Major Changes for Super, but Women are Still Ms … ing Out

Recent major legislative and regulatory changes to superannuation have brought improved equity to Australia's superannuation system, but women are still missing out when it comes to the adequacy of their retirement savings. The reasons are women's continuing marginal attachment to the labour force and their attendant low level of lifetime income in the paid workforce, which translates to low levels of accumulated occupation-linked superannuation savings. This paper argues that gender-based disparities in adequacy of superannuation persist, and that the prospects for retirement lifestyles for most older women continue to be dismal.     

The Introduction of Choice of Superannuation Fund: Results to Date

Commonwealth legislation providing for choice of superannuation fund has now been in operation since 1 July 2005. This paper explores the extent to which employees have exercised choice in the period immediately following the implementation of fund choice. The data available suggest that choice of fund has had only a modest impact. However, while community awareness of superannuation has increased and the level of member attachment to the main superannuation fund has increased, a downturn in investment returns, and subsequently in member sentiment, could have a significant impact on member preparedness to choose another fund     

Taxation and the Australian Superannuation System: An International Comparison

JOHN GLYNN
This study demonstrates the taxation burden applied to Australian superannuation. The superannuation schemes and supporting taxation systems of five OECD countries are reviewed. A hypothetical scenario is applied to demonstrate the imbalance of the Australian system relative to comparable nations. Given concerns about the aging population, this research supports calls for further reforms to the taxation of superannuation in Australia, highlighting the need to make superannuation taxation policies more consistent with government efforts to encourage superannuation savings and self-funded retirement.     

Equity risk versus retirement adequacy: asset allocation solutions for KiwiSaver

New Zealand's KiwiSaver superannuation system operates with a conservatively low asset allocation towards equity investments. Evidence suggests ‘conservative’ portfolios are riskier than portfolios holding more growth assets when considering shortfall risk. This study employs stochastic simulation to determine the optimal asset allocation to improve the balance of probabilities for retirement adequacy. The findings show that KiwiSaver default funds are excessively conservative, preventing investors from reaching their retirement goals. Increasing the asset allocation to equities across the range of available KiwiSaver funds is the only solution to significantly improve retirement adequacy in New Zealand given the low contribution rates observed.     

FINANCIAL LITERACY AND PENSION INVESTMENT DECISIONS

The call for enhanced financial literacy amongst consumers is a global phenomenon, driven by the growing complexity of financial markets and products, and government concerns about the affordability of supporting an ageing population. Worldwide, defined benefit pensions are giving way to the risk and uncertainty of defined contribution superannuation/pension funds where fund members now make choices and decisions that were once made on their behalf. An important prerequisite for informed financial decision‐making is adequate financial knowledge and skills to make competent investment decisions. This paper reports the findings of an online survey of the members of a large Australian public sector‐based superannuation fund and shows that although respondents generally understand basic financial matters, on average, their understanding of investments concepts, such as the relationship between risk and returns, is inadequate. These results highlight the need for education programs focusing specifically on developing fund members’ investment knowledge and skills to facilitate informed retirement savings decisions.     

Choice of Tax Regime for Superannuation Contributors

Choice of tax regime for superannuation contributors was pioneered by the United States, which offers standard 401 (k) plans and Investment Retirement Accounts (pay tax when benefits are withdrawn) alongside Roth 401(k) plans and IRAs (pay tax on employer contributions.) Australian policy is to tax employer contributions and all investment earnings. Life-cycle savers have no choice of taxation regime unless they go outside the superannuation system, notably into negative gearing. Tax-deferred superannuation accounts could make our superannuation more competitive with negative gearing. They would generate a revenue stream for the government at a time when tax revenues will be at a premium.     

Asset allocation and age effects in retirement savings choices

We examine the asset allocation decisions of members of three large Australian retirement savings funds. Superannuation Guarantee legislation in 1992 made Australian employees compulsory investors by requiring employers to contribute a fixed proportion of earnings to a superannuation fund on behalf of employees. A majority of these employees can choose an investment strategy for these contributions. We examine how actual investment strategy and asset allocation choices of members change with age in view of the conventional wisdom that individuals allocate less to risky assets as they age and investments theory which provides conflicting advice on the issue.     

