Category: Features

Super’s attraction wanes as tax benefits decline

The Australian

5 February 2018

Stewart Oldfield

While some are calling 2017 the peak of the Australian housing market did another boom also peak but get far less attention?

For a couple of decades super has been the preferred vehicle for wealth accumulation for well off Australians, but according to some that might be changing.

Thanks to an ongoing legislative crackdown on the tax benefits of super there is a real prospect that over the next decade that Australians will direct more of their savings to homes outside of a super structure than within.

According to research house DEXX&R, retail funds held outside of super are projected to grow at 8.7 per cent per annum over the next 10 years while funds held within the pre-retirement super tax structure are projected to grow at only 6.6 per cent.

This is a big change from the past when post-GFC super funds under management was growing at 9 per cent or higher and super was the preferred tax effective investment vehicle for those on high incomes.

The switch of fund growth will have major ramifications for Australia’s financial services industry and the type of products it builds and markets to consumers.

“The days of high net worth individuals pumping money into super are pretty much over,’’ says Mark Kachor, principal of DEXX&R. “Super has peaked as anything other than its true purpose — funding working Australians in their retirement.’’

Rob Coombe, a former CEO of Westpac’s BT Financial Group and now the chairman of listed investment bond provider Austock Group, says negative investor sentiment towards super has been increasing for some time.

“People frankly don’t trust the system and are worried about putting more money into it in case the preservation age gets pushed out or the tax gets increased,’’ he said.

There were three changes introduced last year that look to have put the brakes on wealthier Australians pumping millions into super. From July 1 last year, the federal government introduced a $1.6 million cap on the total amount of super that could be transferred  into a tax-free retirement account.

It also lowered the maximum size of after-tax, (otherwise known as non-concessional) contributions to super to $100,000 a year from $180,000 a year.

Then there were changes to the size of permitted pre-tax (otherwise known as concessional) contributions to super.

The maximum size of concessional contributions to super was dropped to $25,000 per year for everyone under 75 and an extra 15 per cent contribution tax on concessional contributions was introduced for those lucky enough to be earning more than $250,000 a year (down from more than $300,000 a year).

The changes came on top of pushing out the so-called preservation age — the age at which you can access your super — announced back in 2015.

Coombe said that collectively the changes were extremely negative for wealthier Australians who had traditionally put a lot of money into super. He said the changes were going to stem flows into the super system as a preferred tax structure.

He said that even those with room to put more money into super under the $1.6m cap introduced in July were increasingly nervous about the “shifting sands” of the regulatory settings for the super regime.

Some analysts have estimated that in the current financial year there will be an additional $18 billion available to be captured by fund managers outside super.

And Coombe expects more legislative changes to super to come in the future. For instance, further delays to the age at which we can access our super.

“The government is always hungry for revenue so they are going to keep going back to the super pot,’’ he said. “That trend will continue whether Liberal or Labor, but will potentially accelerate under a Labor Party leading the country.’’

Not that change is a bad thing, according to Coombe.

“I felt that very strongly that the superannuation system in Australian had drifted away from the original intention of it when it was set up — to provide adequate retirement income for all Australians.

“In many ways … it had become a tax haven for the wealthy. People were incentivised to basically jam as much money into super as possible given the favourable tax environment.

“That era is coming to an end.

“The non-super market will explode’’.

Coombe’s Austock Group (which is changing its name to Generation Life) is preparing to launch a raft of new financial services product for Australians looking to invest outside of super.

“The best thing that happens to our business is all the bad things that happen to superannuation. So long may it last,’’ Coombe said. “In many ways I am hoping for a Labor Party to be elected.’’

For its part the federal government said at the time of announcing the $1.6m cap that only a select few people will be affected by the measure.

The average superannuation balance for a 60-year old Australian nearing retirement was $240,000 and therefore less than 1 per cent of fund members would therefore be affected by the cap.

Similarly, less than 1 per cent of fund members would be affected by the changes to the non-concessional contribution rules.

“Superannuation tax concessions are intended to encourage people to save for their retirement. They are not intended to provide people with the opportunity for tax minimisation or for estate planning,’’ the government said when announcing the measures.

Stewart Oldfield is a director of industry intelligence firm Field Research.

Super changes working, so no more meddling: ASFA

The Australian

5 February 2018

Glenda Korporaal

The key lobby group for the $2.3 trillion superannuation industry has warned the federal government to hold off making any more changes to super and the age pension in the May budget or risk eroding confidence in the system.

“We don’t want any more meddling with the super and age pension settings,” said Martin Fahy, the chief executive of the Association of Superannuation Funds of Australia in a budget submission to the federal government released on the weekend.

He said data put together by ASFA had shown that the changes made as a result of the 2015, 2016 and 2017 federal budgets were working to achieve the government’s goals of constraining spending on super and the pension.

“The changes the government has put in place in super and aged care in the past few budgets have given the government the outcome it was looking for,” Dr Fahy said.

