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Why has Australia slipped down the global super ranks?

The recent release of the Mercer CFA Institute Global Pension Index, the 13th edition of this annual survey of the world’s key pension systems, could not have been better timed. Not just because of widespread debate on differing retirement income systems, but it’s an opportunity to revisit one of my earliest contributions for Firstlinks eight years down the track.

In 2013, I wrote a piece entitled “In super the Danes are great, Australia a close third” , based on the fifth edition of the Index. The underlying methodology for ascribing an index value to each country has remained consistent since. The final value is a weighting of three sub components; Adequacy has a 40% weight, Sustainability a 35% weight and Integrity the balancing 25%.

The latest edition covers 43 nations and around 65% of the world’s population. Some 50 questions are posed of each country, the answers helping to rate each from a scale of A (a system with an index score above 80) to E (a system with an index score below 35).

In the case of Australia, only the APRA-regulated part of Australia’s $3.3 trillion super system is subject to the rating process; so in effect 156 or so corporate, industry, public sector and retail funds. The SMSF sector, incorporating some 600,000 funds that collectively hold approximately $820 billion (as at 30 June 2021) is not considered.

Australia slipping in relative and absolute terms

The latest report sees Australia receive an index score of 75.0, putting it in sixth place among the 43 nations. This compares to a score of 77.8 and third place in the 2013 report.

How did Australia slip off the podium of the world’s elite pension systems, and why has it been going backwards, both on a relative (position amongst peers) and absolute (falling index value) basis?

Australia’s fall is partly due to the continuous addition of new countries from the original 11 of 2009. This year four new nations were added. One of them, Iceland, went straight to the gold medal position, scoring an impressive 84.2 on debut.  Neither previous winner Denmark or the Netherlands cracked 84 in any prior report. That’s quite an entrance.

Iceland had both the highest Adequacy and Sustainability index scores, with its retirement income system comprised of a state pension with two components (both of which are income tested according to different rules), mandatory occupational pension schemes with contributions from both employers and employees, rounded out by voluntary contributions into government-approved pension products.

Australia was also nudged out of fifth spot by a much-improved Norway, its index value climbing from 71.2 in 2020 to 75.2 this year. Israel took out the fourth spot (77.1), with Denmark third (82.0) and the Netherlands second (83.5).

The strain from Hayne

The decline in Australia’s index value since 2013 is perhaps the more worrying development. After scoring 77.8 in that 2013 report, Australia peaked at 79.9 the following year, a whisker shy of attaining an ‘A’ rating, and with it recognition as ‘a first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity’.

Australia then trended downward, before a significant fall in 2018 to 72.6, losing its coveted B+ grade for the first time. 2018 was, of course, the year during which the Hayne Royal Commission sat, and much of the evidence surfaced therein was damaging to the super sector, some of it brutally excoriating.

A system in need of a reboot

In addition, the Productivity Commission’s inquiry into the sector, delivered a few short months before Commissioner Hayne’s final report, painted an unflattering picture of superannuation as an “unlucky lottery”, prone to frictions created by unintended multiple accounts, and serial underperformance experienced by far too many superannuation members.

Data collected by the Productivity Commission showed that superannuation fees and costs were at the upper end of global comparators, and significantly higher than pension top dogs, Denmark and the Netherlands, as the following chart from the final report illustrates.

Fees and Costs as a Percentage of Assets, 2016

Part of the reason for this imbalance does, to be fair, lie in Australia’s heavy tilt toward Defined Contribution plans, where the administration burden at the individual member level (contributions, switches, partial commutations, pension payments) tends to be resistant to scale benefits that more readily accrue to other aspects of superannuation management (such as investments).

New headwinds of scale

The super landscape looks very different today than it did when Commissioner Hayne presided over those 2018 hearings. Many financial conglomerates, and most of the big four banks, have exited retail superannuation altogether, if not substantially.

Chief amongst these changes is the recently-enacted ‘Your Future, Your Super’ package which has just seen the commencement of account stapling, so that one super account follows an individual through any number of employment changes, and a new annual investment performance test, the first of which saw 13 MySuper products fail to come within -0.5% p.a. of their respective risk-adjusted benchmarks.

