The battle over the future of Australia’s superannuation system is being fought on the same old ground of accumulation, leaving the real issue unattended – the welfare of millions of people entering retirement, writes Patricia Pascuzzo.
The suggestion by Peter Costello for the Future Fund to become the default superannuation provider of last resort does seek to address important issues in the high cost of the system and its effectiveness in delivering on its objectives.
But Costello, like many others before him in this debate, has framed the problem too narrowly as being about the cost-effectiveness of investing assets during the members’ working life, when the real issue is much broader and far more pernicious.
It is true that under Costello’s proposal, members would benefit from the Future Fund’s sophisticated investment governance and considerable scale economies through higher returns and lower administration fees.
But the system’s success should not be judged simply on its ability to deliver high risk adjusted net returns. Rather, its success relies ultimately on how effectively it helps members manage the heightened financial risks they face in retirement when they no longer have the security of employment income to cover their living expenses.
These risks go well beyond investment risk and include the risk of facing negative returns when the member has little opportunity to recover their losses (sequencing risk), the risk of outliving their savings and the major and often unexpected health and aged care needs of retirement.
The solution to managing these risks involves complicated trade-offs that are highly specific to the member’s particular circumstances and preferences. As has been shown in the countless inquiries to date, most savers are ill-equipped to make decisions about accessing their retirement income or how to protect themselves from these risks.
Default members by definition have had minimal, if any, involvement in investing their funds pre-retirement and are therefore particularly poorly placed to suddenly manage these risks at retirement.
Left open in this whole default fund debate is what happens when these members reach retirement, given the growth in Australia’s post-retirement population over the next two to three years will be mindboggling.
Already, we have problems. Research commissioned by consumer group Choice shows pre-retirees face increasing levels of anxiety about having no plan for retirement. Many feel trapped in their financial situation. This fear can be so great that they are paralysed into inaction which only exacerbates their difficulties.
The situation is unlikely to change unless policy-makers, industry representatives and others widen their focus beyond the phase where members are accumulating superannuation. Solving these problems means recognizing that behavioural bias’ afflict us all and designing techniques to nudge members towards improved outcomes. A default fund that limits itself to the accumulation phase will not be in a position to engage with members to better understand their needs and guide them during this difficult transition in pre-retirement and through the retirement years.
The proposal only makes sense if the Future Fund were able to take these members through to the end of their retirement. The alternative, of offloading them to another super fund once they retire, would defeat the whole purpose.
The Future Fund however, like the exemplary hospital of ‘Yes Minister’ with no patients, has no members. Quite simply, the Future Fund is not set up to provide members with retirement benefit products, or guide their choices at retirement or provide access to cost-effective and sound financial advice.
In effect, the Future Fund would need to become a cradle-to-grave superannuation fund and develop capabilities in the provision of retirement benefits, customer engagement and advice. It would have to build systems to handle servicing millions of members or outsource, with all the associated cost that would entail.
While these debates over who controls the superannuation default market interest many in the industry, they lack clarity about what is the problem we are trying to solve and the outcomes sought. Determining how we meet the needs of members at retirement is critical to both a proper framing of the problem and arriving at a suitable solution.
Our ability to draw on the significant advancement of behavioural science in resolving this most pernicious issue is hamstrung by the narrow framing of the problem and a dichotomous view of the superannuation system. If we are to meet the objectives of superannuation and arrive at a proper solution to the problem, we need an holistic view of superannuation that covers both the accumulation and the drawdown phases.
On that score, we need to advance the debate about the regulatory framework for post retirement. Otherwise we will kick the retirement can even further down the road and leave millions of people, and ultimately the Commonwealth, bearing excessive longevity risk.