“We don’t want things to be dialled down any further.

“The reforms to superannuation and the retirement system are working, but they need to be bedded down. “Stability needs to be achieved to maintain confidence in the system.”

Dr Fahy added that the changes to the asset test for the age pension, which came into effect on January last year, were “helping contain future growth in aged pension expenditures”.

The changes were estimated to cut back spending on the age pension over the period of the forward estimates by about $2.4 billion. The number of people getting the age pension has fallen from 2.57 million in December 2016 to 2.49 million in September last year

— a fall of more than 3 per cent.

“The changes to the age pension were substantial and appear to make the age pension fiscally sustainable for Australian governments in the years ahead,” Dr Fahy said.

“However, any further tightening of either the asset or the income test could leave many Australians in retirement worse off,” he warned.

Changes to the age pension system announced in the May 2015 budget cut back the maximum amount of assets a person could own and still receive a pension.

They also increased the “taper rate” — the amount of pension lost per extra dollar of assets owned.

ASFA said about 100,000 people were estimated to have lost their entitlement to the pension as a result of the changes, with another 330,000 receiving a lower age pension.

Improvements to the lower end of the asset scale saw an estimated 50,000 Australians receive a larger pension.

Dr Fahy said work done by ASFA showed that the compulsory superannuation system was working to cut back reliance by Australians on the age pension.

“Super is working and will do more of the heavy lifting to deliver retirement outcomes into the future,” he said.

He said projections done by ASFA showed that a combination of increasing super balances and the fact that people were working longer would help reduce reliance on the age pension.

Currently, about 70 per cent of people over 65 receive either the full or part pension, with 60 per cent of those getting the full age pension.

Dr Fahy said ASFA projections showed that only 30 per cent of Australians over 65 would be on the full pension by 2025.

He said it would fall further to below 25 per cent by 2055. Dr Fahy said the changes announced in the May 2016 budget on superannuation were estimated to be saving the government about $2.35 billion a year.

This was made up of $1.25bn a year saved from lower contribution caps and $1.1bn as a result of the introduction of the $1.6 million transfer balance cap, a tighter cap on post-tax contributions and changes to transition-to-retirement pension arrangements.

The 2016 budget reduced the annual concessional level of contributions from a maximum of $35,000 a year (or $30,000 a year for people under 50) to $25,000 a year.

It also increased the tax on superannuation contributions for people earning over $250,000 a year from 15 per cent to 30 per cent. (Before that, the 30 per cent tax rate kicked in for super contributions once people earned more than $300,000 a year).

The changes also cut the allowable level of post-tax contributions to super from $180,000 a year to $100,000 a year, with post-tax contributions banned once a person’s super assets reached $1.6m.

It also introduced a cap of $1.6m that could be transferred into a super fund in pension mode earning no tax, with amounts above that being subject to a 15 per cent tax on earnings.

Dr Fahy said the changes to superannuation had cut back the proportion of total tax concessions going to the highest income earners and increased the proportion of tax benefits going to lower and middle income earners.

The proportion of super tax concessions going to people on the top income tax rate fell from 13.3 per cent to 10.8 per cent.

The proportion of tax concessions going to people earning between $37,000 and $80,000 a year rose from 34.7 per cent to 36.9 per cent while the proportion of super tax concessions going to people earning between $18,201 and $37,000 a year rose from 11.9 per cent to 12.4 per cent.

“The changes (to superannuation and the age pension) have had a substantial and positive impact on budget outcomes, in terms of reducing government spending and increase tax revenue,” Mr Fahy said.

“The super tax changes have substantially reduced the tax assistance flowing to upper income earners.

Now is the time for consolidation”.

Deeming: pensioners lose out when rates don’t keep up

The Australian

3 February 2018

John Rawling

Over summer the big four banks quietly cut interest rates for online savings accounts, continuing a trend to squeeze customers. But spare a thought for age pensioners, who have been experiencing a similar squeeze for nearly six years.

For many years banks have offered age pensioners specialised bank accounts under various names: ANZ Pensioner Advantage account, Commonwealth’s Pensioner Security account, NAB’s Retirement account and Westpac’s 55+ and Retiring account.

Alongside the rates earned by these bank accounts is another rate — a deeming rate — which is set by the Minister for Social Services. Deeming rates are the key component of the income test for the pension.

Deeming rates assume that financial investments (including bank accounts, listed securities and managed funds) earn a certain amount of income regardless of the income they actually earn.

If a deemed rate is higher than an actual rate, the pensioner loses out.

For instance, a $200,000 deposit in the Commonwealth Bank’s Pensioner Security account will earn actual interest of $2965 per year. But deemed income is $5747. The end result in this instance is that it will reduce a pension by $26.52 a fortnight.

According to Centrelink, deeming is a simple and fair way to assess income from financial assets.

