Superannuation: Past, present, future

With Jeremy Cooper, Chairman of Retirement Income at Challenger.

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About the podcast

Jeremy Cooper, Chairman of Retirement Income at Challenger, shares how he led the famous Cooper Review into superannuation and what his views are on the current super landscape. During the chat Jeremy also explores why pre-retirees worry more about their savings than those in retirement, and how advisers can support this demographic during this low-interest rate environment.


Matt Heine: I am absolutely delighted today to be joined by Jeremy Cooper. Welcome to the show.

Jeremy Cooper: Good to be here, Matt.

MH: Now, Jeremy, many people would understandably know your name from the famous Cooper Review. But I guess, before we get into it, there's a lot of things that we'd like to cover today. Really interested just to hear a little bit about your career, and more importantly, how you actually ended up as Chair of The Review?

JC: Sure. Well, I finished school in the late 1970s, which seems like a very, very long time ago. And I did something reasonably unusual. I actually ... In those days, there wasn't such a thing as a gap year. But nonetheless, I decided to take three. And I did a couple of interesting things. It was fashionable in those days to get an old car and drive around Australia. I ended up spending a year working in Bass Strait on an oil rig and a few other things that I won't bore anyone with.

But after that, I'd had enough of sort of knocking around. And I was ready to go off and train to be a lawyer, which I spent four years doing that. And then I joined a very sort of establishment law firm in Melbourne that's now called Ashurst. And I spent two decades as what people call a transactional lawyer. So, in those days, large company takeovers was sort of the thing to be in. And I spent, as I say, 20 years with that firm doing that kind of work, and also broader ... In fact, I was privileged in the sense that I think these days lawyers tend to be very specialised. Whereas, I worked for biotech companies. I did work in the mining area, intellectual property, corporate advice, a whole bunch of things.

Anyway, after doing that for a couple of decades, I frankly just got sick of it. It's one of those things where I woke up in the morning and think, "I've done most of the things I'm going to do today before. So, if I don't actively get out of this world," you know? You're well paid and it's a very comfortable, comfortable world. You had to sort of take things into your own hands. So, I said, "Look, I want to get off the bus," which people do more now. But this was in the early 2000s. And so, it was sort of fairly unusual to just leave a law firm at the peak of your career. And I actually wanted to get out of law.

So, I started a process and ended up amazingly sitting in front of Peter Costello interviewing for the job of Deputy Chair of ASIC, which wasn't something I was actually ... It sort of wasn't on the list of my things that I was going to go and do. But I'm very, very glad that I did that because I sort of went in there thinking, "Well, I've got two decades worth of corporate law experience. I'll be working on, I'll be helping out on takeovers and corporate things." When I got in there, I realised that that was yesterday's news, that in fact all of the challenges where Australia was in the early 2000s was around retail, financial services, financial advice, consumers, financial literacy, all those sort of really juicy public policy problems. And that the big end of town and corporate life and so on, that was largely looking after itself.

So, I got plunged into a whole bunch of things, self managed super and super more generally. So, I spent five years doing that. I worked for both brands of government. I was appointed by the Coalition and then in 2007, the Rudd Government came along. So, I worked with a whole new bunch of guys. And they're statutory terms. So, you get five years in a job like that. So, at the end of the five years, it was kind of, "Well, am I going to stay on and do some more?" And I thought, "Well, no. I don't think I'll do that."

And then, the minister, the first superannuation minister there's ever been was Nick Sherry, a senator from Tasmania. And he said, "Look, I want to have a chat to you." And sure enough, it was, "I've got this great idea. We want to do a major review of the super system first time in 20 odd years, first one that's ever really been done. And we want you to run it. And here's how it's going to work. And why don't you sort of go off and think about it?" And to cut a long story short, I spent the next year running The Super Review, which very quickly became The Cooper Review.

MH: And that was 2009, 2010, wasn't it?

JC: Yes, it was. It started July 2009 to be finished by the end of June the following year.

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MH: And given that it was now nearly a decade ago, which went quickly, what was the superannuation market or environment like, particularly when you started as Deputy Chair of ASIC?

