So, what exactly is the purpose of superannuation?
This was the question The Treasury sought views on last week, with the intention of enshrining this purpose in legislation to finally create clarity 24 years after the introduction of the compulsory Superannuation Guarantee.
The obvious response to this question is that the purpose of super is to fund our retirement years, and indeed this is about what the Financial System Inquiry recommended in its final report:
“To provide income in retirement to substitute or supplement the Age Pension”
This is pretty hard to argue with, but our view (as presented in our submission to The Treasury that you can read here (go on, it’s only 4 pages long) is that this is just too narrow in this day and age where our superannuation system has become an economic behemoth that dwarfs the value of our GDP, that is significantly larger than the full market capitalization of all companies on the ASX, and that by 2040 will reach a staggering $9 trillion in assets under management.
It’s our view that any definition of the purpose of superannuation must consider this broader context and acknowledge that the allocation of those trillions of dollars has a direct impact on the future shape of our nation, economy, society and environment.
When considered in this light, superannuation has an individual purpose to deliver each of us income in retirement, as well as a system-wide purpose of shaping the world into which we will all retire.
From this perspective, to simply provide income in retirement is an inadequate purpose for such a substantial and influential pool of capital. Indeed, with an excessively narrowly defined purpose, we risk the sector competing to solely maximise returns for an individual, at any cost, which at worst risks an outcome where superannuation fund members could retire into a world with sufficient income, but low quality of life, due to the external costs (social, environmental and ethical).
This is why we’re advocating that the objective of superannuation must look beyond only providing income to an individual in retirement, and additionally consider a notion of the type and quality of that retirement, and the role superannuation will have impacting upon that.
For example, if superannuation plays no role in providing capital to build the infrastructure our economy needs, or fund the medical technologies, retirement homes, affordable housing, hospitals, energy systems etc.; but it supports companies that pollute, erode natural capital, exploit workers, etc. then it risks its beneficiaries retiring into a world where even with a strong income, quality of life could suffer.
A second and important addition we advocated for when developing a purpose for superannuation is that consumer primacy must be prioritized – as Professor John Kay has so usefully put it, superannuation is managing ‘other people’s money’, and these people (us) must have the primary say in how those retirement savings are managed.
In practice what does this mean?
- Enabling transparency and providing useful, clear and reliable information so that consumers can clearly understand the options they choose and where and how their retirements savings are being invested, and
- Taking care to understand the beliefs, values, needs, objectives of consumers and reflecting these in the way their super is invested.
Sounds obvious, but we’ve only just seen steps being taken by many funds to reflect that most Australians don’t want, for example, their retirement savings to be growing off the back of tobacco company profits. We know that most Australians don’t want their retirement savings doing harm, so consideration should be given to this being reflected in default superannuation investment strategies.
If done well, there is nothing that should prevent consumers having the option, for example, to allocate a small portion of their super to social impact investment assets, in the way of the French pension system. Certainly the quantified evidence shows us that this is entirely achievable and consistent with delivering strong, sustainable, long-term returns. I think Australian’s would love it.
There is little doubt that the purpose of super is to provide an income in retirement and it’s critical that whatever supplementary objectives are put in place, that this remains the primary focus. However, with the growing scale of superannuation, it’s time we acknowledged that how we are investing that capital is already shaping the world into which we will all retire, and in that light, there is a positive duty on superannuation to consider the way it impacts the quality of life at retirement, not just the lump sum of savings at the point of retirement.
You can read our submission here.