C ANBERRA S UMMIT 2019 S UPER S S ILVER L INING D ELIVERING BETTER - - PowerPoint PPT Presentation

RICE WARNER CANBERRA SUMMIT 2019 SUPER’S SILVER LINING

#RWSummit2019

DELIVERING BETTER VALUE AND IMPROVING

MEMBER OUTCOMES IN RETIREMENT IN AN AFFORDABLE AND SUSTAINABLE WAY

Andrew Boal

Chief Executive Officer Rice Warner

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Agenda

CURRENT STATE MEMBERS FIRST A FOCUS ON OUTCOMES DIGNITY IN RETIREMENT, NOT SELF INTEREST

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Current State

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Damage to brand super

Productivity Commission report has criticised fund performance Royal Commission has exposed bad practices Government is concerned members are not getting value from group insurance Constant changes to super system since introduction of SG Regulators under pressure to be more effective Ongoing and high profile conflict between sectors Grandfathered Commissions banned from January 2021 Retirement Incomes Review announced

CONSTANT CHANGES AND REVIEWS IMPACT REPUTATION OF SUPER

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Our industry is much maligned, but has benefited the national interest

$2.8 trillion contribution to capital markets CPI + 5% returns

• ver 25 years

Reducing dependency on Age Pension Affordable and universal life insurance coverage Growing super balances will lead to many achieving dignity in retirement

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Growth of the Super industry

HISTORICAL AND PROJECTED SUPERANNUATION ASSETS AS A PERCENTAGE OF GDP

0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% Year

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Age Pension

Historical and projected proportion of the eligible population receiving the Age Pension

10 20 30 40 50 60 70 80 90 100 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 Percent of eligible population (%) Year % Full Rate % Part Rate % Receiving Pension

ACTUAL PROJECTED

➢ The proportion receiving a full Age Pension has fallen from 80% to under 70% ➢ It will keep falling from 68% in 2018 to around 57% in 2038 ➢ The cost will fall too from 2.6% of GDP in 2018 to around 2.5% of GDP in 2038

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Our industry continues to evolve and improve, and there is more to do

FINANCIAL YEAR EVENTS

2013-14 ▪ Introduction of MySuper 2014-15 ▪ SG reached 9.5% ▪ Financial System Inquiry Final Report 2015-16 ▪ Budget introduced measures to improve fairness, sustainability and integrity of the superannuation system 2016-17 ▪ The Treasury consultation on Development of the Framework for Comprehensive Income Products for Retirement (CIPRs) ▪ Establishment of Insurance in Super Working Group (ISWG) 2017-18 ▪ Productivity Commission Final Report into the efficiency and competitiveness of the Australian superannuation system 2018-19 ▪ Royal Commission Final Report into Misconduct in the Banking, Superannuation and Financial Services Industry

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MySuper

FUM IN MYSUPER PRODUCTS FROM 30 SEPTEMBER 2013 TO 31 MARCH 2019

100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 1/09/2013 1/11/2013 1/01/2014 1/03/2014 1/05/2014 1/07/2014 1/09/2014 1/11/2014 1/01/2015 1/03/2015 1/05/2015 1/07/2015 1/09/2015 1/11/2015 1/01/2016 1/03/2016 1/05/2016 1/07/2016 1/09/2016 1/11/2016 1/01/2017 1/03/2017 1/05/2017 1/07/2017 1/09/2017 1/11/2017 1/01/2018 1/03/2018 1/05/2018 1/07/2018 1/09/2018 1/11/2018 1/01/2019 1/03/2019 FUM in MySuper ($ million) Quarter

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Fees

DEFAULT PRODUCT FEES – 2017 MYSUPER VERSUS 2014 MYSUPER

SEGMENT AVERAGE PER MEMBER FEE ($P.A.) AVERAGE OF ASSETS FEE (%P.A.) AVERAGE ANNUAL FEE BY ACCOUNT BALANCE ($) $5,000 $20,000 $50,000

2014 Corporate 77 0.85 120 247 502 Retail 60 0.78 99 216 448 Industry 75 0.72 111 219 435 Public Sector 58 0.51 84 160 313 Total 66 0.71 102 209 423 2017 Corporate 81 0.76 119 234 462 Retail 75 0.97 123 268 559 Industry 75 0.79 114 232 468 Public Sector 41 0.55 68 151 316 Total 71 0.77 110 225 457

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Investment Returns

AVERAGE NET INVESTMENT RETURNS FOR MYSUPER PRODUCTS FROM 2014 TO 2018

2 4 6 8 10 12 14 2014 2015 2016 2017 2018 Average net investment returns for MySuper products (%) Financial year

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Members First

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Key 2018 Budget changes

• Member Consolidation
• Fee Regulation – caps and exit fees
• Insurance

Protecting Your Super Package

• Retirement framework
• Longevity products – CIPRs
• Budget changes for pensioners

