At this month’s conference hosted by the Association of Superannuation Funds of Australia (ASFA) in Cairns, Queensland, delegates will have a chance to assess how far Australia has progressed in its bid to develop a greater global outlook. In recent years, the country has attempted to become the hub for investment in the Asia Pacific region, with only limited success. Nonetheless, it has a well-developed and sophisticated financial services sector which serves, among other things, a A$500bn (E52bn) pensions industry. This year’s ASFA gathering is likely to involve some lively debate, since there is a raft of new financial services legislation planned, which may result in a rationalisation of the industry. And since this is an election year, ASFA and other representative bodies will be in full lobbying mode.
Financial sector reform has been pushed by successive governments in a bid to bring higher levels of professionalism and supervision to the sector. Licensing and disclosure are a major part of the longterm reform process which began in mid-1990s, following the Wallace Enquiry, which resulted in huge changes to the financial sector and two pillars of regulation – prudential and consumer. A lot of the reform coming through now is concerned with consumer issues. Prudential supervision has been rather undermined, however, by the recent collapse of the country’s second largest general insurer, HIH and the failure of two superannuation operators.
ASFA has lobbied hard to make superannuation a key election issue for Australians. Director of policy and research, Michaela Anderson, says, “It’s high on the agenda and we are hopeful that the parties will make it a campaigning issue.” She goes on to add that the association takes the view that the three pillar structure of Australian pensions is fine, but the compulsory superannuation contributions, which are rising from 3% of earnings to 9% between 1992 and 2002, are insufficient: “It’s a growing problem; research shows that the gap between expectation and reality is way out of kilter.”
Australia doesn’t have the huge underfunding problems that face many European countries. Nonetheless, the relatively low level of guaranteed ‘super’ payouts is a cause for concern. In common with people in other parts of the world, the average Australian does not have a clear idea about pension provision. Research carried out by ASFA, which represents 80% of super funds in Australia, demonstrates that people are surprised, to the point of anger, to discover that when they retire after 30 years of work, they will get less than A$20,000 a year as superannuation.
The association employed market researchers to survey the expectations of ordinary citizens and found that 80% of them expected that amounts between $20,000 and $60,000 would be the minimum income they would require to maintain an adequate lifestyle in retirement. Coverage outside the compulsory regime is considerably lower. For example, only 39% of the self-employed have superannuation, despite the availability of generous tax break on contributions.
As an active lobbying group for reform of the pensions system, one of ASFA’s main arguments, aimed at all parties, is the importance of mutual obligation, amid concern that the government is not doing its part. This year, it has prevailed on all parties to commit to a review of super before the Federal elections. Anderson says that the ALP, the Labour Party, has now committed itself to a review very early in its next term and has made substantive comments to show its intent.
Anderson suggests the taxation of superannuation is too complex. Her team has studied the situation and has concluded that the only way to go is to tax pensions at the end, rather than at the beginning and during the contribution period, “If you are trying to tax pensions equitably, you can’t do it as you go along because it raises anomalies. If you were to take away the tax on contributions, you would instantly add 2%, which is some way towards where we want to be.”
The Association is campaigning, somewhat ambitiously, for compulsory contributions of between 12% and 15%. “Then you top it up with voluntary contributions. We are saying you can get part of the way there by returning the up front tax,” says Anderson.
Issues for multi-nationals have come to the fore in recent months, and ASFA has again successfully lobbied to remove barriers to the globalisation of the workforce. For example, many Australians who have established a personal or self-administered pension plan, hold a position within a multi-national. To address the problems created by their working overseas, the Australian government announced a proposal to legislate that it would not be necessary to live permanently in the country to meet the ‘active member’ test and that the fund would remain complying where the member/ trustee’s move overseas did not exceed two years. The legislation was delayed but now ASFA has been assured that it will go through in this session of Parliament. Equally, the issue of so-called ‘back-packers’ – those people with superannuation plans that are departing Australia permanently; the Howard government had said they could not take their super with them. ASFA has now secured a reversal of this policy.
