Almost a year into his post, senator Nick Sherry, Australian minister for superannuation and corporate governance, lays out the challenges facing the Labor Government
Across all areas there is ongoing community pressure to increase programmes and benefits to the elderly in the community.
Over the past 25 years there have been major changes to the retirement income system that have significantly added to programme costs and/or loss to revenue in the medium to long term.
These include compulsory superannuation -- the diversion of income to contributions which are taxed at the concessional rate of 15% (the total cost of all superannuation taxation concessions is estimated at A$26.8bn in 2007-08); a voluntary co-contribution incentive scheme of $1.50 for a $1 of contribution up to $1,000 for low/middle income earners (costing $1.4bn in 2007-08); a seniors tax offset that reduces tax obligations for those aged 65 and above on incomes of less than $46,707, (costing around $1bn in 2007-08); the utilities allowance; and income tax free superannuation at age 60.
There are existing arrangements that restrain expenditure on the Age Pension that will continue in the future. These include the asset and income tests that ensure recipients are those in need.
For example, the income test stipulates that, to be eligible for a full age pension, a couple may earn a combined income of $240 per fortnight and every $1 exceeding this amount reduces the pension payable by 20 cents in the dollar each.
Means testing saves $11bn a year. With a gradual increase in superannuation savings over time, by June 2047, the proportion of people projected to receive a full government pension will decline from 55% to 36%, but the proportion receiving part pensions is expected to increase from 25% to 41%.
In addition, almost all private and public defined benefit (DB) superannuation funds have been closed to new entrants over the past decade2. Less than 10% of the existing workforce is in a closed DB scheme.
Private sector DB is subject to ongoing funding requirements and considered very sound by the regulator (ASIC), even after the recent market falls.
The Australian government's DB liabilities are fully funded through the Future Fund. The new Labor government is faced with a range of ongoing policy questions:
- Adequacy for those currently retired or approaching retirement who have very little superannuation due to the long phase-in periods -- 9% contributions were only reached on 1 July 2002. The debate has focused around a lift in the base pension rate and a further increase in compulsory superannuation contributions. Both matters are currently under consideration by the Henry Tax Review and the associated pension review, of which the latter will report on the pension by February 2008;
- Those in government DB funds are seeking an improvement in their pension indexation arrangement from prices to wages;
- Concerns about the operational cost effectiveness of key features of the system. These include the average total fees and charges of 1.25%, the 6.2 million lost accounts, [the fact there is] $12bn in a total of 30 million accounts, increasing rapidly, and the lower levels of governance in the self managed sector.
- Extensive debate has focused recently on the widespread and deeply negative returns, averaging minus 6.4% for the financial year 2007-08, the most severe since the introduction of compulsory superannuation in 1987. Many Australians are invested in the default option of their super-annuation fund, which typically holds 50% to 60% of its assets in domestic and international equities. Aside from needing to educate the com-munity about the importance of long term rates of return, declining fund accounts have added to the debate on adequacy. Over the long term, however, Australian superannuation has delivered excellent real returns of approximately 5%.
- Equity release, or reverse mortgages, often promoted as a part solution to underfunding in retirement has increased rapidly within the market over the last three years, doubling to $1.8bn with 31,000 mortgages. Recently, however, ASIC has been closely examining the sector due to excessive fees, negative equity, misleading promotion, and some pro-viders contracting due to the US sub-prime financial crisis. Outlook Despite extensive and frequent change by government over the last two decades, with a general level of improvement to retirement income and service provision, the public expectation of ongoing improvement is unrelenting. Nonetheless, the Australian retirement income system is generally considered financially sound and sustainable over the long term. This reflects a number of factors, including means testing of the Age Pension, the closing of most DB funds and the privately managed compulsory superannuation system.
The Australian pension landscape
Australia's population is aging, albeit at a slower rate than most comparable Organisation for Economic Co-operation and Development (OECD) countries, mainly a consequence of immigration.
Spending pressures, however, are projected to increase as a proportion of GDP: for health from 3.8% in 2006-07 to 7.3% in 2046-47; for aged care from 0.8% in 2006-07 to around 2.0% in 2046-47; and for the Age and Service Pension from 2.5% in 2006-07 to 4.4% by 2046-47.
Nonetheless, expenditures will decline in some other areas. In addition, tax expenditure on superannuation is projected to increase from A$26.8bn in 2007-08 (2.4% of GDP) to $33.9bn by 2011-12 (2.6% of GDP).
According to the Treasury's 2007 Intergenerational Report, over one quarter of Australians will be aged 65 or greater by 2047 compared to 13% currently.
The average retirement age is rising. Those who retired from the labour force in the last five years have average retirement ages of 61.5 for men and 58.3 for women.
A recent survey on the retirement intentions of individuals aged over 45 years suggests this trend will continue with the intended average retirement age of 63 (64 for men, 62 for women).
A brief outline of the key features of Australia's retirement income, health and age care system.
Retirement incomes The Australian three pillars approach consists of:
- The Age Pension, currently a payment of $546.80 per fortnight, single, indexed to male total average weekly earnings, payable at age 65 for males and 63.5 for females rising to 65 by 2014. It is non-contributory and means tested; ¥ Compulsory superannuation (the Superannuation Guarantee) at 9% of employees' ordinary time earnings, minimum earnings of $450 per month;
- Voluntary savings (in excess of SG). AMP estimates average contributions to be between 3% and 4%. Health, aged care and senior concessions The Australian government will provide funding of around $30bn in 2008-09 for the public health system through Medicare ($14bn), the Pharmaceuticals Benefits Scheme ($6bn) and assistance to the states for public hospitals through the Australian Health Care Agreements ($10bn). The government also subsidises private health insurance premiums at a cost of $3.6bn in 2008-09. Senior Australians are entitled to a greater rebate or subsidy for private health insurance, with the government's 30% rebate increasing to 35% for those aged 65 to 69 years, and 40% for people aged 70 years or more. In addition, the bulk of funding for the Pharmaceutical Benefits Scheme benefits eligible Commonwealth concession card holders -- $4.6bn out of $6.2bn in 2008-09 -- which includes pensioners and holders of the Commonwealth Seniors Health Card. A utilities allowance of $500 (current rate) is also provided. The major aged care services funded by the Australian government are residential and community care. Over the next four years, funding for the aged and community care will reach record levels of more than $40bn -- with $28.6bn of that on residential aged care alone. Users of residential care may contribute to the cost of the service depending on income and ability to pay, and the services provided. In addition, there is an expanding community care programme. Australian Government funding for community care services will total $2.2bn in 2008-09, an increase of $260m compared to 2007-08.
Standard Life has increased exposure to risk assets in three out of five funds in its Active Plus and Passive Plus workplace pension ranges.
Some 48% of employers are unaware of the services or help they offer to members of their defined contribution (DC) schemes, according to Aon.
Jupiter Asset Management's Abbie Llewellyn-Waters, manager of the Jupiter Global Sustainable Equity strategy, explains why firms need to integrate ESG into their business model