Managers must maintain competitive edge to ensure a piece of the action
Super industry is growing at a rapid rate
By James Dunn
During the worst of the global financial crisis (GFC) - the 2008-09 financial year - the Australian superannuation system was the envy of the investment world.
At a time when capital was scarce worldwide, almost A$2.2 billion (US$2.21 billion) a week flowed into Australian institutional investors through the "super" system. Over the 2008-09 financial year, contributions to the system grew by 14%, underpinned by the miracle of compulsory super, in which 9% of Australians' wages are paid into superannuation on their behalf. The government has proposed that this levy, the Superannuation Guarantee (SG), be increased progressively to 12% of earnings by 2019, starting in 2013.
But the SG is far from the full story of the success of Australian super. According to research firm Rainmaker, SG contributions make up only 40% of total contributions. Australians pump one-and-a-half times that amount into super themselves each week in voluntary contributions: Rainmaker estimates that total contributions to super are running at 23% of all wages and salaries paid in Australia.
If that level of voluntary contributions were to continue, Australia's superannuation pool could grow even larger than current projections, which have it approaching $7 trillion by 2028.
It is all a very far cry from 1992, when the SG was introduced, at 3%.
In 1985 only 39% of the Australian workforce had superannuation: mostly these were commonwealth and state public servants, members of the armed forces and highly-paid white-collar staff in large corporations. The beginnings of institutionalised employee superannuation began in September 1985 when the Australian Council of Trade Unions (ACTU), as part of its National Wage Case claim with the Conciliation and Arbitration Commission, sought a 3% employer superannuation contribution to be paid into an industry-based super fund, for all workers covered by an award (a pay rate and set of conditions for workers in a specific industry).
The then Labour government supported this claim, because it felt that the super contribution would be better than a wage rise, which could increase inflation. In February 1986, the commission announced that it would approve industrial agreements that provided for contributions of up to 3% to approved superannuation funds. Not all workers were covered by awards, so not all employers complied: some employer groups challenged the commission's decision in the High Court, claiming that superannuation was not an industrial matter under the constitution. The High Court ruled in favour of the Conciliation and Arbitration Commission, which set about approving multi-employer industry funds jointly sponsored by trade unions - and some employer associations - and industry-based super was on its way.
The government introduced the Occupational Superannuation Standards Act 1987, setting the operating standards for industry-based super (this was superseded by the Superannuation Industry Supervision Act of 1993). The introduction of the SG in 1992 set the industry's growth in stone. Between 1987 and 1992, Australian superannuation assets rose from $41.1 billion to $148 billion.
Governments of both main political parties have seen super as one of "three pillars" of the Australian retirement funding system: the government-funded age pension; compulsory superannuation under the superannuation guarantee (SG); and voluntary contributions by individuals to their super accounts. (There is actually a "fourth pillar" of income in retirement: an individual's non-super investments.)
Because super remains the government's preferred source of retirement funding for Australians, it is for individuals the most tax-effective vehicle for saving for retirement. Super is earmarked for the lion's share of the retirement funding task because the age pension, a feature of Australian life since 1908, simply cannot cope with the ageing of the Australian population.
In truth, the age pension is now viewed as a ‘safety net', a bare minimum for those who do not have enough super or other financial resources to provide an adequate retirement income. The government wants all Australians to take charge of our own retirement funding, through super. To reinforce this message, the government has used both a carrot (the 15% tax rate on super funds) and stick (the SG).
By 1996, when the Labour government lost office, superannuation assets had risen to $245 billion, and coverage of the population had increased to 80%. The new coalition government established the main superannuation regulator, the Australian Prudential Regulation Authority (APRA), in 1998, and lifted the SG to 9% in 2002. Its other major change was the introduction of "Super Choice" in 2005, under which employees were able to nominate the fund into which their employer paid their SG contributions, and their accumulated funds could be switched to another fund on their request. But choice is not compulsory: employees can elect to make no choice - do nothing - and their super will sit safely in a "default" fund, usually the fund in which it is currently held and into which their employer pays the employee's SG contributions.
The coalition Howard government lost office to the Kevin Rudd-led Labour Party in 2007, by which time superannuation assets had reached $1.2 trillion and coverage of employees had reached 94%. The Labour government commissioned the Cooper Review into the Australian superannuation system, and the Henry Review into the Australian taxation system. From these reviews, which reported in 2010, came the proposals for the 12% SG and My Super, the low-cost, simple, well-diversified universal default super account option. At present, 95% of employed people have superannuation.
Even for those libertarians who dislike coercion, the Superannuation Guarantee makes sense: after all, it is compulsory saving, and Australians are not good savers. The Superannuation Guarantee at least presents retiring workers with a nest egg that may have been accumulated for them in spite of their own inability to save money.
The first super funds were defined benefit funds, which paid out a specific or "defined" amount of money regardless of how much had been contributed or how well the fund had performed. What you were paid on retirement was calculated based on your annual salary and the number of years you had worked with the employer.
These days, it is considered fairer if the contributions - not the benefit - are defined, and the final benefit is determined by the return on the assets in the fund and the length of time in which the individual has been a member in the fund. Thus, most super funds are accumulation funds: employees save money by regular contribution over many years to the super fund, which invests across a diversified range of asset classes. At a nominated age, or on retirement (or in the case of disablement or death), each employee receives a payment consisting of their contributions plus the investment earnings (and dividend income) on their money. The money may be taken in a lump sum, or as a regular income stream, or a combination of both.
