At ASFA’s recent virtual briefing “The Future of Super” some of the industry’s leading experts shared their thoughts on the current pressing issues shaping super’s future. The briefing was facilitated by ASFA CEO, Martin Fahy, and included the following speakers:
- Michael Rice, Executive Director, Rice Warner
- Andrew Fraser, Chair, Sunsuper
- Anne Ward, Chair, Colonial First State
- Jeremy Cooper, Chairman Retirement Income, Challenger
Michael Rice, Executive Director, Rice Warner started the conversation by noting that the effect of the recent Early Release Scheme (ERS) has been profound. At the time of the event in late June, withdrawals from super were in line with Treasury’s expectations of around $27 billion, and haven’t caused significant liquidity problems for most funds. Rice did stress however, that some funds, with members working in the hardest hit industries such as retail and hospitality, have clearly been disproportionately affected.
Having said that, Rice stressed the longer-term impact of the ERS will be felt in several ways – because funds will have less cash to invest in assets at depressed prices, and because members are capitalising losses at a time when asset prices are low, thereby potentially significantly reducing their retirement balance. Also, members’ exiting their funds after withdrawals will lose their life insurance.
He also spoke of the negative effects of a what he described as a potentially watered down super system. “If, going forward, super’s objective is widened to allow for objectives other than income in retirement – for people to buy their first house, for example, or if early release on hardship grounds becomes a permanent feature – there’s no question there will be some loss of self-sufficiency in retirement,” he said. Particularly because typically those most impacted by early release schemes are those with less in super – with the inevitable result that by offering help to those in need, we are in fact increasing inequality.
According to Andrew Fraser, Chairman of Sunsuper, the only sure thing about scenario planning for the future is that you are likely to be wrong as much as you are right. What he did say was this: “Our ultimate aim should be a system with both universality and compulsion at its core. That’s the only way to get the best possible outcomes for Australians in a generational sense. If you deplete the super system to serve other needs, you increase the fiscal pressure on the Government, and risk outcomes. The real difficulty lies in the notion that using super for other purposes is somehow costless. But it isn’t.
‘If we are interested in outcomes – then many Australians will be materially and meaningfully worse off by removing $10,000 or $20,000 from their super now, but it’s a problem which will be crystallised down the road. Having said that, if $40 billion is removed from a system with $2.7 trillion in assets, is that really a big deal?”
Looking out to 2025, Fraser was asked whether alternatives will play a bigger role. He said that we have created a good system which has the means to offer patient capital necessary to Australia’s economic growth, and that we shouldn’t discount this to pursue other objectives.
Anne Ward, Chairman of Colonial First State started by making a few predictions. In her view we will see fewer funds driven by consolidation, bigger funds driven by the need to achieve scale benefits and more efficient operations, as well as some form of the best in show ranking system. She believes the future will hold a more diversified value proposition and greater choice, which will be driven by heightened member expectations. Her hope is that larger funds will in fact be better at mass customisation than smaller funds, and drive innovation, rather than the opposite.
“The industry trend towards consolidation has been gathering steam for some time, but we’ve seen a rapid acceleration due to COVID-19. The ERS has had a profound effect –it’s helped Australians in hardship, but it’s also awakened many members to the fact that their super is real dollars, and it does belong to them,” she said. Ward’s hope is that this will lead to greater member engagement.
Looking ahead, Ward spoke of the emergence of the ‘megafund’ with a handful of funds managing in excess of $200 billion. She thought megafund scale will be needed to deliver the operational efficiencies required to deliver the enhanced member outcomes and service that members will demand post-COVID.
Ward also thought the funds that help members to access the financial advice they need, when they need it, will have the advantage.
Jeremy Cooper, Chairman, Retirement Income, Challenger started by saying that what really needs to be cleared up is the conflation of the worthy concept of choice, and the ability to change your mind immediately – both between funds and between investment options. “This is problematic. Large funds are harvesting the illiquidity premium to the benefit of their members, but if members can exit at a time of crisis, without advice, it’s harmful to the remaining investors, and harmful to the investment returns of the fund. I think people should have to pay for this choice – we should be more explicit about the cost of doing this,” he said.
On the topic of early release, Cooper said that as a “retirement income purist” it doesn’t fit with beliefs, but what’s interesting is the sheer number of people who took this option – more than two million at 24 June.
“This is a serious policy question. If every time there is a market correction there’s an expectation of early withdrawal, is that really what we want?” he asked.
To avoid a future ERS scenario happening again, he even suggested in the future there might need to be a ‘side car savings account’ system where members save money outside of super with a trusted provider, to put aside funds in case of future emergencies.
Jeremy Cooper then brought up the thorny issue of advice and said there is so much coming down the line it’s hard to see where we will land, or what the answer is. “I still don’t think we have a fit for purpose model, given the origins of the current model in a bank dominated, vertically integrated landscape,” he said.
Some of the questions posed related to the way people view their super. Anne Ward spoke of the need to encourage Australians to commit voluntarily to super, rather than seeing it as a grudge purchase and said funds should ‘earn their customers’ rather than relying on default flows.
Jeremy Cooper asked what we can do to encourage Australians in retirement with larger super balances to safely spend reasonable amounts of their capital each year, rather than looking at their super fund balance as capital which needs to be maintained. He said the wealth management industry is not encouraging or incentivising people to spend in their accumulated super in retirement.
Finally, panellists were asked whether a tax on superannuation would form part of the Government’s budget repair plan. Michael Rice said he did not believe a tax on contributions would be raised—given we already have the Division 293 legislation which taxes higher income earners on their contributions—but did say a tax on fund earnings could be an alternative, particularly because in his view, many members wouldn’t notice such a tax, and that this would make it appealing to the Government.