Rice Warner predicts super industry to grow to $3.3 trillion by 2026

New research by Rice Warner Actuaries outlines the key challenges for the superannuation industry over the next decade, including a shift to post-retirement assets.

According to new data by Rice Warner Actuaries, superannuation assets are set to grow to around $3.3 trillion by 2026, while the number of super funds in Australia will drop by 48 per cent in the next five years.*

Commenting on the figures, Michael Rice, Managing Director of Rice Warner, said, “The industry faces an unprecedented number of challenges over the next few years. Funds need to position themselves to be able to address these successfully while still focusing on delivering the best retirement outcomes possible to members – hence our prediction that the number of funds will continue to reduce substantially.”

One trend that has had a major impact on the superannuation industry in recent years is the growth of self-managed super funds (SMSF). Rice Warner predicts that the flow of assets to the SMSF segment will continue, largely driven by advisers and accountants, with total market share by assets to remain stable at around 30 per cent of the market.

Rice Warner also expects that with the baby boomer generation retiring, post retirement assets will increase to 42 per cent of all superannuation assets by 2026, compared to 30 per cent at 30 June 2011. Industry fund market share of post-retirement assets is predicted to triple from 5.1 per cent at 30 June 2011 to 16.5 per cent by 2026.

Alun Stevens, Principal of Rice Warner, said, “The market has reached a turning point against the backdrop of unparalleled legislative changes, market turmoil and the shift to SMSFs. Simultaneously, there is an accelerating movement of members and assets into the post retirement phase. In response, we expect significant product development and realignment of servicing models.”

For more information, visit www.ricewarner.com.au

*Includes Corporate, Industry Fund, Public Sector and Commercial Funds.

Message from the Chief Executive

Australia’s superannuation system is unique and is often upheld as one of the most successful retirement savings models in the world. In light of recent global market events, however, we need to do more to protect members’ savings, including increasing our engagement with the global financial services industry, says ISN Chief Executive David Whiteley.

In July 2011, David delivered a special address to Sydney’s prestigious Lowy Institute on this topic. The following editorial has been adapted from this address.

Taking a global approach to protecting super members’ savings

Superannuation is one of Australia’s great economic and public policy achievements. In just under two decades, it has helped Australians save more than $1.3 trillion for their retirement and this is estimated to almost triple to $3.2 trillion by 2022.

Superannuation has become much more than a retirement savings vehicle. During the global financial crisis (GFC), Australia’s superannuation system acted as a critical pool of capital in the economy. It provided liquidity and bolstered confidence, asserting itself as an important macroeconomic stabiliser.

However, for many, the global financial services industry (of which our super system is a part) was seen as part of the problem rather than the solution.

The evolution of the financial services industry from being a service to businesses and consumers, to an industry that generates considerable profits from its own activities on financial markets, was identified as one of the causes of the GFC.

Ultimately, poor regulation and risk management in conjunction with the mis-selling of sub-prime mortgages led to the financial crisis, which has had such a detrimental effect on economies, jobs, investment markets and, of course, investment returns.

From the domestic perspective, the 2009 Johnson report on the Australian Financial Centre Forum found that Australia’s regulatory system was adequately balanced between what can be competing objectives, for example, consumer protection and product innovation. The report noted that the general view of market participants is clearly that some of the excesses that led to the GFC were not replicated in the Australian context.

This is largely true, and in my view one reason for Australia’s relative strength has been the increasingly active role played by super funds to improve the application of governance in listed companies, as well as the engagement with listed companies and fund managers. As part of this process, fund managers themselves have developed an understanding of what expectations super funds have of market behaviour.

Nonetheless, the inter-connectedness of global financial markets meant that this strength did not insulate Australians completely from all economic stress, nor did it protect us from the considerably negative effect on our savings and investments.

Collaboration and engagement on a global level

The next step is to commence a dialogue about how the Australian super industry can engage with the global financial services industry to better protect the wealth of our members. This means reducing the volatility caused by speculation, and recognising that there is a role for super and pension funds to influence the behaviour of market participants. It also means acknowledging that regulation is not always able to keep up with what might politely be called ‘innovation’ by sections of the financial services industry.

Global pension funds account for an estimated $28 trillion in assets. Geographically they span Europe, Asia, North and South America. While their structure and governance arrangements vary, their interests are aligned to meet their obligations to fund the retirement incomes of working people.

