Six Simple Questions – Part 1

The CSRI was founded to encourage the sharing of ideas toward building a more sustainable, efficient, equitable and adequate retirement incomes system.

We’re lucky to have attracted some high-profile and highly knowledgeable sponsors to contribute to our work and help shape the debate.

Joining us today for the discussion are these six experts:


In this interview, we put a series of six simple but nevertheless challenging questions to our expert panel:

  • Why do we need to reform our retirement income system?

  • What do you see as the priorities?

  • What are the key challenges and how do we overcome those?

  • How do we balance the key imperatives of adequacy, equity, sustainability, efficiency and simplicity?

  • How do we build public engagement around these issues?

  • What can your organisation bring to this work?

Question 1: Why do we need to reform our retirement income system?

  • Stringer, KWM – “The current system has developed from a lump sum starting point and does not provide an adequate range of retirement products to suit the needs of investors. This is largely a result of regulatory roadblocks and tax impediments.”
  • Pascuzzo, CSRI – “Large numbers of baby boomers with substantial superannuation balances are entering retirement over the next two decades. Governments of both stripes have called multiple inquiries into the system, but short-term political and fiscal tactical imperatives seem to take precedence over the need for broad and effective reforms. The frequent piecemeal changes have meant insufficient attention has been given to the interactions between the various pillars – particularly super and the age pension. This tinkering and lack of long-term thinking has resulted in a system that has moved away from what was seemingly its original purpose – the provision of retirement incomes.”
  • Lennon, Dimensional – “We have a fairly effective retirement system, but that doesn’t mean we can’t make it better. For instance, our understanding of risk is much more sophisticated than it was 25 years ago when the system as we know it began. Our view is that the primary goal of retirement savings is having a steady stream of income through retirement. That means the main challenge of retirement planning throughout life is managing the tension between growth of capital and the uncertainty of future income. This is going to require innovation not just in legislation and supervision but in the products we offer people.”
  • Arnott, First State Super – “Our system encourages people to take lump sums rather than providing retirement income. Adequacy is lacking, as measured by ASFA’s ‘comfortable’ standard. Few products protect against longevity risk and these have only a small level of consumer acceptance. For those who cannot or prefer not to use a planner, the system is complex and likely to deliver sub-optimal outcomes. Current tax concessions favour the wealthy and the system is expensive to administer relative to those of other countries. Finally, whether a person owns their home or is renting has a major bearing on their quality of life in retirement. Consequently, there needs to be more integration between housing policy and the superannuation system.”
  • Coogan, PwC – “We need to provide clarity on the purpose of super and determine what it should not include, such as funding housing or healthcare. We need a system that is both efficient and effective in providing an adequate benefit for those in retirement.  But we also must ensure the system is fiscally sustainable in regards to tax concessions and the age pension and that this cost is consistent with the adequacy objective. Reform is required also to provide clarity and confidence in the system, given all the piecemeal changes we have seen over the last 20 years. Finally, the imperative for reform is driven by our aging population and the need for post-retirement products in addition to the allocated pension model that now dominates.”
  • Wickham, TAL – “We need reform to improve the well being of those that participate in it. Our pure defined contribution system has shifted too much of the burden of risk and choice onto the shoulders of individuals who are not well placed to understand or manage these risks. We also need reform to ensure sustainable outcomes for the economy in terms of expenditure, equity, investment, workforce participation and growth.”

Question 2: What do you see as the priorities?

