The Grattan Institute has labelled the Australian super system as “too complicated” and has proposed a three-pronged reform strategy to simplify superannuation in retirement.
In a report released over the weekend, the institute called for a list of top super funds, a lifetime government annuity for retirees, and free guidance service for retirement planning.
The Grattan Institute said that retirees are struggling to draw down their super, resulting in the system functioning more like an inheritance scheme than a retirement income plan.
Unlike other countries that provide automatic lifetime income, Grattan said Australia’s system offers little guidance, leaving retirees to navigate complex decisions about spending, investment performance, and the age pension.
The institute described the “little” guidance available as “unhelpful,” often pushing retirees towards account-based pensions, which require careful management to avoid outliving their savings.
“Half of those using an account-based pension draw their super at legislated minimum rates, which leave 65 per cent of super balances unspent by average life expectancy,” the report said.
As such, Grattan has proposed a three-pronged reform strategy to simplify super in retirement.
“First, retirees should be encouraged to use a portion of their super to buy an annuity from the government, which would pay an income that lasts retirees’ the rest of their lives,” Grattan said.
According to the institute, retirees should be guided, by both the government and their super fund, to use 80 per cent of their super balance exceeding $250,000 to purchase an annuity. This, it said, could boost retirees’ incomes by up to 25 per cent, while also ensuring that the bulk of retirees’ incomes, irrespective of their super balances, would be guaranteed to last the rest of their lives.
“Retirees’ remaining super would be drawn via an account-based pension, giving them flexible access to capital,” it said.
Second, Grattan called for the government to fund a free service to provide personalised retirement income advice for retirees and those approaching retirement.
“This service should aim to advise at least one-third of new retirees, and would cost about $360 million over its first four years and $50 million a year thereafter, which should be funded by a levy on super fund balances,” it said.
Lastly, Grattan suggested the government create a list of the top 10 super funds, selected by an independent expert panel, and then steer retirees towards those funds.
“The performance test and comprehensive assessments of fund performance by APRA should be extended to account-based pensions. These reforms could boost the incomes of future retirees who continue to opt for an account-based pension by up to $70,000 over their retirement,” it said.
Elaborating on the top 10 listicles, Grattan said it would implement the 2018 Productivity Commission recommendation to create a single ‘best in show’ shortlist of funds, compiled by an independent expert panel and extended to retirees’ offerings.
Funds should be selected on their capacity to deliver strong risk-adjusted returns in the long term, sound governance, and their capacity to provide the best guidance and advice, the institute said.
“‘Best-in-show’ would encourage all super funds to lift their game, because funds would compete to make the top 10 and stay there. Market discipline would come from experts who have the time, resources, and expertise to decide which funds to list, rather than individuals who don’t,” it said.
“It would also create a safe and simple choice environment for retirees, in contrast to the complex and perplexing one retirees currently face.”
Moreover, touching on the government’s Delivering Better Financial Outcomes package, Grattan urged that the package should proceed only once account-based pensions are performance-tested and all retirement products are included in APRA’s assessments.
“The complexity of the retirement income system means funds should be able to help their members on a more personal level. But if these moves are to work in the interests of retirees rather than funds, the government should first create a stronger market design,” it said.
According to Grattan’s statistics, about 80 per cent of Australians find retirement planning complicated and about 60 per cent expect their retirement will be financially stressful.
