In a report released over the weekend, the think tank said Australia’s superannuation system is “too complicated”, proposing a three-pronged reform strategy to simplify superannuation in retirement.
The institute highlighted that retirees are struggling to draw down their super, resulting in the system functioning more like an inheritance scheme than a retirement income plan.
Unlike other countries that provide automatic lifetime income, Grattan said Australia’s system offers little guidance, leaving retirees to navigate complex decisions about spending, investment performance and the age pension.
The institute described the “little” guidance available as “unhelpful”, often pushing retirees towards account-based pensions, which require careful management to avoid outliving their savings.
“Half of those using an account-based pension draw their super at legislated minimum rates, which leave 65 per cent of super balances unspent by average life expectancy,” the report stated.
Pointing to the government’s plans to introduce a new class of adviser (NCA) that super funds could employ to provide personal advice on a narrower set of topics than existing advisers, the Grattan Institute said that even combined with the Retirement Income Covenant and plans to boost the tools available to retirees, the initiatives are “not sufficient”.
“They might improve fund offerings for some, but they fall short of the more systemic changes needed to improve retirement outcomes for all,” it said.
The report added that while freeing up funds to provide a greater level of financial advice could help some retirees, they will need to be “lucky enough to be in a fund that does it well”.
“But relying on more financial advice alone to help retirees navigate such a complex system will prove less effective, and more expensive, than simplifying the choices retirees face in the first place,” the think tank said.
“Further, loosening the regulation of financial advice is dangerous without better consumer protections in place. The most recent announcements are small steps in the right direction, but do not match the magnitude of the problems.
“Overall, current policy direction is asking too much of private financial advice to overcome the systemic flaws in the super system.”
That doesn’t mean the institute is completely against the government’s Delivering Better Financial Outcomes reforms; however, it urged that the package should proceed only once account-based pensions are performance-tested and all retirement products are included in the Australian Prudential Regulation Authority’s (APRA) assessments.
“The complexity of the retirement income system means funds should be able to help their members on a more personal level. But if these moves are to work in the interests of retirees rather than funds, the government should first create a stronger market design,” it said.
Reform strategy
As such, Grattan has proposed a three-pronged reform strategy to simplify super in retirement.
“First, retirees should be encouraged to use a portion of their super to buy an annuity from the government, which would pay an income that lasts retirees’ the rest of their lives,” Grattan said.
According to the institute, retirees should be guided, by both the government and their super fund, to use 80 per cent of their super balance exceeding $250,000 to purchase an annuity. This, it argued, could boost retirees’ incomes by up to 25 per cent, while also ensuring that the bulk of retirees’ incomes, irrespective of their super balances, would be guaranteed to last the rest of their lives.
“Retirees remaining super would be drawn via an account-based pension, giving them flexible access to capital,” it said.
Second, Grattan called for the government to fund a free service to provide personalised retirement income advice for retirees and those approaching retirement.
“This service should aim to advise at least one-third of new retirees and would cost about $360 million over its first four years and $50 million a year thereafter, which should be funded by a levy on super fund balances,” it said.
According to the report, a government guidance service, which it dubbed RetireSmart, would be “less likely to be conflicted” than the advice offered by super funds, and therefore more likely to be trusted by many retirees.
“It would be much better placed than super funds to help couples plan their retirement income, and to service people with diverse linguistic or other needs. It could consolidate existing government services, integrate with the myGov online portal, and could also assist retirees to apply for the age pension,” Grattan said.
It added that the RetireSmart service should have staff that are “empowered to take individuals’ circumstances into account”, suggesting that it could employ the proposed NCAs to deliver this personal advice.
“Offering personal advice is a much bigger endeavour than offering general advice. It introduces new risks, such as a retiree feeling as if the government has given them a bad steer, hurting their financial wellbeing. It is also more costly,” the report said.
“But the retirement income system will remain complex, meaning Australians will inevitably have questions that they need answered in a more personally useful way than general advice can provide. This covers all elements of the retirement income system.”
Lastly, Grattan suggested the government create a list of the top 10 super funds, selected by an independent expert panel, and then steer retirees towards those funds.
“The performance test and comprehensive assessments of fund performance by APRA should be extended to account-based pensions. These reforms could boost the incomes of future retirees who continue to opt for an account-based pension by up to $70,000 over their retirement,” it said.
Elaborating on the top 10 listicle, Grattan said it would implement the 2018 Productivity Commission recommendation to create a single “best in show” shortlist of funds, compiled by an independent expert panel and extended to retirees’ offerings.