  • Stringer, KWM – “The priority should be simplifying and streamlining the legal and tax rules so that product providers can innovate within clear and well-defined policy boundaries.”
  • Pascuzzo, CSRI – “First, clarify an objective for superannuation that shifts the focus toward income. Setting an objective will help change the framing. How we transform balances into income streams and hedge longevity risk will be critical for income security and lessening reliance on the age pension. Second, change those regulations impeding the development of retirement income products.  We need a principles-based approach that allows for innovation.  From there we could develop a regulatory framework that enables trustees to offer their members ‘Comprehensive Income Products for Retirement’ (CIPRs). This would be a combination of products that allows for the better management of market risk and longevity risk.  The ‘nudging’ feature helps members overcome inertia. And ensuring people ‘opt in’ reduces concerns about them being locked into unsuitable products.”
  • Lennon, Dimensional – “With the federal government’s new discussion paper, we are close to nailing down the first priority – establishing the goal. There’ll obviously be debate around the exact wording but it is going to involve income in retirement. We clearly are still awaiting direction on the regulation of income products and we hope Treasury is making some progress there. Most of all, we need a clear idea of what a CIPR will look like. Ideally, we need products that use all the risk management techniques available, while maintaining some flexibility to allow for uncertainty around future consumption. Just putting people in annuities is not the answer.”
  • Arnott, First State Super – “Legislation to enable a greater variety of longevity products would assist in placing more emphasis on retirement incomes. This would improve adequacy and would help close an information gap, by leading to a greater variety of default products in retirement. Legislation to encourage the higher take-up of income streams should be seriously considered. However, members with low balances should not be forced to annuitise their savings. Limits could be set on the level of account balance for concessional tax treatment, which would greatly increase the perception that the system is fair. In terms of rising life expectancy, simply increasing the eligibility age for the age pension is a blunt instrument, and consideration should be given to providing incentives for people to work longer. An increase in the eligibility age would need to address the needs of those forced to retire due to ill-health or because they are no longer able to work in physically demanding occupations. To assist in greater retirement income adequacy, there should be no further delays in the move to increase SG contributions to 12%.
  • Coogan, PwC – “While the superannuation system is good already, it could still be improved by securing bipartisan agreement on the system objectives, including contribution levels, tax on contributions, investment income and benefits. We need agreement that regulatory changes be made only where they are consistent with the agreed objectives. The system should be reviewed on a periodic basis by an independent body assessing progress toward meeting those objectives and reporting to federal parliament. We also need bipartisan agreement on what is and what is not grandfathered so that people can have confidence in the system. Education needs to be a focus, given the general public tends to turn off immediately on mention of superannuation.  We should provide encouragement through the ATO to allow ongoing tax rollover relief in merging funds and products to encourage further efficiency. Finally, given the public effectively own government infrastructure assets, we need a mechanism that allows funds to acquire these assets in a more direct and efficient way, perhaps by being given first option.”
  • Wickham, TAL – “The priorities should be clarifying the objectives of the overall system. We need tax reform, but in a considered way – not budget tinkering. Another priority is removing disincentives and regulatory barriers such as the tax penalties on deferred lifetime annuities. We need to make MySuper the whole-of-life product it was intended to be. And we need to implement the CIPRs– one of the key recommendations of the Murray review.”

Question 3: What are the key challenges and how do we overcome those?

  • Stringer, KWM – “The key challenges arise from the complexity and interconnectedness of the system. By that I mean that a change to one part of the system may have implications for other parts of the system. And, of course, there is that old chestnut of grandfathering. For changes to be accepted as fair, thought needs to be given to how to treat those who have made plans based on the current rules. In terms of overcoming those challenges, a body like the CSRI can play a role because it does not represent particular stakeholders, but rather, seeks to bring together expert opinion. I hope the work of the committee can assist in identifying the various policy tensions and informing debate about how to resolve them.”
  • Pascuzzo, CSRI – “We know from the history of public policy in Australia that real reform happens only where there’s broad acceptance of the need for change and agreement on the essential features. So if we are to get away from the usual pattern of piecemeal change and move towards a more coherent system, we’ll have to secure greater consensus in the Australian community about the agenda. Sure, change can create winners and losers. But people are more likely to accept it if they can see that it is for the greater good and if it doesn’t impact them retrospectively.  The other plus is the greater certainty from replacing constant ad hoc change with gradual implementation of a long-term reform package.”
  • Lennon, Dimensional – “The government is rightly concerned about sustainability. The Murray inquiry stressed the need for greater efficiency. And there are legitimate concerns about adequacy and equity. The good news is a lot of very smart people are thinking about this and looking at best practices around the world. Australia is not alone in experiencing greater longevity and pressure on government budgets. Our business in the US has been working with other parties to come up with new solutions built around income in retirement. And we’ve had the benefit of great counsel from people like Professor Bob Merton, who’s been studying this issue for nearly 50 years. Ultimately, our main focus should be on end-savers themselves, better preparing them for retirement and improving outcomes.”
  • Arnott, First State Super – “Due to the slow pace of legislation, it’s been suggested there be a ‘Retirement Incomes Department’ existing outside of Treasury. This would enable a stronger focus on retirement income rather than as now when it is just one of Treasury’s many responsibilities. Allied to this are the lack of bipartisan support for superannuation policy and the lack of a clear objective for the superannuation system, as identified by the Financial System Inquiry. Both represent obstacles to achieving progress unless remedied. The fragmented nature of the superannuation industry also gives rise to many diverse and often opposing views presented to government.”
  • Coogan, PwC – “Key challenges will be getting consensus from the various stakeholders given the differences in living standards in Australia. Specifically, it will be challenging to secure agreement on what is defined as a sustainable cost for superannuation tax concessions and the age pension. Getting agreement on what is, and what is not, grandfathered will also be tough. But we can help overcome those by putting everything on the table. That means the research, projections, implementation issues etc. It will also help if we can all agree on a process, a timetable and who should be involved to come up with recommendations to the government for the next 10 years. Ideally, changes inside that 10-year review period would be considered only when really needed.”

(Join us again next week for Part 2 of our discussion around the other three questions)

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