Income streams and where they lead

Superannuation policy roundtable

Part 1: Superannuation policy before, during and after the election
Part 2: Can governments resist superannuation temptation?
Part 3: Income streams and where they lead
Part 4: What are the post-election priorities in superannuation?

In the post-election environment, how front and centre are income streams going to be in the general debate surrounding superannuation? A Super Review roundtable took a look at the issues.

Mike Taylor, managing editor, Super Review: It’s interesting you should mention income streams, Pauline, because this morning at a Money Management breakfast, Paul Fletcher speaking for the Opposition raised the whole income stream question, and the fact that a Coalition Government would immediately visit income streams and the seven impediments. 

We’re here to talk about policy before, during and after an election, but I guess also in a post-election environment, how front and centre are income streams going to be, do you believe, to the general debate? And where does the super industry sit in that equation which is somewhere between personal financial planning and superannuation – because they’re interconnected. 

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Pauline Vamos, CEO, Association of Superannuation Funds of Australia (ASFA): You’ve got seven impediments to the development of post retirement products. You’ve got significant issues between the way the Tax Office interprets, APRA interprets and the disclosure that ASIC thinks should happen. 

So that is a major issue. The design of the MyPension default. Okay, nobody has put any rigour behind that yet. So we’ve got all this yet to be done. 

I think the most telling quote came from Treasury, when we lobbied extensively, and I think others did as well, that MySuper might be allowed to have a MyPension automatically.

And Treasury said, and I quote, ‘We haven’t devised the rules yet on the obligations around the fiduciary who delivers post-retirement’. 

So that will open up the interaction between super and life companies – which is massive in the whole regulatory structure and the capital structure around that – that’s work we’ve got to do. It will be front and centre but it will be very slow.

We’ll be getting rid of some of the impediments like the tax rulings, but the work around the fiduciary stuff and the capital stuff is massive. 

Mike Taylor, Super Review: Well, I know MetLife offshore has huge experience in the post-retirement income streams and how they’re devised.   

Marc Lieberman, MetLife Australia: We do probably the largest in the world. We’ve got assets north of $150 billion in those types of assets and we’ve actually, over the last three years, developed products here in Australia specifically designed for superannuation funds. 

I think one of the big problems which everyone likes talking about is longevity and income streams, but very few people are willing to take action and actually implement it – and that’s something that has to change. 

What we see is an inherent conflict with a lot of superannuation funds in that although they know they have to provide an income stream or the operative for an income stream to their members, they’re also very wary of actually losing assets and losing members because they’re a competitive business and they want to grow, they don’t want to shrink.

So that’s one of the reasons we devised a product that actually sits inside the trust so they don’t lose members, they don’t lose assets. 

But again it’s that going from talk to actual action, and maybe one of the things is, maybe there is a true default government option, I don’t know.

But the Government says, ‘here is a default pension option for life and you get a pool of insurance if you wanted to participate, for participating’.

Now that’s probably not of interest to me because we’ve already developed the product: I’d love to be the one providing it to everyone. 

But there’s got to be a situation where people are willing to take action on it and actually do something with it. 

Mike Taylor, Super Review: Alex, post-retirement? 

Alex Hutchison, chief executive, Energy Industries Superannuation: Well, the original question was about government and tax – and trying to stick your hand into the cookie jar because it’s very attractive.

But I think Australians now truly do understand their superannuation, what it’s for and essentially what the deal is between themselves and Government.  

I think the community is a lot more alive to those issues. So if any Government of any persuasion attempts to fetter that access or increase taxes, I think they are going to face a backlash. I think that’s just the maturity of the industry. 

The two biggest issues touched on really are about adequacy and longevity.

And frankly the two biggest issues really are about the contribution caps that have got to go up, and that will help fix the longevity issue – which is the debate about whether you should you have access to a lump sum and should it just be a pension.

I think that will come to its logical conclusion in time, but I think that’s the real issue. 

Let’s be really really clear – to use John’s term, ‘hands off’ – and put the contribution caps up so that people can actually fund themselves.

Because with a fund like ours, the truth is people can’t really start making extra contributions until they’re in their mid-40s, when their mortgage is under control and the kids are leaving school, all those things that everybody’s heard of an infinitum.

And you’ve got to catch up – and you can’t catch up at 25K a year, right?  

That’s the biggest issue – from a member point of view, and hopefully the tax stuff will take care of itself in due course. 

Pauline Vamos, ASFA: Well we can do that now with the systems we have and then reporting into the ATO.  You can put a whole science around contribution caps.

A lifetime cap is the first step and then some annual limits, particularly at the older wages, so that you get the levelling out of the tax concessions. 

