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The most complex super system in the world

Over the past 25 years - the last two in particular - I have examined closely, and in some cases worked directly with, a range of defined contribution pension systems around the world. This includes key aspects of their design and operation, particularly in the UK, Hong Kong, Switzerland, Chile, Ireland, Greece (no finalised systems) and Colombia. The analysis includes key benchmarking against a range of countries. Australia is always included.

The Australian strengths are clear and include compulsory, defined contributions; diversified arms-length investment; independent trustee governance; firm prudential oversight; independent dispute tribunal; compensation in the event of theft and fraud and others.

However, on any analysis our system is the most complex compulsory defined contribution system in the world, mainly because of the number of electable options and decision-making choices that can or should be made by an individual.

And I am not referring here to the fund or investment decision or the tax overlay, which receive considerable attention in public policy debate.

Complexity adds to cost

Ideally a system should be simple to understand, so simple that an individual can effectively make decisions themselves, to the extent permitted in a compulsory system. Simplicity matters because complexity is cost and cost reduces a member’s return particularly in a defined contribution system.

The costs and various system-wide fee analyses have been highlighted from time to time, for example, in the recent Grattan Institute Report (although they make some good points, I disagree with parts of their analysis and policy suggestions) and the Cooper Review (which I established as a Minister).

The critical question is what drives this cost? Valid reasons include the lack of a centralised administration hub, the number of funds (related to this is a lack of scale in some cases), the number of investment options, the conflicted fees or commission related to advice and product selling and others.

One key aspect of the Australian system that receives little critical attention is the considerable number and range of electable options and decisions available to the individual. The range of electable options is not available in any other compulsory system.

Examples of our highly complex system

Our super funds include, in addition to the availability of fund and investment selection, such complexities as:

  • insurance - TPD (Total and Permanent Disability)
  • insurance - salary continuance and unemployment insurance
  • consolidation - rolling together multiple accounts
  • estate provisions
  • early access in a range of defined circumstances.

Furthermore, we have made the area of contributions complicated with:

  • salary sacrifice - concessional
  • other after tax contributions - non-concessional
  • co contributions for low income earners
  • splitting of contributions
  • children accounts
  • transition to retirement at age 55
  • spouse contributions

Some other countries may have a few of these options but nowhere near this range of complexity. The newest defined contribution systems in the UK and New Zealand do not have insurance or estate provisions or most of the above.

Australia also has further complexity in the post-retirement space. In addition to allowing lump sum withdrawals (as other defined contribution systems do), there is also a means-tested government pension. No other advanced economy with such an extensive defined contribution system has this provision.

Are we maximising retirement incomes?

This complexity drives up cost in two main areas – administration and advice (or selling depending on your perspective). This is on top of the additional complexity and cost arising as a result of individual fund and investment selection.

It further leads to a fundamental question in a compulsory defined contribution system that is supposed to be for retirement. Is all of this necessary to maximise the retirement income of the individual?

A critical analysis and debate should consider some of the following in an attempt to reduce the complexity:

  1. Insurance in super. If contributions are inadequate, why is insurance – particularly disablement and salary continuance – appropriate in super? It diverts resources from retirement income.
  2. Estate requirements. Why the need for a parallel and separate system to deal with an individual’s super property in the event of death?
  3. Transition to retirement at the age of 55? The pension age is 65 going to 70!

Concluding comments

Australia has the most complex defined contribution system in the world, both pre- and post-retirement.

Other countries have undertaken a more careful analysis and considered debate. Certainly, the Australian experience as an early mover has been very helpful to other countries in realising, at least in some areas, what not to do. The main point is to avoid complexity to the extent possible and keep it simple.


Nick Sherry was a member of the Australian Senate from 1990 to 2012, Chair/Deputy of the Senate Superannuation Committee (overseeing the Super Guarantee and SIS Legislation), the first Minister for Superannuation and Corporate Law (responsible for ASIC and the superannuation divisions of APRA and the ATO), Assistant Treasurer and many other roles. He now consults to financial providers, governments and international organisations around the world.

October 25, 2014

Like most extremist positions that have a grain of truth at their core but sport huge fluff around, Peter Vickers' shotgun criticism of past politicians and civil servants is built on the elements of our super system counter to its goal. They do exist.

I note that the comments have not identified anything worthwhile in our system.

This is like inveterately criticising our legal system and all its constituents (law-makers, drafts people, lawyers, judges, the para-legals) based on understandable public dissatisfaction and the occasional (or frequent) miscarriages.