In dollar terms, their clout significantly eclipses mutual funds, insurance, real estate, hedge funds and private equity funds. With this in mind, it seems extraordinary they haven’t been more influential than they have been to date.

I believe that there is the potential for funds to be more assertive about which investment practices are acceptable for funds managers to engage in at any level – and to avoid the tail wagging the dog.

An obvious initial collaboration could occur with US and Canadian pension funds. As well as being among some of the largest internationally, they have perhaps the best linkages to the large US-based fund managers that operate globally.

Jack Bogle (head of Vanguard) commented that, “We’ve become a financial economy which has overwhelmed the productive economy to the detriment of investors and the detriment of our society.”

In Australia, industry super funds are clearly aware of our role in the economy and the obligations and opportunities we have when investing our members’ retirement savings. In particular, we seek to invest in the real economy, in businesses, jobs, infrastructure, and in the future.

In doing so, we recognise that our own sector is evolving and that we have a responsibility as guardians of our members’ savings to ensure that our own industry practices are sustainable and productive. It is this philosophy which super funds can extend to initiate successful engagement with the global funds management industry.

David Whiteley

Ensuring equity and adequacy

While addressing the adequacy of Australia’s retirement income system will help improve retirement incomes, equity within the system also needs to be reviewed. Three key reforms could increase the retirement accumulations of low and middle income earners by up to 77%.

In its new report, Integrity in Australia’s Superannuation System, ISN considers the key policy challenges facing the super system. One of the significant changes is the adequacy of the current regime and whether it provides an appropriate and equitable mechanism for building the retirement savings of Australian workers.

The report concludes the existing structure and distribution of super concessions is inequitable, with more than three million low income workers denied comparable contribution tax concessions to those extended to higher income workers. Revising the current structure would improve retirement incomes for low and middle income earners and ensure older workers have the opportunity to improve their retirement incomes through catch-up contributions.

The first area requiring improvement relates to taxation. Currently, those on higher incomes tend to benefit most from contribution tax concessions. For many low income earners, the concession on SG and pre-tax contributions is negative, with Treasury estimating millions of taxpayers receive negative or no concession on their contributions.

The ISN report notes contribution concessions could be made more equitable in a number of ways. The Government’s proposal to provide a new 15% rebate directly into low income earners’ member accounts is one approach.

This reform would result in low income earners effectively paying zero contributions tax and would make the tax concessions more progressive. ISN analysis indicates this could add up to $66,000 additional retirement savings for a 25 year old on $37,000 p.a. with an uninterrupted work pattern until 65.

The report also recommends the introduction of more flexible contribution caps to allow individuals to more closely match their contributions to periods of higher available income over their working life.

The final and most significant measure for improving adequacy is to increase mandatory SG contributions to 12%. Research indicates this reform would increase the retirement accumulation of workers on average full-time earnings by around $110,000.

ISN modelling shows a combination of these equity and adequacy reforms would have a significant impact on low and middle income earners, with their retirement accumulations increasing by up to 77%.

For more information, see Chapter 4 in ISN’s report Integrity in Australia’s Superannuation System.

Financial pressures influence retirement decisions

Many people drawing down on their super are yet to retire from the workforce and describe their current income as only ‘modest’ or ‘tight’. This makes financial pressure a significant influence on decision-making at retirement for some super fund members, according to a new ISN study.

Research commissioned by ISN found investment in pension products is not the norm among retiring industry fund members, with plans for their retirement savings dominated by motivations such as debt repayment, lifestyle choices and immediate financial needs. This contrasts with households reporting higher levels of retirement savings, which are much more likely to allocate savings to pension products.

Awareness of the existence of pension products is also low, but increases with retirement savings levels. Even survey respondents claiming to be familiar with a range of investment products had fairly low levels of awareness about pension products.

While most retirees have no debt, a significant group of retirees and near-retirees has debt levels which will substantially eat into their retirement savings. Around 20% of survey respondents have debt worth more than half the value of their retirement savings.

Retirement decision-making for this group requires consideration of options including delaying retirement and paying debt using retirement savings or the sale of the current home or other assets. Click here to read the report.

Retirement Intentions and Longevity

A major new report ‘Retirement Savings and Longevity’ by ISN Chief Economist Dr Sacha Vidler  found that more than one third of retirees said they only had enough superannuation savings to make ends meet or actually had insufficient superannuation to make ends meet.