Australian super system is good, but not great

Wednesday, 12 November 2014

Rosemary Vilgan, CEO of one of Australia’s largest superannuation funds, QSuper, has challenged the industry to step up and redefine what success looks like for Australian members.

In her delivery of the inaugural Industry Oration at the 2014 Australian Superannuation Funds of Australia (ASFA) Conference in Melbourne, Ms Vilgan said it was time the industry tackled the obstacles to delivering better certainty in retirement outcomes.

“The second super revolution is on its way and we, as an industry, have a responsibility to embrace it,” Ms Vilgan said.

“Since the first revolution in the 1980s, a strong foundation for super in Australia has been built, with the means-tested age pension, near compulsory SG coverage and incentives for voluntary saving.

“But ordinary Australians are still left with too much uncertainty when it matters most, asking – how much will I have at retirement, what income will it produce and, for how long?

“The second super revolution will tackle these questions and measure our success on how reliably we deliver the super outcomes we promise our members,” she said.

Ms Vilgan said the industry had to deal with the two biggest obstacles to achieving better certainty in retirement outcomes for Australians – market risk and longevity risk – and urged Trustees to avoid only thinking in the average asset space for default members.

“Effectively mitigating market risk is about looking at the interplay of the sequence of returns, interest rate and inflation risk not just in an asset space, but against the income liability each individual wants to fund,” Ms Vilgan said.

“This is what our members are currently experiencing. This is what they worry about and try to manage themselves, lying awake at night wondering if they’ll have enough.

“As an industry, we need to grasp that members receive individual money-weighted returns, not the average time weighted returns of our funds. This is sequence risk. The sequence of returns matters, as does the individual effects of inflation and interest rates.

“To effectively mitigate market risk, funds, Trustees and investment strategists should be acknowledging, debating and quantifying the effect of different economic environments on different members,” she said.

Ms Vilgan said the other elephant in the room was longevity risk.

“Just as the first super revolution built a collective accumulation vehicle, today’s challenge and opportunity is to build a collective decumulation vehicle,” she said.

“We have seen the green shoots of this concept with options like annuities, but we are yet to deliver a model that effectively and efficiently deals with longevity risk.

“It is tremendously inefficient for a single person to plan for unpredictable longevity. Australians are in fact underspending in retirement because they’re worried about how long they will live, and that has a flow on effect for the entire system.

“Instead of funding retirement incomes, the tax advantaged super system in this country is funding wealth creation and estate planning – we can do better,” she said.

Ms Vilgan said collective decumulation vehicles were three simple questions away from the industry’s reach.

“Trustees needed to turn their minds to questions of who would pay in, who would be in each pool and how to invest the funds,” she said.

“These certainly are not simple questions to answer, but they are worthy ones. Not doing so will waste one of the greatest opportunities of our time to improve the future state of financial affairs in this country.”

Ms Vilgan’s comments today support the sentiments of international economist Robert Merton, who says the Australian industry needs to shift its focus away from lump sums to retirement income.

For a full copy of Ms Vilgan’s speech please contact Belinda Taylor at QSuper on 07 3029 9374 or