Saturday, February 7, 2009

Time to revamp - or retire - old-age schemes

Feb 5, 2009

By Bruce Gale

SHOULD Australia abandon its compulsory superannuation system and renew its faith in the country's government-funded old-age pension system? This radical solution to the problems facing the once-popular compulsory savings scheme is not being seriously considered by policymakers. But it is surely the sort of thing on the minds of many Australians these days, in the wake of the global financial crisis.

'My superannuation fund has been trashed,' one disgruntled investor lamented to Reuters last week.

In 1992, as part of an attempt to address an expected demographic shift as the population aged, the Australian government introduced a pension scheme similar to Singapore's Central Provident Fund (CPF). The major difference was that while legislation in Singapore provided contributors with a guaranteed annual 2.5 per cent interest on their ordinary accounts in the CPF, the Australian system involved thousands of pension funds operating as trusts under the country's Superannuation Industry (Supervision) Act. There was no minimum rate of return requirement, nor any government guarantee of benefits. But the scheme did offer the prospect of high returns.

Today, however, with the collapse of financial markets wiping huge sums off pension fund savings, the scheme no longer seems quite so attractive. Yet logic suggests that if the government is to cope with the growing financial burden imposed on it by an ageing society, workers should put more, rather than less, of their savings into such funds.

In Australia, employers are required to make compulsory superannuation contributions on behalf of their employees every three months. Since July 2002, the minimum contribution has been set at 9 per cent of an employee's earnings. And since 2005, most employees have been able to choose the fund they prefer.

The global financial meltdown - which has wiped out a quarter of the value of the superannuation funds - has produced a sharp rise in the number of older people having to fall back on state pension, exactly the sort of thing the government was hoping to avoid. Finding their draw- downs from the superannuation funds insufficient, more than 5,000 people a week claimed the fall-back state pension in December, up from 3,500 in September.

The government pension provides for a very limited and low-cost retirement lifestyle for citizens aged 65 and above. Depending on an applicant's assets and income, a single retiree can receive up to A$562.10 (S$543) a fortnight. For couples, the amount is set at A$469.50 each. Singles can also earn up to A$138 a fortnight (couples A$240) and still receive the full pension. These figures represent about one-fifth of a worker's average salary at retirement. Part pensions are paid to single retirees earning up to A$1,558 a fortnight (A$2,602 for couples).

With doubts rising about the ability of the superannuation system to achieve its aim of relieving the fiscal burden on the government as the population ages, Treasurer Wayne Swan has ordered a fresh review of the government pension system. The review is likely to recommend that older Australians remain part of the workforce after they reach retirement age.

One scheme already in existence requires workers to register when they reach 65 and then claim lump-sum bonuses of up to A$33,400 if they defer claiming a pension by five years. This scheme reportedly saves the government more than A$250 million annually.

Meanwhile, news of the poor performance of compulsory superannuation funds last year has angered retirees and led to demands for better governance and structures. Superannuation Minister Nick Sherry, for example, has urged the superannuation industry to find new ways to cut annual fees. The proposed overhaul includes new product disclosure requirements, changes to the way funds report and lower administrative costs.

While the superannuation system has come in for considerable criticism, a recently released study suggests that the overall performance of Australian superannuation funds has been much better than is widely believed.

A report released late last month by asset consultants Watson Wyatt acknowledged that Australian superannuation fund assets fell significantly last year. Taken over a period of 10 years, however, the report noted that asset growth averaged 12 per cent per annum - the highest among the world's 11 largest pension markets. Hong Kong came in second with a 10 per cent annual compound rate, and Germany third, with 6 per cent. US funds, by contrast, could manage only 3 per cent annual growth over the same period.

Given all the negative publicity, however, it is not surprising that voluntary contributions (the amount employees pay in excess of the legally stipulated minimum) have nosedived in recent months. But if the superannuation system is to work as it is supposed to, there is a strong argument for ensuring that contributions rise.

A recent research paper released by the Association of Superannuation Funds of Australia argued that, at current levels, the superannuation system is unlikely to deliver a comfortable standard of living for most Australian retirees. Indeed, long before the global financial crisis hit, critics were arguing that compulsory superannuation contributions needed to be lifted to around 12-15 per cent.

All this suggests that neither the superannuation system, which is closely linked to global financial markets, nor the basic state pension, which now operates as a fallback, is likely to be scrapped. Both, however, could be in for a major revamp. All eyes will be on Treasurer Swan when he announces the federal government's budget next month.

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