Retirement

13

SOME ASPECTS OF PROTECTING YOUR SUPER PACKAGE HAVE BEEN

LEGISLATED WITH SOME CHANGES

NO CHANGES TO SG SCHEDULE

(except inactive members) Legislated

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Member consolidation

$6 $6 BIL

ILLIO ION FEE REDUCTION WITH CLOSURE OF 3

3 MIL

ILLION MEMBER ACCOUNTS

All in inactiv ive super accounts with balances belo low $6,0 ,000 will be transferred to the ATO to protect members through account consolidation ATO will proactiv ively fi find any lo lost super r and have it forwarded to a member’s current active account

ATO STARTS IT

ITS FIR IRST SWEEP IN IN

OCT

CTOBER 2019

2019

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Number of accounts against the number of superannuation members

5,000 10,000 15,000 20,000 25,000 30,000 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Number of accounts ('000) Year Accounts Population with superannuation

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Fee restrictions

NO LONGER POSSIBLE TO CHARGE

AN EXIT

IT FEE WHEN ROLLING

OVER SUPER FROM ONE FUND TO ANOTHER

3% CAP ON COMBINED

ADMINISTRATION AND INVESTMENT FEES FOR ACCOUNTS WIT

ITH LESS THAN $6,000

NEARLY

10 10 MIL

ILLIO ION ACCOUNTS

AFFECTED

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Insurance

Removal of in insurance for MySuper and Choic ice members with:

Inactive accounts - defined as those which have not received a

contribution in the last 16 months – unless have opted-in to retain cover (legislated in PYSP)

All new members under age 25 (re-introduced to parliament

4 July 19 in Putting Members Interests First bill)

Accounts holding less than $6,000 (re-introduced in Putting

Members Interests First bill)

ESTIMATED

REDUCTION OF OF

$3 $3 BIL

ILLIO ION IN GROUP INSURANCE PREMIUMS IF ALL LEGISLATED

COVER TURNED OFF FOR INACTIVE

ACCOUNTS FROM 1 JULY 2019

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Impact of PYSP on group insurance premiums

2 4 6 8 10 12 14 16 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Premiums paid ($ billion) Year Without PYSP With PYSP

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How Putting Members’ Interests First Bill if legislated would affect funds

Decrease in insured members Increase in insurance premium rates On day 1, new members have no cover Potential carve-

• uts for high-risk
• ccupations

The Senate Economics Committee has recommended that Protecting Members Interests’ First be passed with the only change being a deferral of the start date to 1 December 2019

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Other insurance implications if legislated

Loss of young members will create underinsurance gap and move risk to social security Likely increase in the number of complaints received by insurers and funds Less cross subsidies in the industry Rules required for when automatic cover switches on or off

100,000 200,000 300,000 400,000 500,000 600,000 700,000 15-24 years

Median Life Insurance Required Death Cover Required TPD Cover

Source: Rice Warner Underinsurance in Australia 2017

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A Focus on Outcomes

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APRA SPS 515 Member Outcomes

IMPLICATIONS FOR COHORTS OF RETIREES AND MEMBERS APPROACHING RETIREMENT

It is about members’ retirement outcomes! Super funds are required to set up strategic plans of delivering better retirement outcomes to members and have it reviewed at least annually The first assessment is expected to be carried

• ut in conjunction with the

trustee’s 2020 review of its annual Business Plan Needs to be considered at the same time as Retirement Income Framework requirements, including the covenant which the Government proposed to legislate by 1 July 2019 with commencement by 1 July 2020

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Requirements of SPS 515

EMBED MEMBER OUTCOMES

ASSESSMENT WITHIN THE FUND’S STRATEGIC AND ONGOING BUSINESS PLANNING PROCESSES

STIPULATE A VISION THAT

OUTLINES THE VALUE- PROPOSITION TO MEMBERS

IDENTIFY QUANTIFIABLE

MEMBER OUTCOMES BY MEMBERSHIP COHORT THAT ARE CONSISTENT WITH THE SUPERANNUATION FUND’S VISION

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Member Outcomes

• SPS 515 requires superannuation fund trustees to:
• consider the member outcomes that are consistent with

the fund’s vision

• Assess fund performance against these outcomes
• Embed this process within the fund’s strategic and

business planning process.

• Trustees must identify and specify key outcomes that the

fund seeks to achieve for its members. These must be stated as measurable objectives. These must be stated as measurable objectives.

