“Every system is perfectly designed to get the results it gets.” Donald Berwick
With the release of the Retirement Income Review (RIR) expected soon, let’s take a moment to reflect on why it’s so eagerly awaited and what it might mean, particularly for those in the superannuation industry.
Despite the RIR being delivered to Government back in July and the Federal Budget due to be delivered within three weeks, no date has been announced for its public release or when Government will provide comment.
The objective of the RIR is to establish a fact base of the current retirement income system that will improve understanding of its operation and the outcomes it is delivering for Australians.
The COVID-19 pandemic did not change this objective, but certainly added an extra layer of complexity that Government will need to consider prior to offering any commentary. However, while the industry awaits the report’s release, speculation is growing about what it contains. The longer the delay, the more time groups have to campaign in the media on several topics, including the hotly contested Superannuation Guarantee (SG) increases and early release scheme for first time home buyers.
According to the Grattan Institute, just over 50% of submissions on the RIR related to superannuation and 30% related to the Aged Pension. Of course, for many, superannuation is synonymous with retirement and it is on the super component that I will comment on in this post.
It is on proposals for ongoing superannuation early release that Australia needs to tread lightly. It would be irresponsible to break open the piggy bank for purposes other than the intended purpose of catering for an adequate retirement income. If this becomes the norm, many retirees may become fully dependent on the Aged Pension which will not only impact their quality of retirement but also place unnecessary strain on the system. And down the rabbit hole we go.
Despite strong economic growth and investment returns over the past 28 years that enabled a comfortable retirement (for some), the calls to keep SG flat need to be considered (and then be rejected) against the backdrop of an aging population (16% of the population is now over 65); increased life expectancy; changes in home ownership that means retirees are more likely to carry mortgage dept at retirement; low wage growth; and low returns on fixed interest investments impacting savings for retirement. Also, let’s consider for a moment, that retirement provisions for low and middle income households are more likely to feel the negative impact of static wages and low fixed investment growth than those who were able to fully partake in the 28 years of growth.
Australia’s retirement income system is the envy of many around the world. The RIR is timely and the objectives noble. In times of crises (like the current pandemic) we should be practical rather than align purely to some aspirational system. That said, let’s hope that interpretations of the RIR Committee’s observations, and subsequent implementation by Government, remains true to the purpose of the superannuation system and aren’t based on populist choices just because it is easier in the short term.
Australians deserve a robust system that can tick the boxes of adequacy, equity, sustainability and cohesion and we look forward to seeing how the Government will place the sign posts for the industry to achieve this. IQ are ready and waiting for the report’s release and look forward to working with clients to deliver the results, improve the system and ensure we stay well and truly away from the rabbit hole.
As we expected post the Royal Commission, the rules are being refined and all super funds need to jump higher if they want to stay in the race.
APRA has recommenced seeking more information from super funds for its Superannuation Data Transformation project – so that it can include choice products and investment options in an expanded heatmap. This is just one of the tools the regulator will use to foster a “superannuation trustee culture of continuous improvement, including addressing underperformances in the superannuation industry” (as outlined in its recently updated corporate plan).
While a one-year deferral for data collections is still in play, super funds are asked to respond to APRA’s recently released consultation pack (on a voluntary basis). Submissions and pilot data are to be submitted by various dates over the next eight weeks ahead of finalising the nine reporting standards.
The consultation pack is made up of topic papers, draft reporting standards and data collection templates in regards to:
Fees and costs: expanding APRA’s collection of fee and cost disclosure data to choice products and options, and providing key forward-looking drivers of member outcomes for all superannuation products;
Insurance arrangements: collecting more data on insurance policies including premiums, claims payments and processing stages, as well as outcomes for members across different member cohorts, including occupation categories;
Expense reporting: utilising a look-through approach to superannuation fund expenditure and establishing more granular and consistent reporting categories to enable more effective analysis and assessment of levels and types of expenditure; and
Asset allocation: expanding the reporting of asset allocation data to choice products and options, and collecting more granular and consistent MySuper data to provide a more complete picture of superannuation investments at the investment option level.
This is going to be complex and time-consuming for super funds – but also vital to their ongoing viability and marketability. It will be particularly challenging for super funds with large numbers of Choice products and investment options; more than 40,000 of these are in retail funds.
While super fund involvement in this stage is voluntary, it soon won’t be, and funds will have to use this information to fulfil existing regulatory requirements such as their Business Performance Reviews and Member Outcomes Assessment. Just as importantly, the data collected will determine how funds are rated in the APRA league tables – the Heatmaps.
Some funds have chosen to allocate responsibility for this stage to a dedicated team with reporting expertise, some are divvying it up between topic areas, whilst others haven’t yet started to address these requirements.
This stage will be demanding for both funds and APRA alike:
the Insurance paper raises issues about consistency and comparability that have long troubled APRA and it’s not clear that APRA will be able to solve them now;
the Expense paper doesn’t resolve the issue of materiality – how this is addressed will make a big difference to how big a project this is; and
the Asset allocation paper raises many issues which funds will struggle to manage.
Super funds are also required to simultaneously address policy and technical questions raised by the topic papers. For example, will Asset allocation reporting make funds look risker? And will APRA’s insurance categories easily align to all funds?
All this, in the midst of a pandemic, is certainly going to test participants in the race. However, with good support and coaching from companies like IQ, super funds will recognise the criticality of this work and put in place comprehensive and cohesive project plans that will jump over the multiple hurdles and meet next year’s deadline with a winning celebration.
Let’s just hope there’s time for a break, and for the sweat to evaporate, before more hurdles are added to the track!