Alternative Retirement Income Arrangements and Lifetime Income Inequality: Lessons From Australia

This paper examines the implications for lifetime income equality of alternative retirement income arrangements, using the Australian scheme as a benchmark. In Australia, the pay-as-you go financed age pension is means-tested and thereby provides a contrast with those countries where part or all of a basic pension is paid to all aged persons. Many governments are considering an increase in the level of means-testing. The results show that the introduction of a universal pension coupled with significant changes and simplifications to the structure of taxation and superannuation have little effect on the redistributive impact of the tax structure in a life cycle framework. The presence of means-testing appears to have no significant effect on life-time inequality. The results suggest that it is possible to eliminate complexities from the system providing retirement benefits without having any deleterious effect on equity. This revised version was published online in July 2006 with corrections to the Cover Date.     

Quality of life aspirations: Exploring baby-boomer financial means-end goal structures

Motivated by industry concerns that baby-boomers are neglecting to plan for an eventual retirement, this study examines perceptions about the importance of financial means in contributing to their quality of life. Framed by means-end chain analysis and scholarship in consumer evaluations of life satisfaction, a number of theoretical expectations are empirically confirmed. Findings indicate that financial means are not high in the order of life domains that contribute to respondent quality of life. Retirement planning relies predominantly on compulsory superannuation contributions from employers, with the assumption that this would provide sufficient income to maintain their current lifestyle. Prior to retirement, respondents reported being more preoccupied with funding children's education costs and home mortgage payments. They also wished to avoid the embarrassment of approaching a financial planner until they had a reasonable sum that required more skilful investment advice. Finally, it was revealed that gender had an influence on the priority given to financial means and subsequent decisions to seek financial planning advice. These findings confirm the importance for financial planners to determine the core motivations and subordinate means through which baby-boomers envisage achieving quality of life on the journey into retirement.     

Will investors change their superannuation fund given the choice?

A large number of Australian investors have been granted the right to choose where their superannuation fund contributions will be invested, but it is difficult to ascertain whether investors will exercise this choice. Although expected‐utility‐maximizing investors might tend to change their fund once given the choice, loss averse investors would favour the status quo. Using a survey of over 1600 Australian investors, conducted by FinaMetrica in early 2005, we find support for inertia (status quo) in our sample suggesting that, with respect to superannuation choice, individual Australian investors are loss averse.     

When boards use related parties: outsourcing and superannuation fund performance

Superannuation funds heavily outsource key fund functions to service providers who play a crucial role in superannuation fund operations and affecting Australians’ retirement savings. We examine the impact of related party service provider usage and trustee‐director affiliation on investment performance. We find that for‐profit funds significantly underperform when using related party service providers. The underperformance is more severe when the board is controlled by more affiliated trustee‐directors and belongs to a vertically integrated conglomerate group. Our results raise concerns about whether recent regulatory reforms increasing trustee‐directors’ duties effectively address the conflicts of interest inherent in related party service provider arrangements.     

Leveraged superannuation

Rules governing superannuation investments are made with respect to investment‐specific risks, rather than overall portfolio risks. In particular, legislation prohibits borrowing except in specific circumstances and on a non‐recourse basis. We model the distribution of leveraged portfolio outcomes for a representative investor, accounting for their age‐earnings profile, differing taxation of dividends, capital gains and franking credits, and the volatility of equity returns and interest rates. With explicit portfolio modelling, there is no need to categorize specific investments as ‘too risky’ on a stand‐alone basis. We show that leverage is likely to enhance retirement outcomes for investors with low risk aversion.     

An examination of involvement in relation to superannuation consumption

This study examines consumer involvement in the context of superannuation in order to gain an understanding of this important consumer behaviour construct in a forced consumption situation, that is, compulsory superannuation. In doing so, associations between involvement and consumer knowledge, consideration of future consequences (CFC), age and education are proposed and tested. Data were gathered via self-report survey from 329 respondents from four regions in south-east Queensland representing a diverse socio-economic spread. The results of regression analysis clearly indicate that subjective knowledge, age and CFC are positively associated with involvement in relation to superannuation. Findings in relation to objective knowledge and education were not significant. The findings indicate that, in practical terms, marketing efforts should be concentrated, not only on the provision of information in relation to superannuation, but, more importantly, also on attitude change with the objective of stimulating need recognition in younger superannuation consumers.     

