Do we need a major review into superannuation system?

Ross Greenwood speaks to Productivity Commission chairman Michael Brennan as a review is being conducted into the retirement system amid the government’s insistence on increasing the compulsory superannuation contribution

Ross Greenwood: Tell you what. There’s also plenty of conversations now with the government announcing a review into Australia’s superannuation system. Now, if you get to the retirement age, you’ve basically had three or four strains of potential wealth that you can actually rely on in retirement.

One which is the bedrock is the age pension which is the government. More and more Australians are ending out on that age pension. Especially as interest rates have fallen so low, more Australians are not getting the income that they need to actually be self-sufficient, they’re falling back into the age pension.

The second bedrock is their superannuation itself. Most Australians of a certain age do not have enough income to be self-sustaining in their old age. The next bedrock is their own savings they’ve got. The final one which seem sacrosanct is the family home. The wealth inside the family home is always the big hot political potato. What’s going to take place is that there will be, well, you would have to think almost a broad into just what happens without the superannuation system.

The reason why the government has made this call for a review into our superannuation and it is much needed is because of a report prepared by the productivity commission early this year. Now, think over this commission came out with recommendations about the changing nature of Australians, the way we live, the way we work, the way we’re going to work.

Michael Brennan is the chair of the productivity commission. He joins me now. Michael, many thanks for your time.

Interview with: Michael Brennan, Chairman, Productivity Commission

Michael Brennan: Thank you, Ross. Welcome back.

Ross Greenwood: Thank you so much. Leaving aside some of the infightings going on about the composition of the board and one of the inquiry members Deborah Roulston. Now, I’m leaving that completely aside with the conversation with you mainly because the reason for this review in the superannuation is because of your report. Just explain to people broadly what you saw was changing in Australia’s community that really does need this significant review into our superannuation system.

Michael Brennan: Thanks, Ross. Well, look the government had asked the productivity commissions years ago to undertake any inquire entity efficiency of the superannuation itself, which we did. We’ve provided that report as you said earlier in the year and we found that the superannuation system itself which is now about 27 years old has a lot of positive features but a lot of glaring flaws as well including underperforming funds and multiple accounts and a lack of transparency particularly around the insurance.

In addition to that, we just thought it was time to look not only at superannuation itself but also the other pillars of the retirement income which includes the interaction with the age pension and the reaction of voluntary savings which as you said includes the family home. It’s a long time since that whole picture has been looked at. You really have to go back to the early 1990s and the work of Dr. Vince Fitzgerald when he undertook that groundbreaking work on the national savings system.

Ross Greenwood: A couple of bits and pieces really stand out here. Number one is the family home. The fact that right now, it’s excluded. It’s not the subject of the assets test.

It’s not the subject of the incomes test. An actual fact. A very significant proportion of a family’s wealth that is untouched in our pension and our superannuation system. With the report that you did, what was your recommendation in regards to the family home?

Michael Brennan: We made no recommendation really about the family home. The review that has now been announced does include some consideration of voluntary savings and the family home. Now, I think the traders made some remarks about the family home in the age pension assets test. One of the things that is being increasingly thought about I guess in the context of this review and other things is the thought of flexibilities that individuals might have to draw on the wealth that’s in the family home. Given, we do have a number of retirees now who might have a bit of wealth in the home but don’t have a lot of superannuation savings because the super system wasn’t all that mature during their working lives.

For example, a couple of years ago, the government brought in the pension loan scheme to provide just that little bit of extra flexibility to draw down on the wealth in the family home by an increase in the age pension and that’s an addition to the equity release and reverse mortgage products that are out there. The family home, it is a pillar of people’s wealth. It’s good to think about how it can be used flexibly for people.

Ross Greenwood: The other aspect of this is also the amount that Australians pay given the fact that superannuation is right now the committed payment is to go to 12% under the superannuation guarantee from the current 9.5% as it currently stands. Again, there is arguments about whether A, Australians can afford this especially in a very low wage growth environment and B, where the employers will want to afford this. In regards to the productivity commission, where did you come down on this argument?