JC: Well, amazingly, just a thing that comes to mind. So, the figure when we were doing the review, so only 10 years ago, the total assets of the system was only one trillion dollars.

MH: That's amazing.

JC: It is. That is an extraordinary thing to get your mind around. I mean, you know, we've had a few bumps recently. But it's not far off three trillion, you know? With a few billion here and there. So, it just shows you the spectacular growth and just what's happened over that time. It's quite amazing.

And corporate super was obviously very large at the time. You still had a number of companies running their own superannuation funds. What were some of the key findings through The Cooper Review that you saw and then sought to change?

Well, one of them was so obvious, at one point I almost thought, "Well, this is so obvious that we won't deal with it." And that was just the state of the back office, which ultimately became the set of ideas that I branded as SuperStream, which sort of got a life of its own. And I thought to myself, "Well, I've been around the world of policy and politics and so on for long enough to know that it's fairly ..." You have to have a pretty thick skin because sometimes reviews like this happen. And if something else is going on in government or something goes wrong, and the thing just gets put on the shelf and nothing much ever comes out of it.

So, I thought, "Well, I need one really bankable project that if everything blows up and doesn't happen and they only do this one thing, it'll still add significant value." And that actually turned out to be SuperStream, the actual just sheer waste of money, waste of time, and inefficiency of the effectively nonexistent back office of super, the dodgy multiple accounts, and things that are sort of still being talked about and looked at now. If they could be fixed up, then that would sort of make the project bankable. And then all of the other things, if they get done, that's fantastic. But at least that's my lifeboat, if you like. So, that was the first one.

Spent a fair bit of time on governance. I had a thing called outcomes transparency, which is kind of, what is the fund actually putting on the table? How do you measure success? And interestingly enough, the sort of member outcomes world is eerily familiar with some of those ideas. That's taken a while to see the light of day. The redesigning the default. So, the MySuper idea was a pretty big one. And I suppose there were things around the edges. But they were some of the major ideas. And I suppose the one that's caused the most angst and hasn't gone as far as I would have liked is in the governance area. And the reason for that is that that's where the human beings are, that's where the sort of human behaviour and so on is present. And that tends to be often the most difficult policies to get anywhere with.

MH: And to your point earlier, are you surprised at how many of the suggestions or I guess the policy outcomes actually transpired and just the huge impact that they've had on the industry? And speaking as a super trustee, SuperStream compared to the old days of clearing houses and individual checks and payments. It's major, major evolution within the industry.

JC: Yeah, well, often in life it's a matter of timing. And you had a Labour government that was keen to do something, so that was a positive. And as a transactional lawyer, I built stuff that I thought could actually be implemented. So, there is some reviews, and often the subject matter calls for this, that are very dramatically radical and they've got incredible ideas in them and they stimulate thinking, but a lot of the things aren't actually doable. So, I thought, "Well, I won't do one of those. Instead of revolutionising the industry and potentially blowing it up, I'll just take it a material step forward in a way that I'll be able to bring people along with me, but will improve things."

So, MySuper wasn't so much of a revolution. It was just a sort of step change in a particular direction. And basically took what was there already, because let's face it, we already had a trillion dollar system. Rather than just bulldozing it to smithereens and then completely reconstituting it, basically said, "Well, we've got default funds already. We're just going to improve them." And the bringing people along with you is an important principle. So, I thought the budget for this thing was pretty modest. But nonetheless, it was taxpayers' money being spent. And I thought to myself, "Well, the stakeholders in the system, which is pretty well everybody in Australia, are entitled to know what's going on."

So, one of the first things I did was build a website. And I would just put out draught ... Here's a draught with some of the questions we're thinking about and here's where we're going. And just made it very transparent. So, by the time the final report of 500 odd pages was given to the government, without going into all of the details, I think people who had been following this thing were reasonably familiar with and had already sort of thought about most of the big ideas that were involved. And so, there was certainly some resistance to ... I won't say it was plain sailing, but there wasn't an ambush and most people had had that chance to have a say.

