The ageing Baby Boomer generation is dramatically pushing up payouts and outflows from super funds to retired members in pensions, while lump sums have jumped more than 50 per cent in the past five years.
Figures from the Australian Prudential Regulation Authority show funds paid out $76 billion in retirement benefits in the 2019 financial year compared to only $50 billion in 2013. That growth rate is set to continue as retiree numbers jump.
“The number of Australians aged 65 or older will rise by around a third to reach an estimated 18 per cent of the population by 2030,” APRA said in its current Insights publication.
“This will drive further increases in total superannuation benefit payments, which have nearly doubled over the past 10 years, and present headwinds for the scale and sustainability of superannuation funds.”
The overall growth of the superannuation system should allow it to overcome the challenges of rising retiree numbers. The above chart, from Household, Income and Labour Dynamics in Australia (HILDA) at Melbourne University, shows the reliance on the age pension for over 50 per cent of income has declined significantly in recent years for all but the over-80 group, despite population ageing.
That means the budget will not be hit dramatically by population ageing, and projections from the Australian Taxation Office show the move away from pension-funded retirements will grow significantly.
By 2023, 43 per cent of retirees will be self-funded when they leave the workforce, compared to only 22 per cent at the turn of the century.
While that may be the overall situation, even for funds that suffer significant increases in the age profile of their membership, the situation will not necessarily be damaging.
“Even if contributions decline a bit they can still cover benefit flows from investment income,” said David Knox, partner with superannuation consultancy Mercer.
“While around half of investment income might be capital gains, if a fund makes 8 per cent returns and four per cent is dividends and interest, that will be enough. Generally real returns of 4 per cent [above inflation] should be reasonable,” Mr Knox said.
APRA recently released its ‘heat map’ guide to the performance of super funds as part of its aim to force the merger or closure of underperforming and small funds. Mr Knox said that size was not necessarily a determinant of sustainability for funds with ageing member profiles.
Rather fund performance will drive longevity and capacity.
“Merging two underperforming funds doesn’t necessarily fix their problems,” Mr Knox said.
APRA also found that super members are getting cannier and will move their money out of funds they no longer like or trust. Over the past five years there have been times when outward rollover flows from the system have spiked. But they have usually been quickly caught up by the overall growth in the super system.
It is important to note these rollovers are mainly not removals from the super pool, except for cases when the money was placed in self-managed funds. SMSFs, while they amount to one quarter of total super assets at $746 billion, only account for some 9 per cent of members and their growth has slowed in recent years.
In the past the spikes in rollovers have been regulation driven, with the establishment of MySuper defaults in 2014 seeing a rush of money from existing retail funds into their newly created, low-cost MySuper options. The introduction of the $1.6 million cap for tax free pensions in 2017 caused an outflow of funds, mainly as wealthy retirees moved excess pension monies back into accumulation mode or out of super altogether.
Scandals caused outflows
Since 2018 the moves have been driven by scandals that engulfed many bank owned retail funds during the Hayne banking royal commission. The initial revelations caused an outflow mid last year and this has been followed by a tsunami like movement this year and $31 billion was drawn from retail funds and mainly moved to industry funds.
That move caused APRA to observe: “While superannuation members have traditionally been thought of as disengaged, the sharp jump in outward rollovers since the royal commission indicates that active members are prepared to vote with their feet and change providers where they feel it is in their best interests.”
Moves by regulators and the super funds themselves to encourage members to close down unnecessary and expensive multiple accounts have worked. APRA’s Insights showed account numbers declined from more than 30 million in 2010 to about 24.5 million by 2018.
Recent legislative changes which see the ATO and the industry fund group AUSfund hoover up inactive accounts and match them to members’ existing active accounts will see that process enhanced. Since the process began last month 2.775 million inactive accounts have been dealt with so the average number of funds per member will decline further.
The New Daily is owned by Industry Super Holdings