Smart Default Benefits
The Case for Change to Smart Defaults like TTS:
The Royal Commission found, a trustee cannot avoid its obligations by doing nothing (P225).
The Productivity Commission found, well-designed life-cycle Smart Defaults can be better than Balanced Options (4.3).
Now it’s time MySuper trustees tested if their default is well-designed and in members’ best interests.
Put simply the current approach is not working nor is it sustainable.
All of these factors support the introduction of TTS and MySuper Smart Defaults, that are well-designed, more efficient and concentrate on retirement outcomes.
As exposed in detail in the Financial Services Council report Innovation in Superannuation: Smart MySuper Defaults, superannuation is one part of Australia’s three-part retirement system, along with the Age Pension and voluntary savings. These three parts, combined with taxation incentives are designed to minimise the future Retirement Funding Shortfall.
In January 2015, HSBC Australia described this shortfall as amounting to an average of 13 years (number of years superannuation runs out prior to death), being the largest gap in Asia and fourth largest in the world.
The Gap is caused in part because Australians are living longer. It particularly applies to less affluent Australians most of whom are MySuper Members (holders of the 15+ million MySuper accounts).
The gap years are covered by the Age Pension (at a very moderate level), which in turn will be funded by (future) taxpayers. Unfortunately, at the same time, the percentage of these future taxpayers compared to those retired is declining and their ability to pay is not expected to cover the gap.
The 2015 inter-generational report shows that even after 50 years of compulsory Super some 75% of retired Australians will still be reliant on the Age Pension.
In 2017 the World Economic Forum stated the Australian gap was $1.5 trillion and would grow to $8.7 trillion by 2050.
Federal Treasury estimates there are currently 4.5 workers per pensioner but that in 2050 there will only be 2.7 workers to pay for each pensioner.