MH: And how big was the team that you had working on that? Because you would have had countless stakeholders, as you mentioned, nearly everyone in Australia. You had very different factions of the industry between retail and industry funds, as well as government and lobby groups. Not an easy industry to navigate through.

JC: No. And I think when I reflect on this, one of the ... Perhaps the most important and the most demanding job, interestingly enough, was socialising and getting the ... Often with these government reviews, particularly ones that are ad hoc, in other words, not one that the productivity commission's doing. But where you get an independent sort of private group of people, like this one, is that you've got ... And the government in this instance created a panel of seven people. And then I was the chair and then I was the CEO effectively as well.

Now, this panel, and what they do is they try and make sure that every kind of voice, if you like, of an industry like super gets a guernsey on the panel. So, you basically had a blue one, a red one, a green one, an orange one and whatever, who had very different perspectives, some of them, not all. But they'd never really worked together as a team. And they'd given 12 ... I don't think I particularly knew any of these guys either. So, basically, we've got to get these people talking to each other, cooperating. You've got to make sure that you've got sort of consensus, if you like. So, I was very keen for them not to be ... Sometimes in these reviews, you get minority reports where you just can't agree on something. I said, "Well, we're not going to do that."

So, that was one of the biggest ... Apart from all of the other challenges, that was possibly one of the biggest challenges because you've got to get that bit right. And I was pretty skilled up on dealing with the media. I'd had a lot of experience from my ASIC times because that would freak a lot of people out. But that was actually for me the easy part. But just getting that teamwork and consensus took a lot of effort because, as you know, this industry when you get the various parts of it, often there's not a lot of agreement on ... We're certainly seeing a fair bit of that in recent times. There are some very opposing opinions around this industry, around how things should work.

MH: And very different agendas.

JC: Yeah.

MH: And if you fast forward 10 years, obviously a lot of those recommendations have been implemented. And as I said, have had a huge impact on the industry. Many would argue it's not yet perfect. What are some of the things that you think still need to be done? Where do the issues lie within the industry?

JC: Well, I think the one area that's crying out for attention is how things should operate in the retirement phase. And the government's well aware of that. The original MySuper model actually worked into retirement. But I think probably due to a fair bit of lobbying from the industry itself. Although, I have no direct knowledge of that, that was rejected. So, there was a very firm line drawn. In fact, it's amazing, you actually can't pay a pension out of a MySuper product. And the line was made that solid.

So, that was kind of ... And the government said, "Well, look. It would just be too much to do the retirement phase now. We accept that there's going to have to be further work done. But we're just not going to do that now." And then that was sort of picked up again in Murray in 2014 with the so-called CIPR proposal. And the government's been trying to nuance that. And I think even today in the mini-budget there was a small reference to what the CIPR has morphed into is a more governance approach. So, they're calling it the Retirement Income Covenant, which is basically just a new set of duties that would be imposed on trustees for the retirement phase. But that's been put back on the table for commencement on the first of July, 2022. So, that was in the fine print of the announcement today, which is a great thing.

So, it means that the project's still alive. It's been deferred, which is fair enough, because they'll need to circulate draught legislation and get everybody tooled up to line up for that. And it's a pretty important mindset change that's actually very relevant in today's low interest rate environment. And that is that for most people, superannuation is made up of deferred wages that are intended to be consumed in retirement. And it's amazing how behaviorally resistant people are to doing that. Not only have you got an industry that would prefer you to keep building your wealth to infinity, but if you're told for three or four decades that saving is good and building up your super is what you need to be doing and everything's lined up to that.

And then one day in your 60s, to suddenly change that mindset and think in terms of, "Well, now it's time to consume it." There's a default, and it's just human nature, the default setting is to actually conserve the capital and try and live off the yield or the investment income from that. And that's the pickle we're in at the moment, as discount rates fall to here and before not seen levels. And you're seeing reasonably well off people all of a sudden, they've been relying on bank dividends and perhaps a commercial property or something. And all of a sudden, there's just very much less income coming through the door than there was before. They don't know what to do. And we're really seeing some issues revolving around this reluctance. And indeed, there are relatively few products and advice tools and so on that help retirees actually safely spend down their money, which is what really the system's intended to do.

