By David Bell
“Given the interaction between super, aged pension, and housing in retirement, and observing that these areas sit in different government portfolios, would you consider establishing a more integrated policy function focused on retirement incomes?”. This was my question to Chris Bowen at a talk he gave last year. The response: “Don’t boil the ocean”. Back in my box!
With the scope of the retirement income system review still to be determined, calls for integrated retirement policy design are becoming louder, showcased in their own different ways by the Actuaries Institute and the Grattan Institute. Both provide strong reminders that: (1) retirement outcomes are funded from multiple sources (super, age pension, other government assistance, other savings, and home equity release); and (2) policy assessment needs to consider the cross-section of household outcomes, rather than the average outcome.
I would add that this all needs to be assessed through the lens of possible economic scenarios: for instance, inflation, wage growth, and housing affordability are all very different now to what they were when the Superannuation Guarantee (SG) was first implemented. And while it may sound like a toxic derivative, the concept of the “range of outcomes squared” pops into my head: we need to be cognisant of the range of outcomes across the population in different environments, while also considering the range of outcomes across generations.
The Actuaries Institute suggests that while each component (super, age pension, housing, and aged care as well)) would benefit from individual review, there is a strong need for an integrated approach to retirement policy. Meanwhile Grattan essentially positions the rate of the SG as a rather blunt tool with which to address the nuanced challenges faced by specific population cohorts. For instance, targeted housing assistance programs may be a more effective and efficient policy tool for certain cohorts.
How many degrees of freedom will the retirement income system review have in recommending the best set of policies for Australia’s retirement system? A broad scope would represent a wonderful opportunity to put in place frameworks which set Australia up for an efficient, socially healthy retirement system which should serve us well for decades to come. However, it does pose “boiling the ocean” challenges: complexity and the potential for unpopular policies. Nonetheless anything but a broad integrated review, will leave a residual collection of “yeah buts”, effectively deferring resolution of retirement policy in Australia.
The stakes are large: it is estimated that the government will spend $50 billion on age pensions this year, close to another $20 billion on aged care and other assistance for the aged, while they will forgo around $45 billion through provision of superannuation tax incentives (a debated number). For context, total budget expenditure is around $500 billion.
How are super funds positioned within a broadly scoped retirement system debate? The analogy to integration as a policy challenge is personalisation as an industry challenge. Yet most super funds provide a rather generic service (an accumulation account), and (with a few exceptions) little retirement solution innovation (which motivated the proposed CIPR framework). Super funds aren’t tailoring to deliver more effective outcomes for members, yet the capability and technology exists. Perhaps it is because of the current industry structure (inflow-focused competition motivating cost awareness and a heightened operational peer group risk focus), or perhaps it is because of regulatory complexity (tailoring starts to enter advice world, and challenges interpretations of the sole purpose test). Super funds collectively risk being labelled as a blunt tool, when so much more is possible.
If the government recognises the value of integrated policy, who in industry will be the integrated provider / coordinator of retirement outcomes for Australian households? The advice industry is shrinking and can’t provide solutions at the necessary scale. Super funds are the logical provider but aren’t putting their hands up and saying we have the technology, engagement and operational capabilities to tailor, let us be a bigger part of the solution.
If super is viewed as a blunt tool rather than something which can deliver much more, then Best-in-Show is definitely in play…
David Bell, is Independence commentator and a former CIO of Mine Super
This article was published by Connexus Financial PTY LTD in Investment Magazine.