1. Lessons from the Retirement Savings System in Australia
Pauline Vamos
Chief Executive Officer
Association of Superannuation Funds of Australia (ASFA)
May 2008 1

2. Retirement system
Asset and income tested Age Pension set a a flat 25% of average earnings financed out of general taxation
Benefits from superannuation funds largely financed by compulsory employment related contributions (the Superannuation Guarantee)
Voluntary savings, which include sums voluntarily placed in superannuation funds, the purchase of owner-occupied housing and other private savings

3. Age Pension - lessons
Targeted and flat rate publicly funded payment to retirees keeps government expenditure low
Government expenditure on income support for the aged currently 3% of GDP, will rise to only 4.5% of GDP as population ages
Flat rate payment at just above the poverty line does not deliver adequacy of retirement income

4. Compulsory superannuation (private pension) system
Compulsory contributions started in late 1980s, but tax concessions for superannuation for more than 100 years
Prior to compulsory system around 40% of employees with superannuation
Now 98% of full time employees covered
Self employed make own arrangements, as do those not in paid labour force
Very strong community support

5. Compulsory superannuation - lessons
Compulsory private contributions easier to introduce if:
public provision is at low level
phased in over period of years as part of wage setting arrangements
makes allowance for what employers were already doing
allows access to both lump sums and pensions after retirement age

6. Voluntary superannuation contributions
A few funds have compulsory employee contributions, all encourage employee contributions
Government co-contributions for those who are eligible (the low paid)
Employees make salary sacrifice contributions because of tax advantages
Annual caps apply to contributions

7. Voluntary superannuation contributions - lessons
Defaults dominate
Government incentives can be effective
One in ten get co-contribution
Around 20% of employees salary sacrifice
Many delay extra contributions until approaching retirement

8. Challenges flowing from compulsory system
Many members assume default outcome will be sufficient
Members signed up by employers may have little engagement with their fund
Can be costly and difficult to provide education and advice to members
Over 6 million accounts where member has lost contact with fund

9. Assets in superannuation
Currently about $A1.2 trillion (about $US 1.1 trillion) in ($A165 billion in 1992)
Fourth largest managed funds market in the world
Will continue to grow as a percentage of GDP for many decades to come

10. The organisation of the superannuation market
Superannuation is regulated by, not provided by, government (other than for government employees)
Many funds operating
No barriers to new funds other than meeting licensing requirements
Gradual fall in fund numbers, but still many hundreds of them

11. Market structure Fund type % of total assets Number of funds Corporate6%
258
Industry
17% 73
Public sector
15% 40
Retail
31%
170
Self managed
26%
380,000

12. Role of Trustees
Each fund is governed by a board of directors known as the trustee
The trustee is the legal owner of assets and ultimately accountable for the fund investment and administration – but must make decisions in best interests of beneficiaries
Fiduciary duties set out in trust deed and codified by legislation

13. Role of Trustees in investment
No legislative rules specifying required or prohibited categories of investments
The trustee must develop its own investment objective and strategy
The strategy must take into account risk, return, diversity, liquidity, liability and the circumstances of the fund
Most funds provide investment choices for members

14. Investment
Most investment strategies require investment in a range of different asset classes: equities, fixed interest, property and cash
The proportion of investment portfolios in equities has increased
The proportion of overseas investments has increased
There is increasing investment in unlisted companies, infrastructure and hedge funds
Many trustees engage “specialist” managers

15. Investment

16. Investment management
Method of investment
Percentage of total assets
Directly invested
35%
With investment manager
43%
Invested in life insurance funds
22%

17. Investment returns Time period Average annual return 10 years to 2007
8.4%
5 years to 2007
10.7%
1 year to 2007
14.1%
Likely
Negative 3%

18. Legal Framework
Two major pieces of legislation that govern superannuation funds
The Superannuation Industry (Supervision) Act 1993 (SISA) - concerned largely with the prudential management of superannuation funds - administered by Australian Prudential Regulation Authority (APRA)
The Corporations Act concerned with protecting consumers – administered by Australian Securities and Investments Commission
The legislation is enforced by the provision of civil and criminal penalties, and by the potential loss of tax concessions

19. APRA Licensing - The trustee must meet “fit and proper” requirements
Propriety
good character – assessed individually
Fitness
skills and knowledge – assessed collectively

20. APRA Licensing - implications
Processes used by funds are heavily regulated, but not specific actions or outcomes
Still many funds and trustees, but less than there used to be
Low incidence of fraud and theft
Members still exposed to investment market risk

21. Use of service providers
Some superannuation trustees directly undertake administration
Administration benefits from economies of scale so 5 or 6 administration firms dominate
Trustees make use of many investment managers
Also contracting of other specialist service providers

22. Consumer protection
Funds must provide prescribed information to members
Before/when a person joins a fund
Annually (about the fund performance and operation and about there own savings)
when a person leaves the fund, and if there is a special event (eg, if the fund rules change)

23. Level of fees Typically a mix of $ per year and % of assets in account
Total cost depends on the account balance of the individual member
Group arrangements less costly to member because of scale economies and generally no advice component
Costs of advice in personal products recovered through fee for service and/or by way of commission on contributions

24. Fees for a $50,000 account balance
Fund type
Annual fees as % of account
Industry fund
0.5% to 0.8%
Public sector
0.4% to 0.5%
Large group retail plan
0.6% to 0.8%
Retail personal account
3% (often negotiable)
Self managed fund
5% or more (due to fixed costs)

25. Consumer protection - remedies
Superannuation Complaints Tribunal provides low cost review of trustee decisions affecting a member
Compensation mechanism in cases of fraud or theft funded by industry levy after the event

26. Consumer protection - lessons
Disclosure requirements can lead to too much information rather than effective disclosure
Regulation of provision of advice necessary
Need to balance consumer protection and effective delivery of advice and information on basic matters

27. For more information