C3: Future of retirement savings: Critical policy decisions Michael Davison Senior Policy Adviser – Superannuation CPA Australia Thursday 20 November 2014 3:30PM - 4:20PM #CPACONGRESS Future of retirement savings - critical policy decisions Michael Davison Senior policy adviser – superannuation CPA Australia Australia’s retirement savings system • • • • a ‘role model’ for the developed world accumulation phase is well developed The retirement (decumulation) phase is underdeveloped No long-term vision or goal The three pillars • The age pension • Compulsory superannuation guarantee (SG) • Voluntary superannuation Projections of superannuation assets and age pension coverage Source: Treasury projections, Intergenerational Report 2010 The three pillars • The age pension • Compulsory superannuation guarantee (SG) • Voluntary superannuation The international comparison • Melbourne Mercer Global Pension Index • Denmark • Australia • Netherlands • Global AgeWatch Index 2014 • Australia 13th overall • 61st for income security Australia’s retirement savings policy • Long-term vision • Improve adequacy • Encourage retirement income culture A long-term vision and goal Primary objectives • Encourage self-funded retirement savings • Target government assistance at low and middle income earners • Insure against risk Primary characteristics • Simple • Sufficient • Sustainable A long-term vision and goal • • • • • • • • • Poverty alleviation or income / standard of living maintenance? Adequacy target Coverage Appropriate encouragement – incentives vs compulsion Level of government support Accessibility Interaction between super and age pension Non-super investments Remove from political cycle Fine-tune accumulation • Flexible lifetime contribution caps • Remove age limits for contributions • Remove ’10% rule’ for deductibility • Extend SG to self-employed • Remove minimum $450 pm SG threshold • Retain low-income superannuation contribution • Extend co-contribution scheme Encourage a retirement incomes culture • • • • • • • Pension plans not savings plans Income during retirement not lump-sum at retirement Retirement benefit projections ‘Superannuation for life’ Discourage lump-sums through incentives or limits Innovative flexible retirement income products Default super pensions – MyPension Competing financial needs for retirees • Access to capital • Access to good returns • Protection from risk Current retirement options • Lump-sum benefit • Account-based pension • Age pension Future retirement income options • • • • • Lump-sum benefit Superannuation income stream Deferred income stream Age pension Non-superannuation savings Lump sum benefits • Discourage or restrict access to lump sums • Need some access to lump sums Superannuation income streams • • • • • • Account based pensions Flexible annual drawdowns Allow lump sums Subject to investment risk Don’t effectively address longevity risk Subject to age pension income and assets test • Need innovation and default income streams Deferred income streams • Allow deferral of consumption of retirement savings • Deferred lifetime annuities (DLAs) • payable for life • Protect against longevity and investment risk • Guaranteed income • However, no return of capital • No tax concession during deferral period • Subject to age pension test during deferral period • Need pooling The age pension • Safety net or cargo net? • Eligibility age? • Eligibility tests? Non-superannuation savings • The family home • Other assets The ideal retirement solution • Default superannuation income stream • Longevity insurance / deferred income component • Limited access to lump sum Regulatory impediments • Deferred annuities not tax exempt during deferral period • Inflexible SIS pension and annuity rules • Annual payment levels • Indexing • Residual benefits • No long-term bonds or investments A long-term plan • Awaiting reviews • Financial System Inquiry • Review of retirement income stream regulation • White paper on the Reform of Australia’s Tax System First steps • A long-term bipartisan vision for retirement savings • Address regulatory impediments for income streams • Encourage income stream culture • retirement income projections • education • - ‘Super for life’ – appropriate flexible saving incentives and encourage default income streams Longer-term considerations • Reconsider taxation of lump-sums • Overall level of super tax concessions – do they need to be capped? • Age pension age and eligibility? • Preservation age? • Appetite / need for compulsion • Collective pooling? Questions?