As Australia’s superannuation industry continues a period of introspection and change, lurching from commissions and reviews, to political debate, regulatory change and more reviews, it would do well to lift its head above the weeds and cast its gaze outward.
Australian superannuation is in many ways a world leading pension system that can be and is used as a model example around the world. The reviews and commissions, however, have shown that there is room for improvement. Important lessons can be learned from other international best practice examples, with the closest, and perhaps most useful, coming from our antipodean neighbour just across the ditch.
An All Black retirement
KiwiSaver is New Zealand’s equivalent to superannuation. Although voluntary, the compelling benefits and opt-out nature of KiwiSaver mean an overwhelming percentage of working New Zealanders have active accounts. As a defined contribution system, KiwiSaver has many similarities with Australian superannuation. There are, however, some key differences. Here, we highlight three features of KiwiSaver Australia could consider adopting.
Every KiwiSaver provider has an independent trustee – known as a supervisor – licensed by the Government’s Financial Markets Authority (FMA). While the supervisor’s role and fiduciary duties are similar to those of an Australian superannuation trustee, the key word here is independent.
In New Zealand, a KiwiSaver supervisor is defined as a licensed entity independent of the KiwiSaver scheme provider. To hold a license, supervisors must show that they are truly independent of the management of the KiwiSaver scheme, both in its ownership and the relationships its directors and senior managers have with the supervised entities. Such clear legislation ensures from the outset that the supervisors of the nation’s retirement savings are not compromised by any potential conflicts of interest.
By contrast, and despite being highly successful by most measures, the Australian superannuation industry suffers from ingrained structural conflicts of interest.
Vertical integration has made business sense for many funds; however, it has resulted in a situation where many boards are responsible for both the management and supervision of funds. This creates a fundamental conflict, akin to being trusted to mark your own homework. Or asking a Wallaby or All Black to referee the Bledisloe. How can you negotiate fees with yourself? And how can members trust that you are acting in their best interests?
KiwiSaver represents an alternative to the Australian governance model – one in which legislation mandates that those supervising the management of funds are truly independent.
By following the lead of the KiwiSaver system, Australian superannuation would free itself of structural conflicts that are inherent to many current superannuation business models. Given the revelations of the Hayne Royal Commission, has the time come to mandate independent supervision of Australia’s AUD$2.9 trillion retirement savings, helping restore public confidence in the system and negate the need for future Royal Commissions?
One account to rule them all
A further shortcoming of Australian superannuation laid bare by the Royal Commission was the number of Australians with multiple, forgotten or lost superannuation accounts.
When Australians change jobs, they are often entered automatically into a new fund with their employer’s default provider. This has led to approximately 40% of superannuating Australians having two or more accounts.
Multiple accounts mean multiple fees. Australians pay an estimated AUD $2.6 billion per year in extra fees, while forgotten accounts of course remain subject to fees, leaving balances to be steadily eroded over time.
At the last count, lost Australian superannuation accounts numbered a staggering 6.2 million, with a total balance of AUD$17.5 billion. Despite various initiatives, this figure seems only to increase over time.
Lost balances and multiple fees represent a major blow to the finances of many Australian retirees. This systemic problem could be simply eradicated by taking a leaf out of the KiwiSaver book.
When a New Zealander changes jobs or leaves the workforce, their KiwiSaver account moves with them. While remaining free to change providers whenever they want, this means that New Zealanders can only be in one scheme at a time – no multiple accounts, multiple fees and forgotten or lost accounts. Simple, yet highly effective.
To address the problem of unintended multiple accounts, the Australian Government recently introduced the ‘Protecting Your Superannuation Package’ designed to find and consolidate inactive accounts with low balances. Australia should consider whether this is enough, or if it should go further and look to emulate the KiwiSaver approach.
Processing contributions the Kiwi way
A third attribute of KiwiSaver that Australian superannuation could consider relates to the way contribution payments are processed. Many Australians may be surprised to find that their super contributions are not paid alongside their salary. Instead, employers make a quarterly payment on behalf of the employee to their nominated account. This system can create several problems.
At best, quarterly payments mean that some super contributions will take three months to make it into the employees’ super accounts. The funds in question remain in employers’ accounts gathering interest, rather than being instantly deposited in the designated super fund to begin generating investment returns.
At worst, a delinquent employer may ‘misplace’ funds set aside for super payments or go into liquidation with several months of payments outstanding. In this scenario, the Australian Taxation Office faces a significant challenge to track down missing funds well after the fact, and members can lose out.
In New Zealand, KiwiSaver contributions are paid by the employer to the Inland Revenue Department (IRD) alongside their withheld income tax. The IRD then in turn pays the funds to the employee’s nominated KiwiSaver account. This means contributions are paid in a timely manner, and the IRD is well placed to chase up any missing payments, essentially, in real-time.
For employers, making one simple payment to a government department that covers all employees’ tax and superannuation liabilities may represent a more straightforward approach than having to separately process superannuation payments to the various funds nominated by employees. For members, KiwiSaver’s simplified payment system ensures that contributions find their way into their nominated fund on time.
Adopting a KiwiSaver style approach to processing contributions may well be positively received by the industry as it has advantages for all stakeholders, particularly the members whose interests it serves.
Towards best practice
As population demographics change across much of the world, many countries are beginning to feel the strain of an ageing population. Increasing costs of retirement coupled with a reduced proportion of the population in the workforce act as significant burdens on fiscal sustainability and economic productivity.
The Australian superannuation and KiwiSaver schemes represent two of the world’s leading pension systems. Both Australians and New Zealanders should be grateful that they benefit from a scalable and sustainable pension system; one able to deliver strong outcomes for retirees while preventing the worst impacts of an ageing population on the domestic economy.
However, both systems must strive for continuous improvement. For Australia, the KiwiSaver system suggests potential solutions to the challenges of ensuring independent oversight, removing the costly duplication of fees and simplifying the payment of contributions. In the wake of a damning Royal Commission, these lessons are not only timely, but perhaps essential to restore public trust in one of the key pillars of Australia’s economy.
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