October 27, 2010 Tom Murray

The recent research carried out by Mercer for the Australian Centre for Financial Studies[1] makes some fascinating points -(No, it really does.) This report is the second one produced for the Centre and it creates a global pensions index by which they compare the retirement income systems in fourteen countries across all five continents.

 

The Australian superannutaion system comes out as one of the best in the group – although slipping from last year’s second place to fourth position. While the strengths of Super are well known, the report also goes on to recommend changes that could move it from the B-Grade status into an A-Grade status, (incidently, no country managed to get an A-Grade). But the issues on which the Australian system lost points are far easier to resolve than the issues that other countries had.

 

The retirement income systems were compared across three major critera: adequacy of current provision; sustainability of that provision in the future and the integrity of the private sector system supporting the primary pillars of governmental pension provision.

 

Without going into the details of exactly what points were awarded (the full report is available here), the ACFS research showed the key weaknessess of each countries alongside a list of possible remedies.

 

Australia has an excellent basic structure that could easily be improved upon to make it a top-class system. The research shows that there are a number of weaknessess that could be quickly, and cheaply, addressed. The areas in which Super fell down were;

 

  1. Reporting – no projections
  2. No mandating that part of fund must be taken as an income stream
  3. Too many funds leading to lack of efficiency (higher costs)
  4. No mechanism to increas pension age in line with life expectancy increases

 

What’s important about this list, in terms of improving the situation, is that action can be taken here without major upheaval to the system or major expenditure by the government. Already the government is considering moves to improve annual reports by mandating illustrations (see previous blog) but it will take only a legislative change to mandate a proportion of the fund to be annuitised and to move pension age forward in steps as life expectancy increases.

 

While reducing the number of Super funds might appear more difficult, regulation changes to make it easier to amalgamate one’s funds would make people consider costs more, as they decided which fund to bring all the rest into, and the winners will be those who can keep costs lowest.

 

The new governement should take a close look at this report – it might show them an effective way to make Australia’s Superannutaion system into the world’s number one – and without major Treasury expenditure. That’s got to be a winning combination.

 

Tom Murray


[1] Melbourne Mercer Global Pension Index – October 2010

Illustrate Plus, Pensions, superannuation, Life and Pensions, Australia, regulation, Ageing population, Life & Pensions, pension time-bomb

Tom Murray

Tom is Head of Product Strategy at Exaxe with primary responsibility of overseeing product direction. Tom has extensive experience of managing web based insurance software from conceptual design through to commercial release and beyond. Tom has been leading the development of the Exaxe Internet insurance architecture since August 1999.

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