The independent consulting firm Rice Warner has just released a discussion paper proposing that families be able to pool their superannuation into a joint account.
There is much to recommend this idea. At the time of retirement about two-thirds of Australians are in a marital relationship so it is reasonable to expect there is a considerable amount of joint planning/sharing of retirement savings plans and income needs.
Today while people are in the workforce they will have a separate superannuation account. Indeed the system is inefficient in the sense that there are around 33 million accounts in the super system compared to around 12 million working Australians.
The Cooper Review into superannuation proposed a program of administrative efficiency known as Superstream and that should see further reductions in the number of accounts. Rice Warner believes that if joint accounts were allowed between three and seven million accounts would move or consolidate.
That would be quite an efficiency gain for the industry while lowering or reducing fees for fund members.
Of course within the super system there already is a proxy for pooled super accounts - self-managed super funds. Indeed the ability to have a family super fund is possibly one of the "softer" but important emotional reasons why SMSFs continue to grow strongly.
Most SMSFs co-mingle the assets so from a practical viewpoint they act like a joint super account with each member's share accounted for.
One of the challenges within the large institutional fund area is getting members to be more engaged. Rice Warner shares the findings of a survey done for a client where out of a sample of 1500 fund members 53% did not know their investment option and only 265 were aware of fund campaigns designed to encourage them to save more.
That is in stark contrast to survey work that Rice Warner has done for Vanguard that shows SMSF members are clearly very engaged in making active decisions about their super savings and retirement plans.
Rice Warner believes there are a number of benefits to joint super accounts.
While reducing the number of accounts within the system by several million is a practical win the other benefits may include:
- Making retirement projections more accurate because it could include age pension levels based on current marital status
- Reducing the female retirement savings shortfall as couple plan retirement finances together
- A simplified joint structure may appeal to people who want the flexibility without the responsibility of running their own SMSF
It is interesting to reflect on why the super system has evolved to where it is today. Previously retirement benefits were taxed so it was necessary to calculate tax for an individual. Also a key structure of super was the concept of "reasonable benefit limits" which again required the administration of each individual's benefit so that it stayed under the threshold.
Super also used to be tied to work - the so-called "work test".
With the abolition of benefit limits, no tax on super pensions and the abolition of the work test in 2007 these key drivers of separate account administration are no longer factors.
However, to make the change would bring its own administration challenges and Rice Warner are proposing that joint accounts be optional, not compulsory and given the caps on the concessional contribution amounts they would need to be allocated to each partner.
Everyone in the super industry agrees that raising the levels of members engaged with their super is a positive, but another major impact of allowing joint accounts is that it is likely to drive stronger levels of competition between funds as they compete to convince couples that their fund is the one where the superannuation savings ought to be consolidated.
Competition among funds at the member level has not really been a feature of the Australian super system - in part because it was linked to industrial awards or companies - but allowing joint accounts may be a competitive force for good both on the product innovation front and getting fees lower.
By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
17th April 2014
1st-May-2014 |