Think of snoring judges, delayed judgements, 'document retention' that destroys files to preempt discovery, unconscionable charges, stealth of trust funds, the black box of legal professional privilege that will not brook any outside scrutiny, barristers' immunity against negligence actions while they prosper at others' alleged negligence, the hollowness of the adversarial system which has nothing to do with truth and the arcane horse-hair rules befitting early centuries.

All these call for improvement, but they do not receive the sort of wholesale condemnation super has copped here. Perhaps they should?

Nick Sherry has been a good super minister and spokesperson while in opposition, as Hansard and other records attest. Civil servants (not always blameless) have had to work within a system that often constrains them. The profession which proudly prioritises form over substance should know this.

As Churchill would have retorted, our retirement system is the worst possible, bar the rest. If in doubt, refer to the Mercer international survey. It does not cover Mars and Venus, but is otherwise comprehensive and rigorous.

Peter Vickers
October 21, 2014

I agree with Sam that Sherry was part of the system and thus needs to share part of the blame. I had dealings with his office and suspect that like all ministers he just rubber stamped the incompetence of his public servants which seems to be the role ministers in our democracy play.

However I disagree that the system is complicated. I am a long time practitioner in superannuation including running a large employer sponsored super fund.

What is really the issue is the compliance and administration involved. The public servants both in the government and the professional bodies lack the intellect or experience to provide solutions.
The Howard government formulated the strategy for account based pensions. A very worthwhile reform. However someone forgot to read the SIS Act and to eliminate the need for an actuary's certificate for a mathematical calculation that does not need the expertise of an actuary. Then some fool could not understand how this calculation should be done and they asked the ATO. The ATO rather than stating that one should use ones judgement set down a formula that increased the costs of obtaining the certificate.

Then there is the concept of providing an audit report to members on the financial performance of the trustees who are the same people and cannot number more than 4 and who produce a special purpose report because there are no persons who relies on those reports.
The argument that the ATO is relying on the auditors as gate keepers is doubtful. The ATO certainly did not rely on the auditors in the Coles Myer case nor in the 1.5 million tax returns of small companies, trusts and partnership that are no audited. And in the case of SMSFs the tax at risk is even lower or nil if in pension phase.

A whole industry has now developed providing actuaries' certificates over the internet and systematised audits. The auditor cannot read the internet produced audit work papers for the price quoted for the audit. Forget about know the client or actually doing any audit work let alone being sceptical. At least the audits have to be done an Australian resident auditor at six times the price after I lost an AAT case to ASIC when I wanted Ramesh Adiga at BOSS in Bangalore to be registered as an SMSF auditor. ASIC still have not worked out how I won when they thought that I had lost the case with their complete inability to read the SIS Act that was purposely written to confuse everyone in which the draftsman has certainly succeeded.

These are just the more common examples. To this needs to be added, loss of tax deductions for late payment of SGC, the black hole that people are in with complying life pensions and market linked pensions, excess contributions, the joke of the investment strategy, the uselessness of the SMSF trust deed as opposed to the replaceable rules of small proprietary companies and then what about the legacy life policies that cannot be changed. I have a client that pays an annual premium of $300 on the life policy taken out on his life by his father and is only payable on his own death to beneficiaries who do not need the money. However if he cancels the policy he loses all the bonuses that now equal more than half the payout.

To bad Nick has never practiced at the coal face.

Megan Jones
October 21, 2014

Alex, you are dead right. Employees in the superannuation industry/market have too much to lose if Government made the system simpler. I remember when even the biggest funds had only a couple of staff in the trustee office. Nowadays the marketing departments, as well as other departments, have enormous numbers of staff - all benefiting from explaining the complexities to members in jargon.

Personally I'd like to see more disclosure on the investment side. My fund statement shows me the areas of investment but I know very little about the identity of the people or the investment companies that money is invested in. I don't know whether or not they are related to anyone in my fund or why they were chosen. Big super funds seem very reluctant to make the investment process transparent. I can see why SMSFs are so popular = at least you know where the money is going.

Alex Dunnin
October 21, 2014

Hey Ross, don't hold back next time, tell us what you really think....

An academic told me a few years back that superannuation isn't a market but an industry. He was right then, but not as right now because it is starting to change - ironically thanks to regulation reform (which sorta proves the point).

Ross McInnes
October 21, 2014

Too many rent seekers that don't add value as per advisors churning & funds that only earn risk free bond rate - get on with it & simplify the system & get rid of all the parasites living off other peoples incomes.