In respect of foreign nationals working temporarily in Australia but effectively remunerated by their ‘home’ employer, the super guarantee (state pension) legislation only provides an exemption for a narrow class of visa holder. Most will be effectively paying superannuation twice. ASFA supports a system of reciprocal arrangements. Indeed, there is one being negotiated with Portugal, but the association recognises that agreements in this area are rare. ASFA is recommending that there should be no requirement for super guarantee contributions to the extent that equivalent super benefits are provided in the home jurisdiction in respect of Australian remuneration. However, no response has been forthcoming on this point.
Superannuation coverage for employees in Australia has more than doubled since 1984, when the concept of employer-sponsored pensions was extended out from the public sector and key executives within private companies. For permanent full time workers, coverage now stands at 98%. The increase in coverage is a direct result of the introduction of compulsory superannuation, firstly as part of industrial awards dealing with employee wages and conditions and, since 1992, through the Superannuation Guarantee contributions required by Federal legislation.
Assets in the ‘super’ sector have increased by over A$300bn since 1992, totalling $495.3bn at the end of December 2000. Increasingly, super funds provide what the Australians call ‘accumulation’ (effectively defined contribution (DC)) style benefits, rather than the more traditional DC structures. Most superannuation is provided through a range of trust-based funds, many of which are linked to a particular employer or industry. At the end of June 2000, there were 219,219 funds registered with the Australian Prudential Regulatory Authority (APRA) or the Australian Tax Office (ATO). In fact, the vast majority of these were small funds with less than five members, mostly supervised by the ATO.
The funds operating in the industry break down into a number of categories. Corporate or Enterprise Funds represent 16% of total assets. Around 25% of private sector workers are covered by a corporate fund, though the number of funds has fallen from 6,000 to 2,000 in the last five years. This has come about due to amalgamations where there may have been separate schemes for different grades. Consolidation will also have occurred due to company mergers. Overall, though, many companies have decided it is not their business and have decided to handle their super through industry funds or master trusts.
Industry funds are sponsored by employers and trade unions. At the end of December 2000, there were 61 such funds with 6.73m accounts and $40bn of assets (8.2%) of the total. Around half these funds now have public offer status, which means they can accept contributions from employers, employees and the self-employed from their own and other industries.
Public sector funds represent 22% of total assets of the Australian super industry, totalling A$108bn. ASFA research shows that some public sector schemes have a high level of unfunded employer liabilities. While downsizing of public sector employment has also converted some of those liabilities into actual payments, recent estimates of unfunded liabilities included $14bn for the Victoria government and $70bn for the Federal Government.
There were 149 retail super funds being marketed at the end of 2000, with $146bn of assets representing 30% of the total. This includes master trust accounts, personal super plans and allocated pension and annuity products.
The biggest growth area has been small funds, where the average account balance is over $170,000, reflecting the fact that these funds are particularly attractive to high net worth individuals. These are the equivalent of what are known in Europe as small self-administered schemes.
The remainder of pension saving is attributable to retirement savings accounts and indirectly related products sold by the life insurance companies. Currently, there are around 170 approved trustees, managing around one third of the total assets of the sector. The top five approved trustees account for around 40% of assets under management and nearly 50% of members of large retail superannuation funds. While some of the larger corporate and public sector funds may take care of member administration and investment management, these services are normally outsourced. The fund management industry for pensions is growing at around 15% per annum and currently totals over A$350bn. The largest managers are, naturally enough, the big domestic insurers and fund managers in Australia, namely AMP, BT Australia, Commonwealth Bank, Lend Lease, Macquarie, National Mutual and Westpac.
The activities of European and US fund players has been encouraged, up to a point, but the legislation that was supposed to control these activities, the Foreign Investment Fund (FIF) law, has turned out to be rather less accommodating from a taxation standpoint than was initially planned. As things stand, the FIF, combined with the binding nature of most securities dealership agreements, actually makes it quite difficult for Australians to use ‘offshore’ managers.
The major consulting firms operating in Australia include Towers Perrin, Buck Consultants, William Mercer, the Australian Superannuation Group and White & Lewis. Specialist asset consultants such as Intech and Industry Fund Services have a strong position in terms of funds under advice.

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