Michael Brennan: Well, their recommendation was that this review, this broader review ought to take place before there was an increase in the compulsory superannuation contribution. It’s currently scheduled as you say it’s legislated that it moves from 9.5% to 12%. That would imply that people at 12% would get more money placed into their superannuation account and end up with a higher retirement balance.

As you say, it’s not free good. It’s not a magic pudding. It comes out of somewhere and generally means less money for people during their working lives. It is worth just making an assessment I think about whether that’s to people’s overall benefit and if so, whom because of the distributional implications need to be thought through.

Does it work for high-income earners, for low-income owners? What’s the impact on the commonwealth budget because there is a trade-off? More superannuation generally means less reliance on the age pension but it also can mean less text in the here and now because superannuation is tax at a lower rate. We thought all those things, it would be good to have a look at before the rate goes from 9.5% up to 12%.

Ross Greenwood: Is it one of the truths of it that because the vast majority of baby boomers and those around that I chew on the biggie feel like lump going through our time and system because they already have insufficient money in superannuation but a lot of those people now coming into their 60s, they may be still working even if you raise the compulsory of superannuation payment at 12% from 9%. They’re not going to get terribly much benefit. What it’s really going to affect is younger members who are already are being squeezed on the wages.

This is one of the arguments as to why you might either differ or in some way just raise questions about the effectiveness of the increase in that superannuation guarantee charge to 12%. I mean, it’s already for funds that manage some people and their superannuation funds. They will argue for it because it means more money, therefore, more power, more face for them. Whether it genuine helps at that individual, the individual work out, that’s the other question, here isn’t is?

Michael Brennan: I have no review. We have no review about whether it’s right ought to get the 12%. As I say that’s currently legislated. As the announcement of the review, this broader review made clear, it’s import to establish an effect but it. I think that’s right. I think that’s right. All of those issues you’ve talked through about canvassing what are the implications for different people at different ages in different points in the income spectrum and what does it mean for the budget.

Ross Greenwood: A couple of things you raised inside your report, number on was lack of competitiveness, genuine competitiveness in superannuation. Quite often, people are put into the default funds. In some ways, that’s a lottery because they might be put into the wrong default fund. In other words, somebody who has well, little knowledge. They might have chosen that default fund or it just happens if the virtue of who you’re going to work for that they might put you into a poor performing fund. INsufficient competition between this fund is something that you are very strong about.

Michael Brennan: It was. I think by virtue of it being a compulsory system means that a lot of people don’t necessarily have a high degree of engagement with the superannuation particularly when they’re young. The money is being put aside on their behalf and often the employer or maybe their award or their enterprise agreement is effectively selecting the account that is going into the other fund that is going into and people can be pre-disengaged from it. They’re not necessarily aware of whether their fund has good returns of high fees relative to the alternatives.

They just go with the flow. You’re right that we found that too many people where on the wrong end of what is effectively, and unlucky lottery about 5 million accounts We felt we’re underperforming and part of that longtail underperformers.

Ross Greenwood: Five and a half million people. Think about that in underperforming superannuation funds. They just happen to get lucky and get into the right, superannuation fund they would have more money in their retirement and therefore more money to be potentially independent of the government as well.

The chair of the productivity commission as a report has sparked this review int out overall superannuation system. This is Michael Brennan and Michael as always in the program, we appreciate your time.

Michael Brennan: Thank you Ross.

Ross Greenwood: Michael Brennan there. We’ll take your calls in that subject as a week. 131873. The real fight in the debate about who’s on the board. It’s about Deborah Roulston. Now, Dubree Roulston was the former boss of the one who managed the superannuation fund scheme. She’s going to stand down from that while she’s on this committee.

Effectively, she was part of a group that basically suggested that maybe they should defer those increases in superannuation to 12%. That was one thing. Second thing also she was a part of a group that wrote a letter basically suggesting that changes to the dividend imputation system proposed by the Labor Party were wrong. Of course, she was also trying to back her members of that self-managed superannuation funds.

I would suggest to those who are basically suggesting she’s inappropriate to sit on that committee, they should relook at that because you’ve got to have people from all areas with all views to get a genuine change. If you like the right outcome for all Australians when it comes to our super, we’ve got more money news coming up.

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