Superannuation in Society: What are the Accountability Relationships and is there a Role for (Group) Accounting?

Superannuation fund reporting is a topical issue: it is in a state of flux and currently on the Australian Accounting Standards Board (AASB) work program for 2012, with the release of ED 223 Superannuation Entities in December 2011. Issues under debate include uncertainty regarding the users of superannuation financial reports, and the application of the principle of ‘transaction neutrality’ to accounting for corporate groups by superannuation entities. Accountability reporting by superannuation funds has remained largely unchanged since the introduction of compulsory superannuation 20 years ago. This paper describes the changing nature of superannuation from a managerial gratuity to a type of deferred pay, and how accounting for superannuation is likely to increase in significance as it responds to the shifting economic nature of superannuation, especially since the global financial crisis. This paper uses basic content analysis to analyse member submissions to the Australian Government's Review into Governance, Efficiency, Structure and Operation of Australia's Superannuation System 2009, and submissions to the AASB's consultation paper on consolidation accounting for superannuation entities in 2007. Limited characterisations of members as being not interested in financial reporting are out of step with the underlying nature of superannuation, and will likely change as the economic significance of superannuation increases in the future.     

Superannuation: Switching and Roulette Wheels

The introduction of choice has resulted in Australia's superannuation system providing unprecedented flexibility (through increased investment options and the timing choices) for members to optimise their expected benefits. This paper examines the impact of switching between investment options using a normalised ranked return or "roulette wheel" approach developed by Bauer and Dahlquist (2001) for the Australian setting. The paper tests various switching strategies for both single-sector and blended options, for the period 1985–2005, finding that members require forecast accuracy of around 70% to be successful at market timing. Finally, the paper considers the impact of switching strategies on accumulated balances.     

Determinants of seeking advice within defined contribution retirement savings schemes

We report results from a study of superannuation member advice‐seeking within their plan, explaining observed patterns by member age, gender, issue salience and size‐of‐bet effect. Inquiry mode, frequency and volume of contact with the advice‐provider, and sensitivity of members to legislative change and macroeconomic events are considered. Results show that gender (female more likely than male), age (older rather than younger), balance (larger rather than smaller) and experience (longer rather than shorter) are the strongest advice‐seeking predictors, consistent over time. Findings suggest member engagement around retirement planning may be more effective when considering the factors affecting advice‐seeking behaviour in general.     

Forced retirement risk and portfolio choice

Current literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using data from the Health and Retirement Study, this paper finds that the forced retirement risk is both significant and highly correlated with stock market fluctuations. Using a life-cycle portfolio choice model, this paper shows that forced retirement risk makes labor income near retirement stock-like. Therefore, contrary to conventional wisdom, those who are still working but near retirement should have a lower share of risky assets in their financial portfolios than retirees do.     

Institutional investment flows and the determinants of top fund manager turnover

This study examines how the termination of superannuation investment mandates contributes to the departure of top fund managers in companies delegated the portfolio management role. Terminations of superannuation plan mandates increase the probability of a fund company changing the responsible fund manager. Objective‐adjusted returns are also significant managerial turnover considerations. These results illustrate that significant losses of superannuation fund clients act as an external control mechanism in the investment management industry that complements internal managerial performance measures.     

On the Choice of Superannuation Funds in Australia

Using a sample of Australian retail and wholesale superannuation funds to proxy for choice and limited choice alternatives, respectively, we investigate the costs and benefits of providing choice to investors. We find that investors who have choice don't respond to fees. Also, loads - typical of the choice environment - are likely to be a dead-weight loss borne by investors. Employees who involuntarily contribute to (employer) funds, tend to pay the lowest fees. Given these results, the advantages of choice become questionable. Our results show that managers of limited choice funds achieve greater positive abnormal returns than retail fund managers. The analysis of flows provides insight into why choice funds do not perform better than limited choice funds. Investors are not responding to historical performance as predicted.