Not-for-profit funds will continue to lead the pre-retirement savings market in Australia over the next 20 years, but the post-retirement market will be the domain of SMSFs. And retail funds will soon overtake industry funds for total market share.
These are among the important trends in the structure of the super market in the years to come, and the relative market shares of the main participants, as highlighted in the eighth two-yearly study by Deloitte: ‘Dynamics of the Australian Superannuation System – The Next 20 Years: 2015-2035’.
But, while the superannuation system will grow to $9.5 trillion by 2035, it will still be inadequate for the retirement incomes of the average Australian. The latest study, published last week, predicted that the post-retirement part of the system would continue to disappoint, projected to be only $1.5 trillion of the total market in 2035, assuming no remedial legislation. About 60 per cent of this will be accounted for by the SMSF sector, with a combine employer-sponsored and personal retail sector coming a distant second, followed by industry and public sector funds.
The SMSF sector, currently the biggest of the five sectors (industry, public sector, retail, corporate and SMSF) with 34 per cent, will decline to 30 per cent of the total in the next 20 years. Industry funds will grow from 21 per cent to 29 per cent but retail funds, dominated by the banks, will grow from 26 per cent to 34 per cent.
Russell Mason, Deloitte’s head of superannuation, said that the adequacy of the system would still be an issue despite its projected growth. It will rise from the current level of about 110 per cent of GDP to about 200 per cent. This is more, even, than the 180 per cent predicted in the last 20-year projections published in 2013.
Mason said that, with respect to the slow growth in the post-retirement area, there were still a lot of people who used their lump-sum super payment to extinguish debt on retirement.
One of the suggestions, which Deloitte said should be discussed by the industry and government, is introducing a lifetime contributions cap – of maybe $580,000 – to replace the current annual $30,000 cap for concessional contributions and $180,000 for non-concessional contributions.
The report also shows, for the first time, that there is a “hint” of a drop in cashflow for the super system at the end of the projections, but the vast majority of funds would remain cashflow positive for the next 20 years, Mason said.
Diane Somerville, a Deloitte principal, said that the big banks had deep distribution networks to attract and retain members. At the moment, too, they were locked out of about 60 per cent of the employee market because of the current system of Awards and workplace agreements. If this was changed by the Government, as has been suggested, the retail sector would grow even faster.
The industry fund sector will become the largest in pre-retirement or accumulation phase by about 2025 but the SMSF sector will scoot away from the rest to lead the post-retirement sector within the next couple of years. This is because people tend not to start an SMSF until they are in the last 10-20 years of their career and have much larger balances.
Ben Facer, Deloitte partner, said there were several options for a more sustainable super system –
> compulsory member contributions, of perhaps 3 per cent a year, with an opt-out option in certain conditions
> increase the SG more quickly – currently due to rise from 9.5 per cent to 10 per cent in 2021 and then 12 per cent by 2025
> have a bi-partisan super policy for greater certainty
> encourage people to take income streams in retirement rather than lump sums, and
> introduce measures to discourage the use of super as “estate planning”.