8 Guiding Principles | Retirement Savings System - Mercer

Aging Population

8 Guiding Principles

8 Guilding Principles for Australia's Retirement Savings System

 

1. POST RETIREMENT:

The transition from working to retired life needs to be simple and flexible.

2. COST EFFECTIVENESS:

The super system needs to be cost effective, but costs need to be put in perspective and the focus should be on the ultimate outcome to retired Australians. Lower costs do not automatically lead to improved outcomes.

3. DEFAULT OPTIONS:

Straightforward default arrangements should be available for those who are not engaged and they need to focus on net returns and long-term outcomes.

4. FLEXIBILITY:

Members should have the flexibility to choose arrangements best suited to their individual circumstances.

5. FINANCIAL ADVICE:

Australians should expect and receive quality, affordable financial advice they can trust.

6. COMPETITION:

Product providers should be able to compete on an equal footing

7. COVERAGE:

Global best practice would mandate superannuation for all in the workforce.

8. TAX & SOCIAL SECURITY:

The Tax and Social Security systems should support the above outcomes.

Guiding Principles for our Super System

 

Superannuation should be an efficient and effective life-time vehicle that provides adequate and sustainable income in retirement, supported by the age pension where appropriate. This outcome should be backed by the following guiding principles:

 

1.POST RETIREMENT

“The retirement phase of superannuation is underdeveloped and does not meet the risk management needs of many retirees.”

FSI Interim Report – July 2014

  • We need a simple transition from the employment or pre-retirement phase to the retirement (pension) phase.
  • The MySuper framework should be extended with a “MyPension” framework to provide default income arrangements in the post-retirement phase.
  • More flexibility is needed to enable easier introduction of retirement income products that protect against longevity, inflation and investment risks.

2. COST EFFECTIVENESS

Putting the spotlight on the costs of our system is important but the debate over costs needs to be realigned. Global comparisons based on OECD data have painted a picture of Australia having one of the most expensive retirement savings systems in the world. However, this picture is incomplete and misleading..

Furthermore, fees should reduce in the longer term following the introduction of MySuper and SuperStream, which should be given a chance to work.

The following recommendations could improve the cost effectiveness of Australia’s super system:

  • Greater flexibility to utilise electronic means for transactions, communications and disclosure.
  • Simplifying disclosure requirements to provide more scope for providers to highlight key features rather than satisfying complex and often unhelpful legislative requirements
  • Reducing the currently high compliance costs
  • Leaving the active/passive investment management decision to the competitive market place and the discretion and preferences of fund trustees and their members
  • Reviewing the prudential requirements on trustee boards to ensure they do not draw boards into operational matters
  • Greater continuity in superannuation legislation to reduce the high costs of updating administration systems and communication material
  • Removing provisions in the Fair Work Act relating to default funds.

Australia does have a higher exposure to actively managed equities than most other countries, as well as higher exposure to international equities and alternative assets. This contributes significantly to higher investment costs. Mercer believes:

  • there are strong arguments for active management in many markets
  • the active/passive decision should be left to the competitive market place and the discretion and preferences of fund trustees and their members

3. DEFAULT ARRANGEMENTS

Straightforward default arrangements should be available for those who are not engaged.

MySuper legislation needs to focus on net returns and long-term outcomes rather than fees and costs. This should reduce the chances of MySuper resulting in sub-optimal outcomes because of an emphasis on fees (e.g. the adoption of low cost but less effective investment strategies and the removal or reduction of services such as education and helpline advice centres)

4. FLEXIBILITY

The system should be flexible to allow members to choose arrangements best suited to their individual circumstances.

5. FINANCIAL ADVICE

Australians should be able to trust the financial advice they receive. Affordable, quality financial advice can bring significant benefits for consumers.

Recommended improvements include:

  • Improving the quality of advice by mandating higher education and CPD requirements for those providing personal advice
  • Prohibiting unqualified people from providing such advice
  • Replacing the term general advice with “product information”
  • Mandating the provision of retirement projections (including in income stream format)
  • Greater flexibility for tools and calculators to be available without the output being classified as financial advice

6. COMPETITION

Product providers should be able to compete on an equal footing.

Recommendations include:

  • Removing provisions in the Fair Work Act which severely limit competition between superannuation funds as well as increasing costs
  • Ensuring, as far as possible, consistency in tax and social security policies so certain superannuation arrangements are not unduly favoured over other superannuation arrangements
  • Removing barriers to fund consolidation

7. COVERAGE

Global best practice would mandate superannuation for all in the workforce.

Recommendations include:

  • Extending Superannuation Guarantee coverage to the self-employed; those earning less than $450 a month; people on workers compensation or parental leave; and certain disability income benefits
  • Simplifying legislative restrictions applicable to contributions from age 65

 

8. TAX AND SOCIAL SECURITY

The Tax and Social Security systems should support the above outcomes.

OUR VIEW ON SMSFs

SMSFs are, and will remain, a large and important part of the superannuation system.

 

Mercer’s view is:

  1. One size does not fit all. Limitations on the establishment of SMSF are practical, and the large number of existing SMSFs means that future limitations will not address problems with existing funds.
  2. The establishment and management of many SMSFs without receiving any professional advice, or receiving advice from people who do not have appropriate qualifications and experience, is a major risk
  3. There should be consistency in tax and social security policies so certain superannuation arrangements are not unduly favoured over other superannuation arrangements

Your Mercer team would be pleased to discuss any aspect of our submission with you in greater detail.

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