And then there is the new Best Financial Interests Duty (BFID), which places a statutory obligation on super fund trustees to do all things necessary to ensure that spending is best directed to the advancement of member outcomes. The days of profligacy in certain parts of the super sector now appear numbered.

The message being sent to the superannuation industry is as clear as it is stark: cost matters in providing appropriate member outcomes. If you can’t meet that challenge through scale, you should consider your position.

The reason is simple enough, as the Mercer CFA Institute Global Pension Index report states:

“it is likely that as funds increase in size, their costs as a proportion of assets will reduce and some (or all) of these benefits will be passed onto members.”

Australia: big system, small funds

It is remarkable that, as a nation of some 20 million adults, Australia has the fourth largest pension pool, after the US, the UK and Canada.  OECD data put our super system at 3.8% of total OECD pension assets (as at the end of 2019). But by global standards, with a few exceptions, our pension funds lack the scale needed to push costs down significantly.

Margaret Cole, APRA’s new board member in charge of superannuation (British by birth and a veteran of pension regulation within that system) left little doubt of APRA’s thinking at a recent speech. She pointed out that, as at 30 June this year, of the current 156 APRA-regulated funds, only four manage assets in excess of $100 billion. Another 13 managed assets between $50 and $100 billion. In short, 11% of funds currently manage 70% of all APRA-regulated super assets.

To make her point crystal clear she produced the below chart showing the dispersion of funds by size:

Breakdown of APRA-regulated superannuation funds by size and type


Source: APRA

The Australian system is characterised by a handful of funds that have meaningful scale, and a large tail of funds that don’t, and who must now be considering Ms Cole’s warning:

“[f]or all funds, but especially for the vast majority managing assets of less than $10 billion, that [the members’ best interests] needs to include urgent, focused consideration of finding a compatible merger partner, or consolidating products, to gain economies of scale, cut costs and lift returns”.

Consider the latest Pensions & Investments list of the world’s largest pension funds, provided in US dollars as at the end of 2020.

The largest Australian pension fund, AustralianSuper, ranks 22nd, with some USD $156 billion. The next largest is Aware Super at 39th (USD $107 billion). No other Australian pension fund makes the Top 50.

Compare that to the largest pension fund in the world, Japan’s Government Pension Investment Fund (GPIF). It had USD $1.7 trillion in assets under management at year end, 11 times the size of Australia’s largest fund. With that size and buying power, GPIF now has an investment fee of under 0.05% per annum.

That is a stark reminder of the scale discrepancy currently in existence in Australia, and the dilemma in which many smaller super funds now find themselves.

Decumulation - super’s final frontier

Another curious artefact of Australia’s modern super system, barely 20 years old, is that the emphasis so far has been on ‘accumulation’ (growing member balances during their working lives) rather than ‘decumulation’ (converting those balances to a sustainable income in retirement).

In the closing section of my 2013 piece I noted that “[p]ension systems exist to provide benefits in retirement, and the best systems deliver that goal to the greatest number by the most robust means possible”.

Only now, some seven years and numerous consultations, white papers, green papers, roundtables and conferences later, has a legislative framework been implemented to bring the David Murray-led Financial System Inquiry ‘Comprehensive Income Products for Retirement’ (CIPR) vision to life, at least partially.

As from 1 July 2022, super fund trustees will be required to have a Retirement Income Covenant in place for members; essentially a document that details how they propose to create retirement income products to cater for their retiring members. Retirement income strategies can either be developed to treat all retiring members equally, or to separate members into cohorts based on characteristics the trustee deems most relevant.

In some ways, APRA-regulated super funds are playing catch-up with the SMSF sector which has long had a focus on the decumulation phase. Lessons learned in SMSF pensions may well, somewhat ironically, find their way to the APRA-regulated space.

Shooting for an ‘A’ grade?

Despite the unexpected fall in Australia’s standing as a Top 3 super system, with the new legislative impetus, our system can turn the corner and regain its former glory.

With industry consolidation and scale, Australia might not just recapture its previous Bronze medal podium place, but has every chance of pushing for an index score north of 80, and thus an ‘A’ rating.

The APRA-regulated super sector might look significantly different from today when it does, but that will be to the good of all Australians who rely on the super system to help make our retirement years our golden years.

