Thirty years on, where is super going?
Safeguarding super’s purpose will ensure Australia's world-class superannuation industry continues meeting the needs of future generations.
Derrimut is 18 kilometres west of central Melbourne. Fifty years ago, the suburb was a melting pot of hopes for a new generation of Australians. Newly arrived migrants worked in the large sheds on farmlands in the skin and hide industry, eager to provide a better future for their families. It was there the Storeman and Packers Union (FPSU) successfully argued for their workers to be able to put 3% of their wages into super. At the time, superannuation was only available to white collar workers and public servants.
Non-English speaking migrants in the skin and hide industry saw the benefits of superannuation. Many worked two jobs and saving money was a priority. They had come to Australia to give their families a future and believed superannuation was part of this future. After further negotiations between employer groups and the union, the FPSU eventually converted the pay offer into a superannuation contribution and in late 1978 the Labour Union Co-operative Retirement Fund (now known as LUCRF) was born.
This push eventually culminated in mandated superannuation being enshrined in legislation. Thirty years on from the superannuation guarantee (SG) entering the law books, the super industry now manages $3.3 trillion worth of Australians’ savings.
According to former Prime Minister Paul Keating who introduced the SG in 1992, the big driver behind this was reform was that super would be available to everyone “including the bloke running behind the garbage truck”.
But as the industry and its members have aged, a new set of challenges has emerged. Superannuation funds once laser-focused on accumulation are now grappling with how to help members spend their nest eggs in the decades after retirement.
Fit for purpose
Fiona Reynolds started her career in the industry super fund movement back in 1994, coordinating the Conference of Major Superannuation Funds, a forum for the nascent industry to voice concerns and develop long-term policy. Fast forward 28 years and the now-chief executive of Conexus says industry funds need to address the challenge of retiring members.
“Many funds are still not really providing a lot of options at retirement. Super funds with a large membership base of retiring members and older workers really need to be focused on retirement,” Reynolds says.
She acknowledges that the Retirement Income Covenant (RIC) – to be introduced on 1 July - should guide super funds with their retirement strategies. However, as the wider industry oversees the retirement savings of a diverse member base, she also acknowledges that there is a no “one size fits all” solution.
Under the RIC, super funds will need to communicate how they will meet the retirement needs of this cohort of members by providing well-performing flexible solutions.
For Morningstar director of manager research ratings and retirement specialist Annika Bradley, the RIC will lead to new products that serve member’s needs in retirement.
“Superannuation funds (many of them not-for-profit) with large pools of members are in a unique position to develop products, particularly those that derive value from risk-pooling,” Bradley says. She notes that some ‘retirement income-like’ solutions are already in the market, including Mercer LifetimePlus, QSuper Lifetime Pension and Magellan FuturePay.
“All are very different solutions, and one key challenge for investors will be comparing products and understanding whether they are right for them,” Bradley adds.
She also believes it is an opportunity for super funds to be more proactive around understanding their members.
“More personalized solutions are going to be really critical as is the ability to segment members using more sophisticated data and systems. This will become a really important pillar to actually be able to achieve great retirement income outcomes because everyone’s retirement journey is different. At the moment super funds are lucky to know what their members’ age, account balance and gender are, let alone assets outside of super or other personal circumstances.”
Growing numbers of younger people are turning to SMSFs in the search for personalization. The broader super industry is likely to follow suit, says Bradley.
After years of chasing returns in illiquid unlisted assets—a consortium of superannuation funds and private equity groups took Sydney Airport private in February—funds will face greater demand for liquidity as members age and begin to drawdown their nest eggs, adds Bradley.
“As superannuation makes the transition from pre-retirement assets to post retirement assets, they will need to think about managing liquidity a bit differently,” she says.
Indeed, the investment strategy underpinning industry funds have been typified by large allocations to unlisted assets. With a lower correlation to the equity markets, this investment strategy has delivered in terms of performance for members.
Hands off the honey pot
A raft of legislation has been introduced over the past several years to increase transparency and improve governance in the industry. Among them, the Your Future, Your Super reforms introduced a performance test that will apply to multisector choice funds.
For Reynolds, legislation needs to carefully balance member interests against the innovation typical of investment strategies at industry funds. While Reynolds welcomes greater transparency, she hopes reforms don’t simply encourage all super funds to hug a benchmark for fear of being an outlier.
“What is the role of super here? Is it just for funds to meet and make sure they are sitting next to everyone else in the benchmark or is it to provide long term returns for your members? Will this kill off innovation? These are all questions that need to be asked,” Reynolds said.
With trillions sitting in superannuation funds, governments have been tempted to raid the amassed savings for short-term solutions. The Morrison Government’s early access to super scheme during Covid saw Australians withdraw around $42 billion from super, according to Treasury data.
Reynolds and Bradley would like to see the “purpose of super” enshrined in legislation as the superannuation guarantee was three decades ago. For Reynolds this will “ensure clarity around its objectives. “I would hope that subsequent governments can’t come in and use super to fix short term problems,” Reynolds says.
Indeed, safeguarding super’s purpose – that is, investing on behalf of members for the long-term - will ensure our world class superannuation industry will continue to meet the needs of future generations just like the workers in Derrimut.
Christine St Anne's "A Super History" chronicled the multi-decade evolution of the superannuation industry and was published in 2012.