MH: Jeremy, on that point, you and Challenger did some research recently looking at what the great concerns were for people entering retirement and also in retirement. And I think the research suggested that people were more worried about outliving their savings whilst they were accumulating as opposed to those that had actually retired.

JC: Yeah.

MH: Has that changed?

JC: No, that's a real thing. And they labelled it as, this is the National Seniors Australia, they labelled it anticipatory worry. And as someone who ... I had my 60th birthday the other day. And so, I wouldn't be-

MH: Congratulations.

JC: Thank you. I'm not nearing retirement, but it's not that far off, you know? Let's say I was going to retire at 70, it's a decade away. So, it's close enough for me to effectively be a pre-retiree. Now, you know, I know quite a bit about this stuff. But it does my head in a little bit just sort of going from a world where I get a monthly wage and I've got substantial sort of savings built up for retirement. But to the point where that wage switches off and then I've got to manage spending and my lifestyle and my wife's lifestyle for an unknown period of time. And all the sort of issues that I deal with on a day to day basis in research and speaking about this stuff suddenly becomes a personal ... that's something I have to deal with.

So, that worry of people who aren't yet in retirement, but they know it's coming, is actually demonstrably higher than people who actually are there. So, that's another interesting one. So, the message we were saying to people is, advisors just switch on to the fact that the 54 year old or something sitting across your desk who's talking to you about retirement or 64, doesn't really matter, they are likely to be far more worried about retirement than someone who's actually experiencing it.

MH: Is part of that, do you think, that they're saving or trying to build for the lifestyle that they want? And when they get there, it's the lifestyle they've got and therefore, they need to manage to it?

JC: Yeah. I think, we've partnered with National Seniors and done now quite a few of these sorts of things. But what we do find is that there is ... People are reasonably good. And again, this is part of the human experience, I suppose. They're reasonably good with sort of putting up with what they've got. So, if they get to retirement and find that whichever way you cut it, the aspirations that they might have had when they were 50 are going to have to be detuned a little bit, after a while in retirement, they accept and get used to those circumstances. People do really cut their cloth to fit the circumstances.

MH: That's interesting. And going back to your earlier point, those in retirement that had sort of expected that interest rates might be a lot higher for a lot longer and have subsequently had to deal with bush fires, sequencing risk, and most recently, COVID, how are retirees in Australia feeling at the moment?

JC: Well yeah, there's a lot of concern out there, you know? And some of it's well-founded and in other respects, it's just there's so much information on the evening news and just all the uncertainty around. Whereas, in fact if you look at particularly if they have normal and reasonably well diversified superannuation that they're living on, so far in peak to trough terms, or if you just look at the last 12 months, we've had a period of strong returns in the industry. And the last 12 months might be negative three quarters of a percent or square or something like that. So, in actual dollar terms, so far anyway, it's not so bad. But just the feeling and the news stories and ... You know? That's in the mass middle. There are certainly retirees, if your retirement nest egg was two commercial properties and neither of your tenants can pay rent. Well, you're in an extreme situation. So, I just think sometimes it's the emotion of this as much as the reality.

MH: And the destructive outcome of that is switching to cash at the worst possible times. Have you got any thoughts on how that can be better managed in the industry?

JC: Yeah. That's one of the lessons that we just didn't seem to learn from ... This is something that was a bit of a problem in the GFC. And we haven't, or at least I haven't seen sufficient data on this as to the extent to which people have done this. And of course, then you've got situation where people are doing it with advice, people doing it without advice. And particularly where people are switching out of asset mixes that are designed for very long-term savings programmes. So, let's pick, and I won't mention any names. But let's just pick a large industry fund that's really harvesting the illiquidity premium from investing in illiquid assets that are designed for staying the course and really reaping the benefit.

It's surprising that we allow people in asset mixes like that, we give them effectively a free option to benefit from those illiquidity premiums. But at their election and to everyone else's disadvantage, potentially the fund itself, and also the people who get left behind, because if there's a lot of switching out of a mix like that, what you're doing is you're actually increasing the illiquidity of the remaining assets, potentially causing problems for the fund. And people have free option to do this.