 

Harry Chemay has more than two decades of experience across both wealth management and institutional asset consulting. An active participant within the wealth and superannuation space, Harry is a regular contributor to investment websites in Australia and overseas, writing on investing and financial planning.  

He has also been appointed an Australian ambassador to the Transparency Task Force, a UK-led global initiative to bring greater transparency and accountability to financial services.

 

21 Comments
Tom Taylor
November 15, 2021

Chass Greenway's comment at the start of the comments about the elephant in the room which is the way Australia taxes super, is not mentioned, is in fact a seismic event that is 10 on the richter scale. I had a SMSF that I ran for 25 years and I was gobsmacked at the stupidity of the 15% contribution and earnings tax worked to diminish the final super balance. In the 2009 Cooper review on superannuation in my submission I made the observation that it was obscene that less than 20% of the population could retire independent of the pension and the dead hand of government.
I was fortunate enough to start my SMSF in 1992 and I set up a trevisan unit trust in 1994 that enabled us to purchase the buildings our business operated from which to a large degree negated the 15% earnings tax. Before our now Prime Minister brought in the 1.7 million dollar cap in the tax free component the wife and I were old enough and fortunate enough to have the forsight to get off the merry go round that is now a super dooper scam.

Andrew Smith
November 11, 2021

Interesting, though one would have liked to see more context regarding individual funds like Oz Super vs. analysis of all funds together, and future sustainability compared with elsewhere; we know there are 'libertarian' forces in mainstream finance and politics who would prefer to shut super down (to avoid SCGs for business). Over time, Australia's retirement income system to be more robust, complemented by state pensions from general revenue, with an ageing permanent population, in turn supported by temporary NOM churn over of net financial contributors (inc. to budgets), as opposed to old style retirement income or pension systems (based on years worked and salary levels). For example, the work subscription or insurance based retirement income of many nations in Europe may be stable for now but future sustainability is in doubt, if many have insufficient retirement income, backgrounded by ageing populations? One would be concerned if government MPs and Ministers were compelled to nobble a system that may not reach its optimal level for another generation or decades (first full generation of working age recipients receiving significant SCG); then we will understand the benefits of our hybrid retirement income system round super, with only a continuing moderate drag on budgets (vs. potential 'pension bombs' elsewhere).

rod jeffery
November 11, 2021

Thanks Harry for an interesting analysis . I am a supporter of Rob's comments and add a few more .The theory posed by some that ' big is better ' totally fails the test if population alone were the criteria . All countries ranked above Aus. are smaller than us with only the Netherlands roughly approaching our size with 17 millions and the others being less than about 8.5 millions [ Israel ] . On another size analysis it is simple logic to me that a fund managing say $5 Billion should have a similar % cost base as a percentage to a $10B. fund or even a huge fund such as Aus. Super . If we adopt the average Aus. cost of 0.8% for a $5B.fund then it represents a budget of $400 million which surely allows establishment of a huge control system which does not need duplication for a $10B. fund . On the % fee basis it is clear that many are being conned in Aus. as Harry's histogram shows Aus. fee as about 0.8 % , the median and Israel 0.5 % and the other 4 top ranking countries at 0.3 or 0.2 % .I cannot reconcile the fee difference that Aus. is excessive by a factor of 1.5 to 3 . If I analyse my SMSF costs at say 50% of a full working week for my input at a high income plus all external costs then I end up much less cost % than than Netherlands with a cost of 0.2 %. A reasonable conclusion is possible inefficiencies of Aus. super funds plus excessive , excessive fees. I add that acceptance of excessive fees is possibly related to apathy by the super individual owners . I consider that evidence of this is that less than 10,000 persons are members of ASA and AIA combined .They essentially are the only individual organisations either presenting unbiased financial / super educational courses , presentations, conferences etc and the ASA is the only truly national independent group representing and voicing for retail shareholders at public company AGMs. This is 10,000 members out of I guess well in excess of 10,000,000 individuals who have super accounts ; this only represents a mere 1 in 1,000 persons . This is unfortunate apathy in my opinion . However, I do accept that a proportion of the 1,000 persons do not have the interest , capability or time to overview their retail / industry super account or run their own SMSF . So say even if 75% fall into this category that leaves only 1 in 250 who use low cost independent education and assistance plus often representation at AGM's .

