On 25 May, ACFS hosted a roundtable discussion with Jae-Won Choi from Korea’s Mae-il Business Newspaper. The discussion focused on the apparent success of Australia’s superannuation system, and lessons that Korea may learn from the Australian experience. While Korea’s pension system is growing, average returns are low, investment is primarily in defensive assets, and most retirees withdraw their savings as a lump sum.
Jae-Won Choi (Maeil Business Newspaper) and guests.
The following is a summary of the discussion:
The shift from ‘defined benefit’ to ‘defined contribution’
In Australia, this decision was primarily led by employers – who chose to transfer risk to employees by moving the unfunded liability off their balances sheet and to individuals – not employees. At the time, DC schemes looked especially attractive because they had a more aggressive asset allocation (compared with DB funds) and were producing higher returns. An additional benefit is that under DC schemes employees have greater account portability and are not locked into jobs. There is a shift towards risk sharing (traditionally part of DB schemes) in the post-retirement phase.
Increases to the Superannuation Guarantee (SG)
The SG is currently legislated to increase (incrementally) to 12% in 2025, and there is discussion about increasing it further still. There is on ongoing discussion about whether this would produce better outcomes for retirees, or merely see saving reallocated between superannuation and non-superannuation assets. Interestingly, arguments against increasing the SG have been led by governments who are wary of increasing tax concessions. Another potential opposition to the increase is workers, as increased superannuation contributions will reduce workers’ take-home-pay, although this argument is rarely heard.
Investment returns and risky assets
Australian superannuation funds have a high allocation to risky assets, including domestic equities. There is a widely held view among Australian investors that equity investment is rewarded. This is enhanced by the favourable tax treatment of investment in domestic equities under dividend imputation. The allocation to risky assets reduces somewhat post-retirement, although it can be argued that given high life expectancies and access to a means-tested Age Pension, retirees should continue to invest in growth assets. Sequencing risk is an important consideration as, in the superannuation system, it is borne by individuals.
Small businesses and choice of fund
Most employees can choose their superannuation fund, however if they do not make a choice, their superannuation will be paid to a fund of their employer’s choosing by ‘default’. Businesses cannot choose a public sector fund as their default fund. To assist small business, the government has established a clearing house – employers make superannuation contributions to the clearing house, which are then allocated to the employees’ chosen funds. The number of corporate superannuation funds has fallen significantly over the past decade.
Alternative assets and liquidity
Super funds invest in alternative growth assets (such as property and infrastructure) to reduce their investment risk. Research suggests that an allocation of up to 15-20% to alternative assets is reasonable, although it’s important to note that ‘alternative’ assets vary widely and have differing levels of riskiness and liquidity.
Long-term, illiquid investments are generally a good fit for pension funds who can realize illiquidity premiums. The major risk of a property market crash to super funds is not a potential loss of returns, but liquidity issues if members choose to sell these assets and shift to cash. Regulators have to manage this risk, as superannuation members can change their asset allocation with little notice. Super funds with a positive cash flow are generally happy to invest in illiquid assets, while those in outflow (and most members in retirement) prefer more liquid assets.
MySuper and default investment products
Before the introduction of MySuper, there were no ‘default’ investments, and employers chose their employees’ superannuation investment products. MySuper is designed to protect disengaged members, ensuring they are invested in low-cost products. Whether superannuation funds have a greater fiduciary responsibility to their members who are allocated to a MySuper product is an open question. An alternative view is that funds have a reduced responsibility since the investment product had been approved by the regulator (APRA).
Self-Managed Super Funds (SMSFs)
The number of SMSF accounts has grown rapidly, although this is now plateauing. While approximately 30% of superannuation FUM are in SMSFs, they account for only 5% of superannuation members. The growth of the SMSF sector was driven by members who wanted more flexibility and control over their superannuation. These funds also allow members to directly invest in property (at a tax advantage), or in unlisted businesses that large superannuation funds wouldn’t invest in. The profile of SMSF members is unique – they tend to be older and wealthier than average superannuation members – and many view their SMSF as an extension of their business holdings.
Lump sum withdrawals on retirement
In Korea most retirees withdraw their savings as a lump sum and many choose to invest these into small businesses. Alternatively, almost all Australian retirees withdraw their superannuation savings as an income stream (account-based pension). Lump sum withdrawals tend to be (relatively) small balances, and are primarily used to extinguish debt, or invest in assets (eg housing and cars) which improve quality of life in retirement.
This roundtable was presented in partnership with Austrade.
Thank you to Eddy Yoo for acting as a translator.