• Product development will need to support the member
• utcome assessment ... Which will need to validate the

product development! Target Member Outcomes

BUSINESS PLAN STRATEGIC INITIATIVES ONGOING MONITORING BUSINESS PERFORMANCE REVIEW

APPROVE STRATEGIC OBJECTIVES TO SUPPORT TARGETED MEMBER OUTCOMES TARGET MEMBER OUTCOMES FOR FUND VISION

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Trustee obligations

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WILL BE IMPORTANT FOR

FUNDS TO PREPARE AND TAKE ACT CTIO ION EARLY

Legislative developments and heightened community expectations will impact how retirement solutions are designed and brought to market

Design and Distribution Obligations (DDOs) Proposed Retirement Income Covenant Interaction between retirement products and financial advice models APRA SPS 515 Strategic Planning and Member Outcomes

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Retirement Income Framework

Retirement In Income Covenant is the first stage of Retirement In Income Framework Superannuation trustees will need to formulate a str trategy to provide members with a path to achieve their retirement income objectives

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Funds will require a retir irement str trategy Funds will need to engage members in retirement strategy consider additional tools ls for r members - and potentially improve intra-fund advice offerings Main focus of framework is introduction of new reti tirement products - striking a balance between returns and income

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Financial advice models

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ROLE OF ADVICE AND

RETIREMENT

• Members need advice,

particularly as they approach retirement

• No default retirement

products

• 70% of members are

married at retirement – need to give advice to couples

ROYAL COMMISSION’S

FINAL REPORT

• Annual renewal of
• ngoing service
• Removal of

grandfathered commission

• No advice fees for

MySuper account (except intra-fund advice)

• Best interest and advice

standards

• Challenges to traditional

advice business models

• Political pressure to

accept recommendations

AND RECOMMENDATIONS

FROM THE PRODUCTIVITY

COMMISSION

• Approved Product Lists
• Removal of legacy

commissions structures

WE EXPECT

CT IN INCREASING FOCUS ON ON HIG IGH QUALIT ITY IN INTRA- FUND ADVIC ICE

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Dignity in Retirement, Not Self Interest

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Objective of superannuation

Pending legislation defines the primary objective of the superannuation system. This is to provide income in retirement to substitute or supplement the Age Pension

IDEALLY, WE SHOULD HAVE

A SYSTEM WHERE

THE DISADVANTAGED SHOULD BE SUPPORTED THE MIDDLE SHOULD BE PARTLY SELF-SUFFICIENT, BUT

THE AGE PENSION WILL SUPPLEMENT THEIR RETIREMENT INCOME, PARTICULARLY LATE IN LIFE

THE WEALTHY SHOULD BE LARGELY SELF-SUFFICIENT

THE DEFINITION IS BROAD AND

IT DOES NOT DEAL WITH ADEQUACY

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Retirement incomes review

MUCH IS BEING MADE OF THE REVIEW LOOKING AT THE RATE OF THE SG INCREASING TO 12% WHILE WE BELIEVE THIS IS GOOD POLICY, THE REVIEW NEEDS TO LOOK AT THE EFFICIENCY OF

THE ENTIRE SYSTEM IN AN INTEGRATED WAY

WE THEN NEED TO DEVISE A PATHWAY TO REFORM, THAT PRODUCES AN AFFORDABLE

PACKAGE OF OPTIONS TO IMPROVE OUR WORLD CLASS SYSTEM

THE GOVERNMENT IS UNLIKELY TO DEVELOP THE INDUSTRY AND ALLOW HIGHER CONTRIBUTION

RATES IF WE CAN’T REFLECT AND FIX ISSUES CALLED OUT IN THE LAST TWO YEARS

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Issues today

Issues

• The current means test creates disincentives

to save for those on middle incomes

• The OECD reports high rates of old age

poverty with the current level of the Age Pension

• There is a large gap in outcomes for renters

and homeowners, singles and couples

• The SG is set at a level today that will result in

majority reliance on the Age Pension in retirement

Options

• The taper rate could be reduced from $3 per

$1,000 of assets to $2.25

• The Age Pension could be set to 30% of

MTAWE instead of 27.7%

• Rent assistance to pensioners could be

increased by 40%

• We could continue with the rise to 12%

instead of pausing at 9.5%

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Impact on the Age Pension

Projected impact on social security spending

• 30
• 20
• 10

10 20 30 40 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 2064 2066 2068 2070 2072 2074 2076 2078 2080 2082 2084 2086 2088 2090 2092 2094 2096 2098 Impact on social security spending ($billion) Year Age Pension - Taper rate reduces to $2.25 Age Pension - SG rate increases to 12% compared to staying at 9.5% Age Pension - Payment rates increase to 30% of MTAWE Rent assistance for pensioners - Rates increase by 40%

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Impact on Tax Concessions

Projected impact on tax concessions when SG rate increases to 12%

5 10 15 20 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 2064 2066 2068 2070 2072 2074 2076 2078 2080 2082 2084 2086 2088 2090 2092 2094 2096 2098 Impact on tax concessions ($billion) Year Contribution Tax Concessions Earnings Tax Concessions

Note, these are not the same as budget impacts, though are close in the short term

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Projections – Annual retirement income (12% SG – Full unbroken career, retire 67)

Average annual retirement income in today's dollars, discounted at 3.5% p.a.

*Replacement benchmark is set to be 75% of net pre-retirement income

93% 73% 56%

• 20,000

40,000 60,000 80,000 100,000 120,000 20,000 40,000 60,000 80,000 100,000 120,000 Median income earner Average income earner High income earner Annual retirement income ($) Average Pension Payment Average Age Pension Replacement Income* ASFA Single Comfortable Replacement Rate