Chas Greenway
November 11, 2021

The elephant in the room which is the way Australia taxes super, is not mentioned.
We are the only country to tax super right up front and during accumulation. So the the govt gets taxes a long time before we collect our super. The whole way we tax super is back to front

Geoff R
November 12, 2021

That is true Chas but it is tax free once in pension/retirement mode (admittedly limited by your TBC) - so it is swings and roundabouts really and probably hard to change now.

I really just wish politicians would leave it alone and stop meddling. As others have said it is hard to invest with confidence in Super especially if you are young and multiple decades away from retiring. I have recently retired and super has worked well for me but my grown-up children are not trusting enough to put extra contributions in citing the uncertainty and risk involved in locking away their money for 30-40 years - and frankly I can't blame them. Also they possibly recognise I have perhaps lived "too frugally" (likely an outcome of my parents having lived through the Great Depression) and now find I have saved more than I really need in retirement - maybe I should have "let down my hair" and lived it up a little more!

Of course I am not dead yet - but I used to laugh at old guys driving flash sports cars!

James
November 12, 2021

“That is true Chas but it is tax free once in pension/retirement mode”

Watch this space. It won’t stay tax free for much longer!

If I was a young lad, I’d not be putting one extra cent, beyond what’s compulsory, into superannuation either. Successive governments have repeatedly shown they can’t be trusted to leave it alone. The temptation to raid it is too great!

SMSF Trustee
November 12, 2021

James exactly what has been done to make super unappealing? Contributions are taxed less than retained income; investment earnings are taxed less in super than in a non-super fund; there's enormous choice and flexibility about how you invest. Yeah it's such a crap system .... NOT.

Ian
November 13, 2021

Lots of things to spend money on in retirement if you want to make up for the frugal years, without which you wouldn’t be in the nice position you appear to be in. Take some trips overseas. Renovate your kitchen, bathroom or entire house. Outsourcing the entire job of course, to a project manager as you need your time to do fun stuff. Basically, let your hair down a bit, it’s the last chance.

James
November 14, 2021

@SMSF Trustee: "James exactly what has been done to make super unappealing?" Continual changes and likely more! It was set up wrong because of greedy government too. Contributions and earnings shouldn't be taxed (max compounding and therefore greater chance of fit for purpose i.e. a retiree not government pension dependent) but pension drawdown should be. Now due to huge government debt and looming intergenerational envy/wars pension drawdown is unlikely to remain tax free. As a long term investment, continual moving of the goalposts is a turn off and a liability/risk to the investor. Plenty of people choose to not input extra beyond what the government mandates. I'm not bagging it entirely but its a matter of choice and risk. Everyone is entitled to an opinion. No need to shout eh!

Dudley
November 14, 2021

"Contributions and earnings shouldn't be taxed (max compounding and therefore greater chance of fit for purpose i.e. a retiree not government pension dependent) but pension drawdown should be.":

That results in tax on capital.

James
November 14, 2021

@ Dudley: "That results in tax on capital."

True, but only if you sell! Remember too %50% CG discount and probably tax at a lower marginal rate in pension mode.

The point is unhindered compounding (no taxation) resulting in higher super balances, gives retirees a better chance of being independent of a government pension. Win for the retiree, win for the government! Now all they have to do is become more efficient and reduce the huge wastage and squandering of tax moneys! Simple! Haha

Dudley
November 14, 2021

"True, but only if you sell!": No. Taxing super withdrawals would tax capital - as would taxing bank account withdrawals.

Terms 'pension' and 'income stream' when referring to withdrawals causes confusion.

Super in 'retirement' mode is not a pension as the entire balance can be withdrawn in one transaction - not just regular small portions.

Withdrawals are also not an 'income stream' as the withdrawals are capital - a 'capital stream' perhaps.

James
November 15, 2021

@Dudley: True, valid points although getting somewhat off track here from the original discourse.

The original point being made that superannuation is an uncertain investment, given constant and inevitable government meddling and "clipping of the ticket", and (my prediction) it being unlikely that a pension drawn from superannuation will remain fully tax free!