Richard Watts
October 20, 2014

Sherry is only partially right. With around 75% of fund members not exercising their right to choose a super fund surely its about getting the default settings right. The problem with insurance in super is not the cost, it can be very cost effective - although it is increasing. The problem is to ensure the cost is smoothed and risk appropriately and fairly shared. Do you have a basic default level of insurance and allow member opt out or by default have no insurance and allow member opt-in - pain and cost consequences either way.
Frankly for the industry consultation members involved in the Stronger Super reform discussions - it was a case of a rock and a hard place.
Ultimately its the trustees obligation within the limits imposed by the law to design a product that is in the best interests of members - hopefully the result would be not overly complex and allow the member to readily understand what they are getting and importantly what the present and future cost is.

October 19, 2014

Like seeking help from the Mafiosi to end contract-killing, the seeker will be next on the list.

Thinking aloud, how would the retirement scene look in 25 years if compulsion and preservation were removed prospectively, and those who wish to save do so with a capped tax benefit of say $10,000 pa?

If even super professionals despair of complexity, what hope exists for the common man? As an inebriated Omar Khayyam pines in his celebrated ‘Rubaiyat':

Ah Love! could you and I with Him conspire
To grasp this sorry Scheme of Things entire,
Would not we shatter it to bits—and then
Re-mold it nearer to the Heart’s Desire!

'Him' refers to God here, but we will make do with Paul Keating. Close enough...

Alex Dunnin
October 19, 2014

Want a simple superannuation system, like other countries have? Easy. Remove choice, get insurance out of superannuation, eliminate grandfathering, fully separate occupational superannuation from the weath management marketplace, remove multi-tiered tax concessions and make the sector subject to competition laws.

But there goes the SMSF sector, the tax arbitrage market, a big chunk of advice business and probably half the financial services industry. In return though we get much lower fees and higher superannuation investment returns. Even better we a wealth sector, albeit a smaller one, that's off the leash.

This way FOFA would never need to have happened.

The worst thing that even happened to superannuation was fund choice. In ending The Detente former Prime Minister John Howard condemned us to years of insurgencies. The second worst was the Better Super reforms.

So why do the system architects complain? Because, like Ramani says, they have perspective.

Any govt could fix superannuation tomorrow. The real question is whether the financial sector would let them.

October 19, 2014

David, the path to simplification is strewn with complexities galore. Remember, the original 'Simpler Super' reforms had to be hastily rechristened as 'Stronger Super' when the Government realised, in the best of 'yes-Minister' traditions, that there was nothing simple about them for trustees, administrators, auditors, custodians, regulators and even members!

Eventually it should become simpler. Never simple.

As super has to achieve multiple and often contradictory aims (reduced age pension reliance; freedom of members to choose without literacy or engagement; rapacious adviser lobby acting in their own best interests; powerful intermediary rights dominating member rights; filling budget holes with money most do not see as their own; pandering to political prejudices; the inbuilt aversion to inheritance and gift tax, while taxing the daylights out of the living and the unborn) complexity is unavoidable. One almost forgets the primary purpose.

Like organised religions, liturgy and rituals prevail over the substantive. Thus super is almost faith-based. The DC model illustrates this perfectly for the members!

David O'Donnell
October 19, 2014

I considering whether/why he is 'complaining' it might also be a factor that while he was there at the time, Nick Sherry might not have had a significant role in the design of the system. I do find aspects of his article a little puzzling, like listing 'consolidation of accounts' - which simplifies a superannuation member's dealings - as a complexity, and listing benefits such as insurance as complexities. I feel that a lot of international comparisons such as this leave a lot to be desired.

By the way - I do happen to believe that areas such as estate provisions in superannuation and early release provisions are more complex that necessary and would benefit from review.

October 19, 2014

Why complain? Because time and distance lend perspective, that's why.
For example, Sam,accountants are part of the system founded on double entry book-keeping, but many sensibly criticise its critical inadequacies (such as the failure to show losses avoided by pro-active business activity: if you bought a pen at $10, and fearing its price will drop to $2, you sold it at $5 under historical cost valuation, then the price does fall as expected; the accounts will show you lost $5, not made an opportunity profit of $3). If an accountant criticises the historical cost policy and demands mark-to-market, will you criticise her?