Super funds are managed conservatively, with the emphasis on capital growth. More than 80% of Australians have their super invested in "balanced" options, which have 60%-76% of their assets in growth-style investments.
Australian super funds come in a number of forms:
A retail super fund is offered by a bank, insurance company or financial services company. It is operated to make a profit, and can use commission-paid financial planners to sell its products.
A corporate superannuation fund is operated for the benefit of its members, who are employees in a particular company. It is a not-for-profit fund and does not pay sales commissions. Its trustees, who are appointed by the company and employees, are not paid. A well-run corporate superannuation fund is able to provide its employee members with a customised retirement savings vehicle: in effect, the various superannuation services - for example, investment management, insurance and administration - are outsourced, and the best providers of each chosen.
An industry fund is also a not-for-profit fund. From their beginnings serving workers in particular industries, most industry super funds have become "public offer" funds, meaning that they are open to anyone. In other words, they are just like the retail super funds offered by large investment institutions, with one important difference - they are much cheaper. Trustees are drawn from employers and employees in the particular industry.
A government fund (or public sector fund) is open to workers in the public service and government agencies.
A master trust is a single-entry "platform" vehicle, provided through a funds manager, where the various superannuation services are bundled into one superannuation product. Master trusts are used by employers and individuals who want to access a range of different investment managers and styles within one overall account. A master trust is a for-profit business.
A self-managed, or do-it-yourself (DIY) super fund, has less than five members. If you are prepared to take the responsibility for managing your super nest-egg yourself, you can control the investment of the fund's assets, and can invest in just about any asset you choose; and when you retire, your DIY fund can pay you a pension. Also known as self-managed super funds (SMSFs), DIY funds are the fastest-growing sector of the market: at present there are about 423,000 self-managed super funds in Australia, holding about $400 billion in assets, or 32% of the total superannuation pool.
Heading into the 2010s, the challenges for the Australian super industry are based around the fact that compulsory super is still a relatively young policy: as a result, many Australians simply don't have enough super to retire comfortably.
Many members of the "baby boomer" generation did not have superannuation until the 1980s, and even then, it commenced at a relatively modest 3% of wages before reaching the current level of 9%. The retirement benefits for these people do not reflect a lifetime in the system and will not be sufficient to provide for a financially comfortable retirement.
Although people entering the workforce now will have a much better outcome - it is estimated that by 2028, generations X and Y (those born between 1961 and 2000) will control 84% of superannuation assets - it is still very important that they get interested in their super from an early age, to make sure that they make the proper decisions to maximise their retirement income.
For fund managers, the major challenges are responding to the extraordinary growth of the SMSF sector, and the simpler, lower-cost options proposed by the government. Retail funds have begun to fight back against the cost advantage of the industry funds. The super industry is growing at a huge rate, but for managers, the challenge remains being competitive enough to ensure your share of the action.
Roll of honour of the Australian superannuation industry
Greg Sword: founder and current CEO of LUCRF (Labour Union Co-operative Retirement Fund), the first industry super fund, established in 1978. All other industry funds were later modelled on LUCRF.
Bill Kelty: Secretary of the ACTU (1983-2000). Jointly credited with Paul Keating as establishing the industry fund sector.
Garry Weaven: Assistant secretary of the ACTU (1986-1990), after joining the ACTU in 1981. Mr. Weaven went on to become head of Industry Funds Services, and help to found Members Equity Bank, the industry funds' banking arm. Credited as the vision behind the growth of the industry fund sector.
Bob Hawke: Prime Minister 1983-1991. Mr. Hawke led the government in 1985-86 when the Wages Accord was struck and award super introduced, and in 1991 when the SG was designed.
Paul Keating: Treasurer 1983-1991, and Prime Minister 1991-1996. Was Prime Minister when the SG was introduced in 1992: he had a close working relationship with Bill Kelty.
John Howard, Peter Costello: As Prime Minister and Treasurer from 1996-2007, Mr. Howard and Mr. Costello pushed superannuation into the modern “choice” era and laid the seeds that forced it to modernise. Built on Labour's framework to entrench super as a natural right for every Australian.
David Whiteley: executive manager of the Industry Super Network, the umbrella body representing many of Australia's industry superannuation funds. Has led the fight against excessive fees and commissions paid to financial advisers.
Jeremy Cooper: former deputy chairman of the Australian Securities and Investments Commission (ASIC), Mr. Cooper led the panel whose landmark report may become a casualty of the minority Gillard government, but he has challenged the superannuation industry to think outside its comfort zone and to confront itself across how it operates, be that in administration, electronic commerce, consolidation, excess servicing. His legacy will be the changed direction super will take over the next 20 years as it begins to mature. Mr. Cooper's impact in forcing the super industry to change its thinking is so profound, it is arguably irrelevant whether his report is implemented.
Andrea Slattery: the chief executive officer of the SMSF Professionals' Association of Australia Limited (SPAA). Her passion for the self-managed fund sector of the industry is one of the major reasons why it was explicitly recognised by the Cooper Review as being a successful and legitimate vehicle for saving for retirement.