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The most recent Committee for Economic Development of Australia (CEDA) lunch event, held in Sydney yesterday, saw various financial services luminaries (and others) gathered to hear perspectives on superannuation in 2013 – specifically ‘A look at system architecture and policy themes’. And as we cast our gaze out beyond 2013, if you read to the end of this blog you will find the three most critical factors in determining your likelihood of staying alive for the next 12 months …
Three guest speakers: Mathias Cormann, Shadow Assistant Treasurer and Shadow Minister for Financial Services, Brad Cooper, CEO of BT Financial Group and Melinda Howes, CEO of the Actuaries Institute each shone a brief light on the current state of super affairs – and what improvements or changes might be needed if the system is to meet the considerable demographic and other challenges that lie ahead.
First up was Mathias Cormann who, while unable to resist some egregious electioneering, also outlined some of the areas in which a future coalition government would effect change. In addition to widening the ATO’s discretion in relation to what he described as ‘disproportionate penalties’ for inadvertent breaches of concessional caps, he also said that a coalition government would seek to raise both concessional caps and co-contributions for low-income earners “if and when the budget was in a strong enough position to do so”. However, he made it clear that this latter commitment would not be possible in the short-term.
His primary area of focus was governance, one of the perennial bugbears of the super industry (and particularly industry super, although Mr Cormann did stress that his recommendations should apply to retail funds, as well).
He pointed out that the $1.5 trillion super industry today is almost unrecognisable in size and scale from its earlier self. And, he asserted, just as that landscape has changed so have the requirements of effective governance. The increasingly contentious ‘equal representation’ model of the past is no longer up to the job leaving funds, trustees and members exposed to unacceptable risk of conflicts of interest, in particular in relation to related party transactions.
A coalition government would favour the full adoption of the board composition recommendations made by the Cooper Review, with at least a third of super fund board members comprised of independent members with appropriate skills and backgrounds, and more open disclosure as to remuneration. In addition, where a director served on more than one superannuation fund board, he or she would be required to notify APRA and declare their independent status. Board chairmen would ideally be independent.
Mr Cormann also maintained that, under a coalition government, “no negative or detrimental changes” would be made to the superannuation system. Who would judge what comprises a “negative or detrimental change” was not a question that was asked or answered – perhaps best left to another time.
Next up was Brad Cooper, who took the audience on a ride through time to 2033: an Australia with a population of 28 million – of whom one person in four would be aged over 65. His focus was very much on addressing the compounding impacts of an ageing population and a shrinking tax base.
What is required to address it? In Mr Cooper’s view, stable policy, engagement and smarter, better long-term investment opportunities, reflecting the fact that, come 2033, today’s $1.5 trillion will be more like $7 trillion. Nation building, anyone?
He contended that, despite having one of the largest and best private pension systems in the world, nevertheless, as it stands today, it will be a failure to some.
A dominant theme of his presentation was adequacy and the need to focus on the proportion of pre-retirement income realistically required not to subsist, but to enjoy an active and fulfilling lifestyle in a retirement that’s likely to extend for 30 years or more. In his view, some 65% to 70% of pre-retirement earnings is required to achieve this for most people – and the vast majority of us are nowhere near reaching it.
The vital role of voluntary contributions (and, one would surmise, lifting caps on these) in achieving these levels was raised more than once, as was the need for great care in how to go about it: Mr Cooper cautioned on the use of tax treatment versus increasing contributions, citing modelling which shows the former as a tempting trap of the ‘buy now, pay later’ variety.
Melinda Howes, the final speaker had the audience instantly enthralled with her initial declaration that half of all the people who have ever lived to age 65 are alive today. She also thrilled us with the news that, if you’re 65 and healthy you have a 50% chance of living til you’re 100. Who said actuaries were grim beings?
Ms Howe’s point, however, was crystal clear. Our life expectancy is literally increasing by the day (in fact, by five or six hours a day) and current projections, modelling and investment options are based on old figures that fail to adequately address even the here and now – let alone what may occur in the future.
More innovation in products is called for, as is more accurate modelling and projection in line with continuing advances in healthcare. The stark truth, according to Ms Howes, is that underfunding of retirement is an international issue. Given that the one possible solution – a global pandemic – seems a little extreme (outside the world of the epic disaster movie, of course) then it behoves all of us to get cracking on it sooner, rather than later.
The need for action on demographic grounds and corresponding innovation to develop long-term sustainable products (think – infrastructure in brave new models) was a point of common ground for all speakers. So too was the need for stability to rebuild confidence in a system that commentators of all stripes agree has seen way more changes than a mere 20 years of existence should warrant.
And now the answer to the big question. What are the three most critical factors in determining your likelihood of staying alive for any given 12 month period? According to Melinda Howes they are age, gender and walking speed. Thanks for staying with us – and remember to keep your pace up!
