working for Australians in retirement

Response to Productivity Commission Draft Report September 2016 [abridged]

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How to Assess the Competitiveness and Efficiency of the Superannuation System

A.I.R. accepts, in preparing this submission, the statement from the Deputy Chair of the Productivity Commission, Karen Chester that “This system-wide assessment of the competitiveness and efficiency of our super system is challenging and novel. It has not been done before. Getting the foundations right matters most — and we know there are no silver bullets”.

However in reviewing the draft report we consider that it does not adequately cover aspects specifically impacting on those in the retirement income stream pension phase or those who are about to retire.

We do agree on the need for: 

  1. the superannuation system to maximise net returns on member contributions and balances over the long term; 
  2. the superannuation system to meet member preferences and needs, in relation to information, products and risk management, over the member’s lifetime; 
  3. the superannuation system to complement a stable financial system and not impede longterm improvements in efficiency; 
  4. competition in the superannuation system that drives efficient outcomes for members.

A.I.R. sees a critical need for a broad political and community agreement to enshrine in legislation a realistic Objective of Superannuation and a set of measurable goals to ensure that there is clarity of purpose and a clear path forward.

Our view is that the Government’s current adopted Objective is not a positive statement and does not satisfy this need. It should be modified to reflect the intent of the superannuation system - which is to support the self-funding of a sustainable income stream in retirement that will adequately provide for a comfortable and active lifestyle in retirement rather than creating a dependency on the Age Pension in retirement.

We believe this opinion is supported by Commissioner Angela MacRae’s statement that the intent of the superannuation system is to be able to meet its primary purpose of providing retirement income.

The Association is critical of the Government’s position on the current reform of the superannuation system, and in particular the lack of adequate consultation with those who are now self-funding their retirement or have plans in place to retiree.

Likewise we are critical that proposed reforms are not adequately grandfathered for those who are retired, having made their retirement income and asset investment decisions on the basis of past rules and regulations and are now locked into the existing income stream pensions.

It needs to be clearly understood in looking for improvements that the accumulation phase of superannuation and the retirement income stream pension phase are very different.

Improvement is needed to the process to facilitate self-sufficiency in retirement with the need for self-management of superannuation retirement assets and the investment strategies to generate a retirement income stream. These must be no Government involvement in specifying the detailed management of an individual’s assets and investments.

Also, in looking at improving efficiency and effectiveness, there is a need to choose between market driven competitiveness and efficiency as opposed to regulation. A.I.R. supports a market driven approach with limited but necessary regulation to protect retirees and mitigate abuse of the system.

Retirement planning has not only become more complex, but current volatile market conditions and low interest rates are making it harder for many to develop a retirement plan that’s built to last for the long term.

The Government needs to adopt a truly holistic approach to bring about greater efficiencies from the superannuation system especially for those in this retirement income pension phase. It needs to ensure in the process of change that this specific group is protected from unintended consequences of change. 

required in the income stream pension phase of superannuation where the retirement income stream fund assets are used to provide income for everyday living.

A.I.R.’s view is that while the market itself must be the driver of change, there are other market forces that can have a negative impact as individuals move from the accumulation phase to preparing for retirement and then into the income stream pension phase. Self-sufficiency is 

It is essential to take into account the additional costs incurred by aging retirees, including

  • significant home improvements necessary for lifestyle, maintenance and to enable retirees to remain in their home; 
  • replacement of major household equipment (refrigerator, washing machine, etc); 
  • replacement of the family motor vehicle; 
  • home, home contents and private health insurance; 
  • specific aged care that is subject to means testing; 
  • GP and medical specialists, including prescriptions; 
  • medical procedures, rehabilitation and equipment; 
  • special support for family members when needed.

One specific area where significant effectiveness and efficiency improvements could be gained would be a revision of the current aged based percentage drawdown requirements and lowering the percentage once people have reached age thresholds.

It is estimated such change would generate as much as $200 million additional savings for the Government, enabling an extension of the period until a retiree’s assets have been drawn down to the level where he/she qualifies to apply for and receive a Government part Age Pension.

The Government has stated that reforms and approval of additional more flexible income stream pension product are intended to make the system more equitable and sustainable. However these goals would be undermined if the tax treatment of all income stream pension products are not treated equally and based on the aggregated total of the pension asset held by an individual.

A.I.R. also believes that in special circumstances, after the preservation age, a retiree should be able to use funds from outside superannuation to set up an account based pension or an annuity and receive an income stream pension subject to revised annually minimum drawdown rates suggested above.

This in no way detracts from the superannuation system and is only for the purpose of establishing an income stream minimum annual drawdown pension by those who have not contributed to superannuation over their working life, and do not comply with the special case circumstances are in place for small business owners and farmers.

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