What is it?

In September 2019, Treasurer Josh Frydenberg announced a long-awaited independent review of Australia’s retirement income system.

The review, recommended by the Productivity Commission, will examine the retirement income system’s ‘three pillars’ –

  • the age pension,
  • superannuation, and
  • voluntary savings, including home ownership.

The Commission urged the government to carry out the review before increasing the superannuation guarantee (SG) rate. The SG is scheduled to rise in stages to 12% by 2025.

The review provides an important opportunity to evaluate how Australia’s retirement income system is tracking and what reforms may be needed to ensure the system is both equitable and sustainable over the long term. The system needs to accommodate the challenges of Australia’s ageing population and more people entering retirement with debt or without the security of a home.

Who is undertaking the review?

The review will be chaired by former senior treasury official Mike Callaghan, a former executive director of the IMF, and will include Carolyn Kay, a director of the Future Fund, and Deborah Ralston, professorial fellow in banking and finance at Monash University and a member of the central bank’s payments system board. She is also chair of the SMSF Association but will step down while working on the review.

The final report will be provided to the government by June 2020.

What will the review consider?

The terms of reference are quite high-level and broad and could cover:

  • home ownership – the review will examine the growing number of non-home owner retirees and how people survive the private rental market.
  • the interaction between super and the age pension – whether the means test acts as a disincentive to saving given the more super you have, the less pension you get. Also, whether an income test as well as an assets test is needed (Australia has two tests, unlike most other countries).
  • superannuation tax concessions.
  • income and intergenerational equity, and
  • the cost to the federal budget.

What it won’t cover

Industry experts have pushed for sensitive issues to be probed, such as including the value of a retiree’s home in the means test for the age pension and aged care, lifting the qualifying age for the government pension and overhauling superannuation tax breaks for the wealthy. However, the government appears to have ruled out touching some sensitive parts of the system, such as including the principal place of residence in the age pension asset test and cutting generous super tax concessions.

Concerns

In general, the review has been welcomed by industry participants, however, most have warned against ‘changing the goalposts’ on legislative arrangements for Australians who have already retired and are already partly or fully self-funding their retirement.

The government has sought to ease concerns with Senator Cormann stating the inquiry will not lead to a ‘major wave of significant reforms’ and will present a fact base which will inform the public about where the system is at and how it operates.

There is also nervousness about whether the government will seek to use the inquiry to abandon its timetable for increasing the superannuation guarantee (SG) to 12% by 2025 and reduce the beneficial tax treatment of superannuation, particularly for large balance holders.

Lonsec’s view

Lonsec believes that whatever the government is seeking to achieve from the review should be revealed to the industry as soon as possible. This will help provide clarity to those product providers operating in the Australian financial services industry looking to deliver new retirement products and services but are reluctant to do so until they fully understand the changing regulatory landscape.

The timeframe for the review recommendations is mid-year, however as any changes to the retirement income system become likely, Lonsec will provide a summary of these and help make sense of the implications for advisers.

The following lesson is one of IML’s ‘20 lessons for 20 years of quality and value investing’, which were recently published by Anton Tagliaferro and the IML investment team to mark 20 years since IML was founded.

We chose this lesson for Lonsec Retire, as it highlights the need for growth assets in retirement, particularly for early retirees who typically have investment timeframes of 20+ years.

The lesson illustrates the benefits of compounding by showing how companies that reinvest back into their businesses can reward investors with increasing dividends and appreciating share prices over the long-term. Increasing dividends is vital for retirees facing significantly lower returns from popular retirement income streams such as term deposits and traditional fixed income funds.


#6 The Power and Benefits of Compounding Over Time in Equity Portfolios

Most people are familiar with the concept of compound interest when it comes to term deposits, where one can earn interest on interest by continuing to roll over a term deposit. However, many investors do not relate the concept of compounding to their investments in the sharemarket.
Compounding occurs in the sharemarket when income from an investment is reinvested back into the business, and investors are rewarded with the benefits of increasing profits and appreciating share price growth over the long-term.
For investors in the sharemarket, there are two ways compounding can work in their favour to enhance their long-term returns.

These lessons are available both in hard copy and e-book format. For a copy of the book please register your interest here or email iml@iml.com.au

**IML and Lonsec  Investment Consulting will be holding a webinar as part of Lonsec Retire Program on Wednesday, February 12th, find out more.

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.