Now, arguably, there should be a cost in that if you want to switch, you maybe should be prevented from being ... I'm just throwing policy ideas out here. But maybe you shouldn't be in a mix like that. Maybe the price you should pay for having the right to switch is that you're in a far more liquid option. And the price there really is that an expectation you probably wouldn't be earning as high returns as you would in the illiquid one. So, we tend to sort of almost promise too much. We're trying to please all comers. And really, either there should be a much bigger spread on it. You should pay an explicit price to switch there, or there should be a timer. You go into the product, and you're told, "Well, you want to switch out of this? It's 180 day waiting period." Anyway, we'll just need to see the dust settle.

But I was a little bit alarmed to hear that the old switching to cash thing was coming back. And it's where people are doing this with no advice. And then of course, what happens is, they forget to switch back or they switch back at the wrong time. And you know all the cons of that. It's just a pity that we don't seem to have really done anything about that.

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MH: And that's probably not a bad segue into some of the issues that we've seen off the back of the early release scheme.

JC: Yeah.

MH: What's your thoughts on how badly that might in fact impact the future retirements of Australia?

JC: I think frankly, the ball ... It's probably a little bit early to say the ball's now in the court of the super funds. But at some point during this year, when the second tranche finishes at the end of September, the industry's sort of got to dust itself down and go, "Well, look, we didn't really like that experience. But it had to be done in the sense that we're in an unprecedented ..." Everybody's saying unprecedented, but, "We were in a genuine economic crisis. The government decided to do something creative to allow people who met certain criteria to get early release in two separate phases. That's happened." Purists would say, "Well, that's just a bizarre super retirement. You're taking money out which should be compounding and it's all terrible from a retirement income policy point of view." I say, "Well, that's all very well. I know that. It's happened."

And what the industry has to do is somehow make a positive out of it and say, "Well, to this age group," it's typically people in their sort of 25 to 25 year age bracket. Not entirely, but let's just say it's kind of around about there. And the industry's really got to go, "Well, look, we've helped you out. It potentially has an impact on the amount of money that you're potentially retiring with. What do you want to do about it? Here are some ways that we can catch you up." And then we also need to think about people in that age bracket, they may be working until they're 75. So, we tend to sort of put our settings on a much younger cohort.

So, we tend to run models, "Look, when they retire at 65, they're only going to have ..." You know? All these sort of assumptions about how things are going to play out. But they assume that things remain static and they assume that these people aren't going to be somehow encouraged to contribute more and be more engaged. If the super system gives you 20 grand in a crisis when you're in your late 20s or early 30s or something, you're going to remember that and be a lot more engaged with it than otherwise. And people forget that in the younger years, there can be very limited engagement with super because you're not even putting money in, your employer's doing that.

So, the amount of contact and engagement that younger cohorts have with super in many cases can be extremely limited. And this is an instant where they've been very engaged in this process. And I just think the challenge is with the industry to make something positive about it, rather than wringing hands and going, "Well, they're all going to have bad retirements." And the reality is who knows? With a bit of engagement, that could well not be the case.

MH: And do you think there's scope to create more products within superannuation or more offerings, such as non-super savings or extending the First Home Owner's Grant? What do you think are the ways that we should be engaging with the younger generation?

JC: Splitting those in two, so let's deal with the non-super savings, I absolutely think that is what's going to have to happen because, as we've seen with the reduction in minimum draw down rates that were offered during the GFC, they were instantly requested this time around and granted because that's just what politicians have to do in these circumstances. I wouldn't like to see early release like this sort of staying as an emergency lever every time the market goes down by more than 10%, we're back into early release. I really wouldn't want to see that.

And so, I think good policy would see what the Americans and in the UK, they call side car savings, which is as you said. It's a savings product that a trusted brand like super offers, but it's not actually within the super system. Now, prior to this happening, if you'd asked me that same question, I would have said, "Look, we don't need to do that because we've got a compulsory super system and blah, blah, blah." But I think this incident has shown that people don't have ... And this is exactly the situation in the US, there are a lot of people who, if they needed more than $500 in a hurry, they don't have it. And so, I think yes is the answer to that.

