What have we learnt from the COVID-19 ERS program and how we can prepare for round 3?
COVID-19 ERS program. Now that the dust has settled on the first two rounds of the program, we reflect on what went down. The program put a lot of stress on an industry not geared for rapid change. nuj reveals what we learnt, how ERS compared with other government support programs, and how we can prepare for ERS round 3…
The COVID-19 Early Release of Super (ERS) program is now complete, although we don’t believe that the ERS program is done, in fact, we think it is just getting started. In this review, we look back at the program and reflect on what we learnt, the effectiveness of the program and who was most impacted.
nuj has followed the ERS program from the start, ingesting, augmenting and enriching all available data. We have immersed ourselves in the program in order to uncover insights and share our opinions. If the ERS program interested you as much as it interested us, you will enjoy our perspective.
Time to adapt
“It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change.” Charles Darwin
Darwin’s observation is becoming more and more relevant for the superannuation industry, as the rate and pace of change continue to speed up. Government and regulators add and change policies at a rate of knots, leaving the industry to rapidly adapt or become a target of mass scrutiny (death of a thousand questions).
What did we learn from Round 1 and 2?
14% of total superannuation members joined the ERS program, resulting in initial application payments of $25.6bn and repeat application payments of $11.7bn, revealing that 41% of participating members withdrew twice.
The speed at which the government informed both the regulator and the industry of the COVID-19 ERS program, left the industry scrambling to set, manage and meet expectations. Looking back, it is hard not to commend all parties involved for their efforts, however, we still need to consider the financial support extended relative to the money spent to deliver it.
Participation in the program was relatively low, with only 14% of total members (3.5mn) electing to release a portion of the retirement savings. This participation resulted in financial support payments of $37.3bn compared with the combined $117.8bn from the Job Keeper and the Job Seeker programs.
Initial ERS applications resulted in payments of $25.6bn with a 41% repeat in applications amounting to $11.7bn, intimating that even those who participated in the program were wary of the impact of an early release on their retirement savings.
A snapshot of the entire ERS program broken down into initial and repeat applications and payments
Learnings
Behaviours always play a part in these programs, evident in the spike in applications at the beginning of each round. With a lead time prior to the kick-off of each round, anticipation can often trump rational decision making, leaving members with the sense that they need to apply early to avoid missing out.
Initial application numbers decreased consistently throughout the program, inferring that with increased awareness around the long term impacts of an early release of super, along with the influence of other government support programs, new participation in ERS decreased.
Average withdrawal amounts across each of the super fund sectors remained relatively consistent for the program, with very little deviation from the mean. This consistency assumes that participating members did not merely withdraw their maximum amount, but rather considered their needs and withdrew accordingly.
Who was impacted the most?
Superannuation benefits of Australian males aged 34 and younger were impacted the most thorough the program, with an average decline in their benefits of 9.3% across all superannuation sectors.
The ERS program allowed Australians to access their retirement savings early in order to support them through COVID-19 related financial hardship. The financial hardship parameters set by the ATO allowed almost any member to qualify for an early release of their superannuation.
With almost unfettered access to the program, the choices made by members reflect a true picture of the value they attribute to the superannuation system. Distilling these choices into the relevant age-based, sector-based and gender-based cohorts allowed us to zoom in to the problem areas.
Analysing the impact to benefit growth over round 1 of the COVID-19 ERS program for both age and gender-based cohorts against the previous 4-year average
Impacts
Members from the retail sector in the age-based cohort of 25 to 34 years suffered the largest decline in their benefits, which is not surprising given the likelihood that this cohort of members would be unadvised. With average member balances of $16.9k in this cohort, double-dipping was inevitable.
Across all age cohorts, the impact to benefit growth was larger for males than females, which begs the question of whether all of these males were experiencing financial hardship or just drawing down on their retirement to support their lifestyle choices.
A sad reality of the program is the age-based cohort of those 34 years and younger are the ones who withdrew the most from their superannuation, also representing the cohort that would gain the most value by leaving their super to grow until retirement. We would hope that the government would consider this for future programs to ensure that the most affected are not just kicking their problems into their retirement.
How effective was the program?
The ERS program delivered less than a third of the benefits of the Job Keeper and Job Seeker programs combined, however, based on the compounded cost growth, would cost more within the retirement timeframe for the most impacted age-based cohort.
Nobody can argue that the financial support programs that were put in place in 2020 through the peaks of COVID-19 were extremely beneficial for many Australians. In order to determine the effectiveness of the ERS program, we need to consider it against two of the other significant programs, Job Keeper and Job Seeker (JK&S).
According to government data, the JK&S program delivered a collective of $117.8bn in support benefits to Australians through COVID-19 to help both retain and find jobs. This funding was directly from the government coffers and when considering the cost of the program into the future, we compound the amount with the current risk-free rate.
On the other hand, based on APRA data, the ERS program delivered $37.3bn in early access to retirement savings for Australians. This funding was directly from our “future selves” and so in determining the cost of this program, we compound the amount with the current net investment returns to reflect the opportunity cost for “future us” to pay.
Comparing the cost of the ERS program against both Job Keeper and Job Seeker combined, compounded by net investment returns forgone and the risk-free rate respectively
Effectiveness
The JK&S programs delivered more than 3 times the amount of support delivered by the ERS program. JK&S payments were monthly amounts versus the ERS lump-sum payments, thus delivering more consistent value through the peak of the COVID-19 pandemic to support those experiencing financial hardship.
Forward projecting the compounded cost of the program for just 30 years, a rough estimate of the retirement timeframe for the most impacted age-based cohort, it becomes clear that the total cost of the ERS exceeds that of the JK&S programs.
Considering that COVID-19 impacted all Australians, one would assume that everyone should chip in to support those impacted the most. However, the ERS program effectively future taxed those most financially impacted to protect those most physically impacted by the pandemic. Taxing the young to protect the old!
How can we prepare for Round 3?
Adaptability is key to the preparation for the next ERS round, underpinned by harnessing member data to build deeper awareness of members.
The superannuation vault was opened through the COVID-19 ERS program and now is shut again… but how tight?
It would be foolish to think that the superannuation “honeypot” will not be used again for another ERS program to provide further financial support to a sub-set of members. With that in mind, what did we learn from the COVID-19 ERS program to prepare for the next ERS program?
member behaviours won't change - don’t make entry too cheap
maximise the benefit to the target audience - ensure the framework aligns with the desired outcomes
focus on alleviating the pain - not deferring it
Preparing
Adaptability is the key to survival for the superannuation industry through the next ERS program. Adaptability translates into a mixture of resilience, flexibility and awareness.
Super funds have shown their resilience and flexibility through 2020 with responding to COVID-19, mobilising their workforces, executing the ERS program and managing constant regulatory change.
Meanwhile, awareness, distilled down to a better understanding of members, needs further work. Member data is the blueprint to unlocking this awareness.
If you are interested in harnessing and enriching your data, we'd love to help out. Email us or follow us on LinkedIn.