OPINION PIECE - by Jane Macnamara, Senior Policy Manager – Superannuation & Retirement Incomes
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The COVID-19 crisis has transformed the superannuation industry almost in the blink of an eye.
The immediate focus for superannuation funds is, as it should be, on making sure Australians in hardship can access their superannuation efficiently. Showing people (members) that their superannuation fund is there when they need access to their savings is vital to ensuring trust and confidence in the system – especially as this may be the first-time many have engaged with their super!
However, with a little time to reflect, we’re starting to see a few early learnings emerging from the crisis that will help guide the FSC in its policy responses over the coming months.
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The Superannuation Guarantee is not guaranteed
Never before has the superannuation system faced the double-threat of significant hardship outflows and significant reductions in Superannuation Guarantee payments. This has been described as the “black swan” event of this crisis – the one thing we didn’t see coming.
Most funds are equipped to manage this situation, and have not had trouble meeting the early release requests of members to date. However, this is an important lesson that no fund can rely on guaranteed inflows.
There’s little doubt that sector-specific superannuation funds concentrate this risk and any fund with concentrated membership should have strategies in place to ensure it can withstand an event that impacts an entire industry.
Policy changes such as a default-once framework that breaks the nexus between superannuation and employment will help address this risk. But for funds that offer a niche product that will likely always concentrate their membership, managing this risk should be on their radar (and on APRA’s).
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Returns also entail risk
The significant market downturn and ongoing volatility has also brought into focus the level of risk in individual member portfolios.
The relentless focus on fees and headline returns as the only metrics of any importance when assessing superannuation fund performance grew out of a decade-long period of unprecedented returns. The market losses experienced this year should be the final nail in the coffin of this two-dimensional approach.
Members close to retirement are learning about sequencing risk in real time and the level of risk in their portfolio could be material to whether they are able to meet their retirement goals.
Investment strategies which have sensibly reduced the level of investment risk for older cohorts in order to protect their retirement savings from market volatility have been panned for the last several years, but their value has now become evident.
Superannuation is an investment, and we’ve just been reminded that it’s not one with a guaranteed positive return. This crisis provides an opportunity for super funds to refocus on member outcomes, help members understand what matters to them, and ensure that products and strategies align with member needs.
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There’s always a silver lining
There’s a role for appropriate policy to support Australians to rebuild their savings, but the opportunity for super funds to work with their members to engage more closely with their superannuation on the other side of the crisis should not be squandered.
Engagement and rebuilding will look different for different cohorts.
For young Australians, for example, there’s a significant risk that disengagement will only be entrenched as members withdraw their balances and are effectively starting from scratch. They won’t be in a position to top up their accounts, and they won’t be seeing investment growth. As individual funds and as an industry, we will need to put in the hard yards to remind these people that superannuation has value to them as a long-term investment.
Those nearing retirement may be keenly feeling the blow of the investment losses they’ve experienced. For many, they will be facing tough decisions about their previous retirement plans. Accessible financial advice will be vital for these individuals, and policy changes such as extending the proposed work test exemption and relaxing contribution caps may need to be considered to help these members recover.
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Where to from here?
By looking beyond the immediate impacts of the pandemic, we have an opportunity to ensure the superannuation system that emerges from the crisis is stronger, more resilient and more trusted.
As we look towards the recovery phase, the FSC will work with industry and our stakeholders to ensure superannuation sector is well-equipped to deliver good retirement outcomes for Australians who may be in a very different financial position than they were before the crisis.