On the real estate one, look, the difficulty with that is just the ... In my view anyway, is just if you create more ways to pay for a limited stock of real estate, you just drive up the price. So, that's why I baulk at that. The problem is a supply problem more than anything else. And also, this is a little bit controversial, but I'm going to say it anyway. I think we've got a funny ... I suppose it's because of the geography in Australia. If I could ask you this question. How many young Americans would complain about not being able to afford to buy an apartment in Manhattan? And the answer to that, I'm going to answer the question myself, pretty limited, right?

But every Australian seems to think that it's a fundamental human right to buy a house in a nice spot in either Melbourne or Sydney. And the fact is that unfortunately, those places are in limited supply and it's maybe not a realistic ... I know this is not a popular thing to say. But it's maybe not a realistic expectation for ... In times gone by, it was. But I think in an increasingly ... Well, globalization's going in reverse at the moment. But these cities are globally relevant cities that a lot of people want to live in. And it's just driving up the price.

MH: Jeremy, we're unfortunately going to run out of time very shortly. But before we go, it'd be remiss not to ask what you're up to at Challenger at the moment and how you're thinking about solving some of the things that we've talked about?

JC: Well, just it's very timely that you posed me that question today because at 11:00 AM this morning, the government reset the timeframe on what I think is the sort of single most important policy piece out there at the moment. And that is describing and guiding trustees on what their duties are to their retired members. And so, all of the thought leadership and research and webinars and things that we're doing effectively are now repurposed because over the last ... let me think, probably three or four months, the government's timeframe on that was effectively just suspended. They weren't quite clear on when this new policy was going to kick in. So, it's really focused on articulating the issues, particularly in this low rate environment that I've touched on. What funds, and even in the ... This is not an irrelevant topic in the self-managed sector either. That's actually a canary in the coalmine for retirement. It's already heavily in retirement. You can see that by the net flow ration in the self-managed sector is something like negative 170%.

Now, some people would think, "Gosh, that doesn't sound good." But that's exactly what you want a retirement system to do, because what you're doing, just in a personal sense, and discount rates have probably thrown these figures out of alignment. But basically, for every $1 real that you put into super in accumulation, you want to take out $3 real in retirement. So, you can actually see, as the system gets to a matured state, which ours is rapidly approaching, the flow piece actually has the three to one, you know? You're actually wanting more ... Otherwise the system doesn't make sense, if you're just putting $1 in real and then getting $1 real out at the other end, it just makes no sense.

MH: And is that the same across all market segments? So, SMSF, industry, and retail?

JC: No. SMSF is way ahead in terms of the ... I would say there's probably in round terms, let's just say there's 500 billion in retirement already in the self-managed sector. And probably 400 in the large APRA sector. And of course, a lot more human beings, there'd be a lot more people in the large APRA sector than actual people in retirement in the self-managed sector. But it's a highly relevant topic. It's hundreds and hundreds of billions of dollars are already in retirement. And we just need to be able to focus, particularly in the mass ... I'm not talking about high net wealth here. I'm talking about in the mass market, people need help to understand that effectively what they've done is they've sacrificed wages during their working lives. And those wages are really intended to smooth out their living standard across their whole lives, rather than spending retirement just relying on the aged pension and underspending those deferred wages.

MH: And Challenger's response as a result?

JC: Well, I suppose we're just talking to funds of all different types about some of the solutions and things that they can do to cover off on longevity risk and give retirees peace of mind in retirement, while leaving the bulk of their portfolio for investing in growth assets and liquidity and those sorts of things.

MH: I think it's going to be interesting to see what actually emerges over the next couple of years, because there hasn't been any true innovation, I think, in that space. But it's needed and I'm sure it will come.

JC: Yeah. Let's hope.

MH: Fantastic. Jeremy, thank you so much for the conversation today. We've covered a lot of ground, as we tend to do on this podcast. But it's been really interesting. Congratulations on the significant impact you've had on the industry.

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