Better to tackle the roots of complexity: the ill-fitting trust system, endless grand-fathering in this long term vehicle following each incremental short-term change instead of sunsets, the industry lobbying for advantageous changes but asymmetrically decrying others as 'tinkering', tax grabs as our system is mired in tax issues and estate planning in breach of the spirit of SPT. Not to mention the SMSF shenanigans.

We should leave the messenger alone, regardless of his past. His present is a nice present!

Nick Rossetto
October 19, 2014

It is called My Super. As far as I know each fund has to have a dashboard with standard information on their website.

Megan Jones
October 19, 2014

I think you will find it suits many funds to keep it complex. It would help if the government or industry mandated a universal superannuation statement so that members could compare information based on similar language, format and design. A universal superannuation statement would also force funds to reveal their hidden fees and charges.

Sam Naidu
October 19, 2014

He was part of the system that created this complexity. Why complain now?

SMSF Trustee
October 20, 2014

Come on, Sam. Sherry was a minister in a government elected in 2008, more than 20 years after the essence of the system was put in place. To say he helped 'create' the complexity is unfair, whatever you think of the job he did when he was the minister. In any case, him having worked on it from the perspective of a government minister gives his opinions weight beyond yours or mine, so can't be dismissed quite that flippantly.

October 19, 2014

Too little competition, not good enough. Too much competition, too costly

You can't win Nick.

October 18, 2014

Complexity derives from a range of factors: trust structure (imported from the ancient law of equity; trusts meant for benevolent gifting ill-fitted to the present deferred wages, an entitlement); ability to continue conflicted arrangements in retail and industry sectors (despite some efforts to rein them in); bolted-on changes to achieve incremental outcomes being perpetually grandfathered rather than being closed off with sunset clauses); taxation being an integral part (at entry, accumulation, benefits with quirks like anti-detriment); sole purpose test being patently breached through use of super as an inheritance device; expedient changes being thought up to fill budget holes rather than as part of a coherent strategy in this long term arrangement (e.g., the short-lived super surcharge, the mess of contribution caps and the failed move to tax pensions subject to income limits).

Before the industry is allowed to rail against the constant tinkering, let us remember that they constantly lobby for changes. Mandate the continuance of the status quo for the next ten years with no change, the industry will turn blue with apoplexy!

Senator Sherry (in addition to Senator Watson from Libs) was an outstanding spokesperson for super, and must be commended for now recognising the gaping holes in the emperor's clothes tending towards nudity. To carp on the fact that he might have partaken in the political pretence about his sartorial superiority as an existential imperative seems churlish.

William Mills
October 17, 2014

Thank you Nick, your comments are spot on.
Paul Keating should have simplified our superannuation.
Superannuation is in reality an income equalization scheme, money in is tax deductible and money out is assessable.
Encourage members to contribute tax deductible contributions as well as employers and the government will balance their books with benefits being assessable. Existing balances could have been transferred as tax free benefits.
Make the rules simple and easy to understand and you improve the take up by everyone.
Non-Concessional contributions would be tax free on withdrawal, however all income would be assessable. Franking credits would be refundable to the fund.
Just a thought!

October 17, 2014

I think Nick is missing the point and undervaluing the potential role of a well-functioning advice industry. Politically-motivated fiddling aside, is choice and flexibility not a good thing? Is the issue here not one of navigation and access to quality, affordable advice? With better advice, can 'complicated' merely be the cynics word for 'sophisticated'?

October 16, 2014

It's complex because politicians want to fiddle with the rules every 12 months:

Changing who is eligible to contribute, how much they can contribute, how much they can claim as a tax deduction, how the contribution is taxed, how the benefit is taxed, when it is taxed, when it can be cashed as a lump sum or pension, how much can be taken as a pension, the preservation age, the age pension age, the types of pensions retirees are allowed to take.......need I go on?

Tony Negline
October 16, 2014

Did Nick ever talk about this complexity while he was in Parliament?

October 16, 2014

In my experience salary continuance insurance was a waste of time. I was injured in the work place. Ceased work on Dec 20 had to wait until March 20 to be eligible to even apply for salary continuance and the insurers and my super fund didn't accept my claim until more than 4 months and not until after Risk CoverWA had accepted my claim which of course meant that the insurer had nothing to pay me as I was paid via my employers insurance. Having paid this premium for many years (I'm turning 55 soon) I was left feeling I have been ripped off not to mention the hardship I endured during the time I was waiting for both claims to be accepted. Luckily for me I was in advance with my mortgage or I would have become homeless by the time the insurer accepted my claim.


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