Superannuation at the crossroads

The Australian Business Review

16 september 2020

Glenda Korporaal

The super system is at a crossroads with the combination of the $33bn early access drain, the withdrawal of banks from wealth management and the decline of other traditional retail players in super.

When the history books are written about superannuation in Australia, one question to be asked is whether 2020 will be a high-water mark for the sector.

Overall, total new contributions going into super will continue to increase with the compulsory super contribution scheme, but the combination of the early access to super scheme, questions over the move to a 12 per cent compulsory guarantee levy and new fears that the October budget could allow more access to super for housing add up to an inflection point for the industry.

As Industry Super Australia chief executive Bernie Dean says, the worry is that having seen the success of the early access to super scheme since April this year, the government may be tempted to open up super for all sorts of short-term stimulatory means — sugar hits that limit the amount of money the government has to pay out of its own budget.

As AMP struggles and the banks exit the wealth management business and the private wealth management sector is still coping with the fallout from the royal commission, the traditional private sector companies and lobby groups that have championed the case are distracted or battling to get cut-through against rising anti-super voices.

Having to have two former prime ministers in Paul Keating and Kevin Rudd argue the case to continue the move to 12 per cent was a sign of the limited voices arguing in favour of the compulsory super system, which has been the envy of the world.

Until recently it appeared to have bipartisan support, introduced by Labor and supported by Liberal governments, but now that seems to be eroding.

There was a time when the total super asset pool continued to set records, going through the $1 trillion and $2 trillion figures barriers, underwriting a massive funds management industry in Australia and retirement savings-oriented businesses.

By the end of last year, the total assets in super hit $2.951 trillion, up from $2.88 trillion in June last year.

But the pendulum has swung back this year. Total assets in super funds at June were down to $2.864 trillion despite the sharemarket holding up well in the face of the pandemic.

The latest figures from the Australian Prudential Regulation Authority show that total contribution flows into super funds rose from $114.7bn for the year to June 30 last year to $120.6bn for the year to June 30 this year.

But total benefit payments — including those paid as a result of the early super release scheme that started on April 20 — rose from $76.5bn last financial year to a record $100.4bn for the financial year just ended.

This meant net contributions flows were down by an unheard of 38 per cent from $38bn to $23.5bn.

Total benefits paid out in the June quarter this year of $37bn were almost double the $21.1bn paid out in the March quarter and the $20.5bn in the June quarter last year.

The June quarter payouts included $18.1bn from the early release scheme with 2.4 million Australians choosing to draw on their super for an average amount of $7503.

Australian Prudential Regulation Authority data shows total drawdowns under the early release scheme are now $33bn, with more than 3.2 million Australians choosing to put their hands in their own retirement savings for an average payment of $7678. This means another $15bn flowed out of the system in the two months from July 1 to September 6.

Rather than falling, the average amount accessed by those going to the well a second time (allowed from July 1 until the end of the year) rose to $8427 compared with $7402 for the first application. In short, the super drain has continued with people who do access their super wanting to take out more.

No one can blame people doing it tough from wanting to access their super to pay short-term bills.

But the whole point of our super system is one of compulsory savings to provide income for retirement. The danger is that the government’s early access scheme opens a Pandora’s box of new reasons to access super that could, over time, undermine the system.

There have always been those who have been critical of compulsory super, introduced almost 30 years ago, for ideological reasons. The system, after all, was based on forcing workers who might not save to put money aside for their retirement.

The Treasury also has been wary of the total tax forgone in the super system. But the tax breaks are part of the quid pro quo of forcing people to lock up a proportion of their funds.

With some tweaks to cut back on concessions to the wealthy the system appeared to be holding up well, generating a huge pool of national savings that was being used to help stabilise our financial system in times of crisis and invest in infrastructure and key assets such as electricity, ports and airports.

Now the concern is that the debate has reached a tipping point and super is regarded as a honey pot to be raided.

There is no magic pudding. The less put away for retirement, the worse off people — particularly lower-paid people — will be when they stop working. The value of compounding means that $20,000 taken out of super has a net cost of many times that at the end of a 30-year career.

Another factor is that the system has allowed the rise of a new section of the financial system — the $700bn industry super sector — while the retail super sector has been hit by the royal commission and other issues.

The Jetstar of the super sector, industry super funds have not had to deal with the legacy issues of the private sector super funds, having lower cost structures and a younger membership base as well as not having to pay out profits to shareholders. Their strong cashflows also have allowed them to deliver good returns as they could safely lock in their investments over a longer timeframe.

But there is no great love for the industry super fund sector in some conservative parts of politics despite the fact, by and large, they have delivered well for their millions of members.

The super system is at a crossroads with the combination of the $33bn early access drain, the withdrawal of banks from wealth management and the decline of other traditional retail players in super.