Funds should be selected on their capacity to deliver strong risk-adjusted returns in the long term, sound governance and their capacity to provide the best guidance and advice, the institute said.
“‘Best-in-show’ would encourage all super funds to lift their game, because funds would compete to make the top 10 and stay there. Market discipline would come from experts who have the time, resources and expertise to decide which funds to list, rather than individuals who don’t,” it said.
“It would also create a safe and simple choice environment for retirees, in contrast to the complex and perplexing one retirees currently face.”
I will admit – I stopped reading once I got to the words – Grattan Institute –
Hyper left wing think tank with an absurd agenda.
Slightly off topic – Where is that red tape relief ?
Obviously these Muppets have never sat down with an average Joe and Joanne to see what % of them would take this up. Even if everyone is fully informed less than 5% would take up the option. What a waste to force it on the system.
“But relying on more financial advice alone to help retirees navigate such a complex system will prove less effective, and more expensive, than simplifying the choices retirees face in the first place,” the think tank said.
Wow – just wow?
A great way for people to avoid Super with other savings and not risk Govt control.
Garbage article. I cannot believe I wasted my time reading this article.
So, accumulation super was introduced because defined benefits were too expensive? Now, accumulation is set to cost 14% of people’s pay – no wonder the younger generation is finding it hard to save for a first home and seem to be delaying having families?
Now, if Grattan is saying the system is not working – perhaps it should be scrapped?
The institute described the “little” guidance available as “unhelpful”, often pushing retirees towards account-based pensions, which require careful management to avoid outliving their savings.
How does Grattan think most people manage earning wages/salaries after having 11.5% removed?
“First, retirees should be encouraged to use a portion of their super to buy an annuity from the government, which would pay an income that lasts retirees’ the rest of their lives,” Grattan said. My god – who wants this?
You would be sacrificing your retirement savings for an increased age pension, with no capital for any big ticket costs.
Has this super system reduce reliance on Age Pension?
Whoever was responsible for this report ahould be fired for incompetence.
[i]”Lastly, Grattan suggested the government create a list of the top 10 super funds, selected by an independent expert panel, and then steer retirees towards those funds.”[/i]
Comment – I don’t think is not a good idea trying to muster people into 10 super funds.
Who would be appointed to the panel? How do you score super funds? How do you account for risk profile (surely you cannot just use the MySuper options). What are the considerations to opaque unlisted asset valuations? What about fund liquidity constraints? Are there considerations to fund transparency and accountability? Any consideration to Trustee spending of member funds?
The last thing we need is a ‘panel’ turbo charging FUM into the wrong places because of poor metrics. I’d be very skeptical about this approach.
Buy an annuity from the Government? So let tax payers underwrite peoples’ income streams and bear the market risk? Don’t the tax payers already do that in the form of an age pension?
Interested to see how the industry funds respond to this….
This is the most biased article I have read on this area. The Grattan Institute is a very left wing research institution very related to both the ALP and pro-Industry Super Funds who are also pro-ALP. This completely neglects that fact that superannuation is owned by the members and is not and never should be invested via the government into an annuity which it owns and controls.
This would give the so-called top 10 super funds massive financial power which would never be permitted for public companies as it would be reduced competition.
I will never accept any recommendations put forward by the Grattan Institute because of their inherent biases.
A “free” service funded by a levy on super fund balances… sounds like the customer pays to me.. Why not legislate for all super funds to provide this guidance service as a minimum for every customer and the government funding apportioned appropriately. It seems super funds are fully geared up to take your money but not hand it back.. how
many clients simply just take out their super on retirement and put it in the bank? Some simple engagement and genuine education at appropriate ages is needed by super funds. I’ve yet to receive anything from my fund and I’m 59. The basic level of hygiene should be to provide simple education and let the customer opt in for something else (guidance/advice) if they feel they need it and are prepared to pay. Sounds almost folly that clients are more likely to trust a government guidance system than that of the super fund for which they trusted to manage their retirement savings…all sounds like a pipe dream to me.
Communist view.
Looks like the deeps state wants to control everything. What will it be, 14% of peoples gross go to these funds with and basically the peoples will no longer be able to control the capital? Who wants this? Who benefits?
Totally communist and the Govt Annuities will be invested into ALP / Union Green Bonds set up by Jim Charlmers and Chris Bowen investing in untested and unproven wind farms off the east coast.
Guaranteeing they will return nothing and the taxpayer will have to fund them.
This comment is actually insane. Sad to see people trust you with their life savings.
And you trust Government?