You can do all of that now with the reporting and the centralisation of records under the ATO. That’s in the ASFA White Paper – but again that’s the great conversation to have because we’ve got so many cohorts and we’re just nowhere near getting near retirement outcomes.  

We’ve just done figures on this and whilst the average account balance has gone up there’s still the average female who has 50 per cent [superannuation] of that of a male. Fifty per cent because of the type of work and because of the stop to have babies. 

Mike Taylor, Super Review: Russell, you’re sitting there looking very thoughtful, unusual. 

Russell Mason, lead superannuation advisory partner, Deloitte: I agree with Alex’s comments. I think the majority of Australians would love to have an income stream dilemma and the problem of what to do.

You’ve firstly got to have accumulated enough money to have the dilemma, and as Pauline has just said the vast majority of Australians aren’t there still.

A huge percentage of the workforce retiring is somewhere between 40/80/90,000 dollars. 

So we spent a lot of time working on income streams. That side of policy has to be improved and as Pauline said there are huge impediments.

But let’s first address the really burning issue, which is allowing people to accumulate enough to have that as a problem. I’m a great supporter of the lifetime caps. I think the ATO and, as Pauline said, the systems are there. 

I’m less concerned about people catching up later. If someone wants to salary sacrifice their entire salary towards the end of their working life, let them, if it’s within a lifetime cap. I personally don’t have a problem.

Yes, there might be a little bit of arbitrationing of the tax system but the end of the day, within limits, the wealthier we make people in retirement, the less burden they’re going to be on our social security and healthcare systems. 

And we are living longer and longer. We all know that our children or grandchildren are going to live on average to 100.

If we still persist with 65 as a retirement age or even leading up to 67 that’s a long time in retirement.  

That’s potentially a long time for people to rely on the government or for the next generations of tax payers to have to support those retirees. 

So my view is if it means giving away a little bit today, so be it. The wealthier we can make those people – within reason – in retirement, the better for society generally.

And let’s face, it I think we would all agree at this table we want people to live with dignity in retirement and to be able to enjoy retirement and not have to worry every week about whether they can spend money on fairly minor things in order to continue to enjoy life. 

Marc Lieberman, MetLife Australia: I think one of the things Russell said is very critical, and one of the things we look at constantly, is that people are retiring today with $40,000-to-$100,000 balances.

We have got to take a long view on this. If we focus on the short view, we’re going to miss the opportunity because one of the first things you learn in this business is time and timing. 

We’ve got to take the long view, knowing that 20 years from now is when the big balances are going to happen.

If we don’t make the changes now to facilitate that growth and that contribution and then ultimately that ability to pay an income – if we do it 10 years from now it’s too late.

Because then it keeps pushing it back. So we’ve got to take that long view, and to that end I think one of the things that needs to happen as well is the Government needs to look at really expanding the capital market base in Australia. 

Pauline Vamos, ASFA: Absolutely. 

Marc Lieberman, MetLife Australia: To not have a long bond that goes out 25/30 years makes providing for longevity very, very difficult... 

Pauline Vamos, ASFA: Agree. 

Marc Lieberman, MetLife Australia: If you look at where we are in the global interest rate environment, there is no better time than right now to start looking at longer data debt.  

It’s cheap.

They’re never going to get cheaper debt. There’s this focus in Australia that debt is bad in the Government, but it’s part of the global economy now. 

You’ve got to manage debt against resources and to just rely on superannuation funds to invest in infrastructure, with that getting harder and harder due to the illiquidity of it. 

If they had a more robust capital market, that will allow them to do the investment and allow those away from us to invest in those bonds as a way to participate.

All of a sudden you get a funding vehicle, you got longevity management vehicle, you’ve got a much more robust system – and quite frankly I think others would look at it and say this is not something that’s maybe transportable or offshore. 

Pauline Vamos, ASFA: Agree entirely, but I think there’s more to the solution and long-sell bonds are very, very important. We had a forum the other day on providing a liquidity facility.

It was all part of the Deloitte Access Report on how we make superannuation perform better in the economy and get that growth and stability in the economy. 

We know that one of the big impediments to infrastructure and other assets that are liquid is the liquidity requirements that we need in our system.  

And there is some innovating and thinking that’s happening in terms of how we create a liquidity vehicle. But that takes the banks, the insurance companies, it takes finance experts, it takes Treasury. 

It’s a long conversation but it’s an exciting conversation – and that’s what I meant before about it’s no longer easy conversations.

These are complex conversations that need sophisticated research and expertise behind them, and that’s the new paradigm that we find ourselves in.