Opinions

CAANZ

Are we there yet?

It’s often said the super system won’t reach maturity for at least another 25 years. However, when you look at the net cash flows of the super industry and consider other factors, I think this view might be wrong.

Compulsory super first appeared in the mid-1980s when 3 per cent of salary was put into industry super funds via industrial awards and agreements. Those who joined the workforce back then will be thinking about retirement over the next 10 to 15 years.

Legislated compulsory super, called the super guarantee, first appeared in July 1992 at 3 per cent of salary for smaller businesses and 5 per cent for all other enterprises. Those who joined the workforce back then will be thinking about retirement in about 20 years’ time.

Employers began paying 9 per cent of salary into super from July 2000 and in about 2045 or in 30 years’ time, those who started work then will start thinking about retirement.

But when we look at the super system from the point of view of whether or not it’s organically growing, we get a different picture.

Funds receive contributions primarily from members and employers. A fund might also get inflows via account balance transfers and also lose money by moving balances to other funds. They also pay taxes to the federal government, have administration and investment expenses, and pay pension and lump sum benefits to members.

In 2013/14, all super funds received $121.5 billion in contributions. Two-thirds of this amount was paid by employers. In the same year they paid out almost $85 billion in lump sum and pension benefit payments. About $53.2 billion – 63 per cent of the total benefit withdrawals – were pension income payments.

Super funds also paid $14 billion in fund taxes and $11 billion in administration and investment management expenses.

The net result for all this activity? Funds took in a net $11.5 billion, which means super funds, as a whole, managed to keep less than 10 per cent of the total new contributions they managed to attract.

Clearly the super system isn’t far from having inflows match outflows. Given how quickly the population is ageing, it won’t take much for outflows to outstrip inflows, even allowing for the fact the minimum employer contributions will edge up to 12 per cent of salary by 2025.

We might already be looking at a mature super system. In particular, the corporate super fund category has been bleeding money for some time.

So how do total super assets keep growing now? Only with the positive increase in the market value of investments.

There is another reason why the super system may be almost mature. Let’s look at two examples. Airbnb and Uber have few employees – in both cases the people offering services via these platforms are self-employed and under current law they aren’t required to make super contributions for themselves. That is, for them, and a growing number of people in similar arrangements, super is entirely voluntary.

I will leave it to others to determine if we’re entering a new world of work, but the ageing of the workforce and the rise of alternative working arrangements seems to be creating an interesting situation for the organic growth of super funds.

For a long time it seemed super funds could just sit there and infinitely gobble up money because governments force employers to make contributions for employees.

This may not actually be the case.

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