Some tax on superannuation is inevitable. I question however whether Australia's approach (that differs so much from other countries) to tax contributions and earnings rather than drawdown is beneficial to the ultimate aim of superannuation, which one would hope, is to provide the retiree with the greatest chance of a more than adequate self funded retirement with the need for a pension or part pension only as a safety net, rather than something to be aspired to or deliberately reverse engineered!

Dudley
November 16, 2021

"| question however whether Australia's approach (that differs so much from other countries) to tax contributions and earnings rather than drawdown is beneficial to the ultimate aim of superannuation":

Comparative calculation shows the Australian retiree having less capital and receiving more after tax cash in retirement.

That is a result of a larger overall taxes for the non-Australian retiree.

Sally
November 11, 2021

Food for thought in relation to fees .... To start a new allocated pension within my industry fund I have to commute/partially commute my SMSF allocated pension & transfer from my SMSF into an accumulation account. I then start a second allocated pension .... therefore paying double the fees. To avoid this I have to commute my current industry allocated pension and start a new pension with the combined amount. This results in one lot of fees, but my TBC has to be reset .... meaning that any gains after the commencement of my pension will have to remain in accumulation if the maximum TBC had been reached. The other risk is that the Government will continue to change the rules for super, and by commuting a pension there is the risk that any grandfathering will be lost. Very hard to make plans when the rules keep changing.

Geoff R
November 12, 2021

> meaning that any gains after the commencement of my pension will have to remain in accumulation if the maximum TBC had been reached.

yes this seems really unfair - you should be able to transfer $x in pension mode from one super fund to another without having to commute back to accumulation.

Rob
November 11, 2021

We should never accept this analysis without challenge, particularly "bigger is better and will drive costs down" 1] It excludes roughly 1/3rd of Super Savers - SMSF's. Throw them into the mix, the average account size rockets and the average cost plummets BECAUSE they can largely avoid % based fees. The cost of running a $3m SMSF will hardly vary from a $1m fund 2] Our Admin costs appear high BECAUSE of the ridiculous complexity in our system AND because compulsory Super spawns a myriad of small accounts and each account "costs" about the same to maintain, irrespective of the account size. 3] Investment costs can and will come down with size BUT that will end up with "Index hugging" returns Bottom line, look under the hood, size is not the magical pudding, percentage based fees need to go and the crazy post Hayne fear that has added complexity, where it should have been the catalyst to strip it out, has simply compounded the problem. When we get to the stage in Australia where the analysis is across the whole Super universe including SMSF's, where % fees are dead and where a statement of advice is on one page, we can lead the world It is not that hard and that is the tragedy

Aaron
November 11, 2021

Harry (& David) There will also be an improvement in the adequacy (and overall) score once the OECD catches up with the 2019 changes to the means test rules. Their methodology for the net replacement rate do not consider changes in means tested pensions over time. The old rules currently captured in the index produce a very low replacement rate because they assume that an average worker gets little age pension throughout their retirement even as their savings are spent down. The new rules flatten the Age Pension exposure so will be more reflective of the current situation in Australia. Probably not enough to get us to gold in one step but it will go close.

Jeff O
November 11, 2021

Agree - SMSFs are leading the way for rich well advised Australians. And then, there are other types of 'family" trusts.

However, some buts..

How can the Australian and any other national system be considered and properly rated, without covering the whole (national) savings & income life cycle ?

What about the accumulated savings in the home - by far the largest unlocked source of private savings for 80% of older Australians?

David Knox
November 11, 2021

Thanks Harry for your review of the 2021 Mercer CFA Institute Global Penson index. Australia's score can certainly improve and we can do this by expanding coverage (removing the $450 threshold will help); having a greater focus on retirement and not just accumulation (for example, the Retirement Income Covenant and requiring benefit projections - the better systems do this) and ensuring the SG gets to 12%. Consolidation will also help and should reduce costs.

Harry Chemay
November 11, 2021

Hi David. Thanks for your insights. Very much welcome, as always. I can't believe it's been 8 years since I interviewed you for that 2013 piece. Congrats on another impressive GPI report. You can be justifiably proud of this impressive achievement, now a key resource in the study of pension systems worldwide. Hope all is well at your end. Harry

 

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