surprising that successive governments
are torn between the value of these concessions
for encouraging self-funding of retirement and
their need to balance the Federal Budget.
Various think tanks and interest groups have
their views on the social and economic benefits
of the tax concessions within superannuation.
The constant changes to tax and other
legislative aspects over the history of the
system have led to significant complexity.
This results in costs to providers and lack of
engagement by consumers. The average
Australian’s reaction when the topic of
superannuation is raised is that it is all too
difficult and the rules keep on changing.
This is a disincentive for members to be
suitably engaged in saving for their
retirement and discourages them from
making voluntary contributions.
Furthermore, the very public, and often ugly,
debate about the future direction cannot help.
There are many well-run superannuation
funds that are constantly looking for better
ways to improve the retirement outcomes of
their members. But it is difficult to be overly
optimistic about the future of the system as a
whole. Australia does have the foundation of
a good retirement system, but significant
work is required to better prepare and provide
for the post-retirement phase. This should
include finding ways for members to make
the right decisions at the right time, a better
range of efficient post-retirement products
and improved integration between
superannuation systems, state pension and
long-term care.
This will require cooperation between the
government, the regulators and the industry.
Past experience suggests that this will not
be easy. a
GETTY
The structure, governance regime and size
of the Australian system result in it
consistently being rated highly in both the
Mercer Global Pension Index and the Allianz
Pension Sustainability Index. However, by
certain criteria, it has a number of major
challenges that must be addressed – for
example, we are world-class at getting money
into the system, but there is significant work to
be done at the other end.
Investment choice
About 85% of Australia’s superannuation assets
are in defined contribution schemes and the
majority of Australians are in the default
investment option of their employer’s default
superannuation fund. These default investment
options are typically 70/30 balanced funds.
Funds do offer a range of alternative investment
options and members do have choice, but less
than 20% of members exercise this choice.
Unfortunately, when members do switch
investment options it is often to chase returns
and leads to worse rather than better outcomes.
We also see younger members shifting to more
conservative options not understanding the
concept of an investment time horizon.
Almost all retirees receive their benefit on
retirement as a lump sum. If they want an
income stream in retirement they must
purchase one. Apart from a small number of
defined benefit members, there is no default
transition to an income stream. Australia has a
very small market for annuities, either term
certain or lifetime.
For the 85% in DC schemes, the most popular
option is an allocated annuity. This is an
account-based pension that provides a series of
regular payments. The payment amount is
subject to minimums described as a percentage
of the account balance and the member can take
lump sum amounts out.
The debate about compulsory annuitisation
does surface from time to time but there is
nothing to suggest it will occur in the
foreseeable future. There is significant industry
support for changes to tax legislation to make
deferred annuities more competitive.
Since the introduction of compulsory
contributions, the message has been that these
contributions are deferred salary. Employees are
told that it is their money. Anything other than
account-based pensions will be a hard sell
politically and commercially.
There are two dimensions to sustainability
of a retirement system: national and
individual. Like in all countries, improved
longevity and other demographic pressures
have led to significant
tension between these
two dimensions.
The two major ways
the Commonwealth
Government helps
retirees are the Age
Pension and
superannuation tax
concessions. Treasury
estimates that tax
concessions on
superannuation cost
around A$30bn each
year. It is claimed that
almost half of the tax
concessions go to the
top 12% of income
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