#CPACONGRESS C3: Future of retirement savings: Critical policy decisions Michael Davison Senior Policy Adviser – Superannuation CPA Australia Thursday 20 November :30PM - 4:20PM

Future of retirement savings - critical policy decisions Michael Davison Senior policy adviser – superannuation CPA Australia

Australia’s retirement savings system a ‘role model’ for the developed world accumulation phase is well developed The retirement (decumulation) phase is underdeveloped No long-term vision or goal

The three pillars The age pension Compulsory superannuation guarantee (SG) Voluntary superannuation

Projections of superannuation assets and age pension coverage Source: Treasury projections, Intergenerational Report 2010

The three pillars The age pension Compulsory superannuation guarantee (SG) Voluntary superannuation

The pension paradox How can governments maintain retirement income adequacy without endangering financial sustainability? Three options: Longer working lives Concentrate public retirement provision on the most vulnerable Encourage personal savings

The multi-pillar approach Pillar 0 – a basic public pension Pillar 1 – a public mandatory contributory pension Pillar 2 – a private mandatory fully funded system Pillar 3 – a voluntary and fully funded system Pillar 4 - voluntary financial and non-financial support outside pension system

The international comparison Melbourne Mercer Global Pension Index Denmark Australia Netherlands Global AgeWatch Index 2014 Australia 13 th overall 61 st for income security

Australia’s retirement savings policy Long-term vision Improve adequacy Encourage retirement income culture

A long-term vision and goal Primary objectives Encourage self-funded retirement savings Target government assistance at low and middle income earners Insure against risk Primary characteristics Simple Sufficient Sustainable

A long-term vision and goal Poverty alleviation or income / standard of living maintenance? Adequacy target Coverage Appropriate encouragement – incentives vs compulsion Level of government support Accessibility Interaction between super and age pension Non-super investments Remove from political cycle

Fine-tune accumulation Flexible lifetime contribution caps Remove age limits for contributions Remove ’10% rule’ for deductibility Extend SG to self-employed Remove minimum $450 pm SG threshold Retain low-income superannuation contribution Extend co-contribution scheme

Encourage a retirement incomes culture Pension plans not savings plans Income during retirement not lump-sum at retirement Retirement benefit projections ‘Superannuation for life’ Discourage lump-sums through incentives or limits Innovative flexible retirement income products Default super pensions – MyPension

Competing financial needs for retirees Access to capital Access to good returns Protection from risk

Risks faced by retirees Investment risk Sequencing risk Longevity risk Inflation risk Expenditure risk Timing (or interest rate) risk Counterparty risk Liquidity risk Legislative risk

Current retirement options Lump-sum benefit Account-based pension Age pension

Future retirement income options Lump-sum benefit Superannuation income stream Deferred income stream Age pension Non-superannuation savings

Lump sum benefits Discourage or restrict access to lump sums Need some access to lump sums

Superannuation income streams Account based pensions Flexible annual drawdowns Allow lump sums Subject to investment risk Don’t effectively address longevity risk Subject to age pension income and assets test Need innovation and default income streams

Deferred income streams Allow deferral of consumption of retirement savings Deferred lifetime annuities (DLAs) payable for life Protect against longevity and investment risk Guaranteed income However, no return of capital No tax concession during deferral period Subject to age pension test during deferral period Need pooling

The age pension Safety net or cargo net? Eligibility age? Eligibility tests?

Non-superannuation savings The family home Other assets

The ideal retirement solution Default superannuation income stream Longevity insurance / deferred income component Limited access to lump sum

Regulatory impediments Deferred annuities not tax exempt during deferral period Inflexible SIS pension and annuity rules Annual payment levels Indexing Residual benefits No long-term bonds or investments

A long-term plan Awaiting reviews Financial System Inquiry Review of retirement income stream regulation White paper on the Reform of Australia’s Tax System

First steps A long-term bipartisan vision for retirement savings Address regulatory impediments for income streams Encourage income stream culture retirement income projections education - ‘Super for life’ – appropriate flexible saving incentives and encourage default income streams

Longer-term considerations Reconsider taxation of lump-sums Overall level of super tax concessions – do they need to be capped? Age pension age and eligibility? Preservation age? Appetite / need for compulsion Collective pooling?

Questions?