“By treating all financial investments in the same way the deeming rules encourage people to choose investments on their merit rather than on the effect the investment income may have on the person’s pension entitlement,” a Centrelink spokesman says.

Banks have offered specific accounts for pensioners/seniors since the deeming regime was adopted by Centrelink in 1996. They were marketed as “deeming accounts” and paid actual interest which closely matched the Centrelink deeming rates. Deeming rates were set at 5 per cent for the first $30,000 for single pensioners and $50,000 for couples. Higher amounts earned 7 per cent.

By 2010, in the wash-up of the global financial crisis, deeming rates had fallen to 3 per cent and 4.5 per cent, respectively — still at or below the cash rate. They remained there for three years, until March 2013.

When the official cash rate fell from 4.5 per cent to 2.5 per cent over a couple of years, the banks followed suit.

By December 2013 — as the official cash rate fell to below 3 per cent — the disparity between the cash rate and the deemed rate had become so great that ASIC stepped in. To avoid action for misleading and deceptive advertising, the banks were forced to remove references to deeming and rename the accounts.

July 2012, six years ago, marked the first time that the official cash rate was lower than the higher deeming rate. Pensioners with large deposits started losing out.

August 2016 was the first time the official cash rate, at today’s rate of 1.5 per cent, fell below the lower deeming rate. Suddenly all pensioners were affected.

Currently the deeming rates are set at 1.75 per cent for the first $50,200 for single pensioners and $83,400 for couples, with higher amounts assumed to earn 3.25 per cent.

There has been no comment from Centrelink or the Minister for Social Services as to why the large disparity between deeming rates and official interest rates has been allowed to occur.

One can only speculate how much pensioners subject to the income test have lost since 2012.

These days, finding a savings account with a major bank that pays an interest rate anywhere near the official deeming rates is close to impossible.

For pensioners not to lose out, either interest rates will have to increase, or the minister will have to lower the deeming rates, or both.

John Rawling is an aged-care consultant at Joseph Palmer and Sons

Treasury’s update on the ‘cost’ of limiting Australian taxes is easy to twist into bad arguments for raising them

Centre for Independent Studies

1 February 2018

Robert Carling

With the campaign to increase tax on superannuation in full swing two years ago, Kelly O’Dwyer (Assistant Treasurer at the time) let it be known that superannuation tax concessions were “a gift that the government should only provide when it makes sense”.

It has long been obvious there was a belief alive in some corners of Canberra that government has first claim on our income and the role of tax policy is to determine the residual available for private use. But it still came as something of a shock that this interventionist way of viewing the relationship between government and the people had spread so far.

It’s at this time of the year the government reveals the extent of its generosity, in the annual Tax Expenditures Statement (this year quietly released after the close of business on the day before Australia Day).

The government’s ‘gifts’ are all there to be seen in the TES, each one with its own price tag. Not taxing capital gains on the family home the same as other assets: $33 billion a year, thank you very much. Discounting capital gains by half: another $51 billion. Not taxing concessional superannuation contributions at full rates: another $17 billion. Not taxing superannuation fund earnings at full rates: another $19 billion. And so on it goes.

The problem with all this is that the estimates are extremely rubbery, and in any case they all depend on the benchmark against which the ‘gifts’ are measured. Taken to extremes, the notion of ‘tax expenditure’ could be used to claim that not taxing all income at the top marginal rate is a ‘gift’, or for that matter so is not taxing everything at 100%.

Thankfully the TES does not go that far. The benchmark used by Treasury to make the estimates is the so-called comprehensive income tax benchmark, under which the standard income tax scale is applied to any form of income.

But what is included in ‘income’ under this approach is still a matter of judgement. They don’t include in the benchmark the imputed rental income of owner-occupied housing, which a purist would include. They do include realised capital gains on such housing — and the purist would go further and include unrealised gains as well.

It’s not clear that capital gains should be included at all. And it’s not clear that taxes on saving through superannuation should be benchmarked against a comprehensive income tax on such saving.

In this year’s TES, the Treasury makes a concession to that viewpoint by including alternative estimates of tax expenditures on superannuation against an expenditure (or ‘consumption’) tax benchmark, and the result is a startling $28.7 billion a year lower.

Treasury concedes “there are reasonable arguments for both the comprehensive income tax benchmark and the expenditure tax benchmark” and adds that “caution should be exercised when drawing conclusions on the size of the superannuation tax expenditures.”

This is a warning to those who confidently state year after year, as if reciting an incontrovertible fact, that superannuation tax concessions are costing the budget more than

$30 billion. The Henry tax review went further than the TES warning, stating baldly that “comprehensive income taxation, under which all savings income is taxed in the same way as labour income, is not an appropriate policy goal or benchmark.”

The benchmark isn’t the only problem with tax expenditure estimates, and the Treasury has sprayed words of warning all over the document. The problem is that these warnings have been judiciously ignored by users in the past and are likely to be again this year.

The TES is like manna from heaven for those on a mission to increase revenue to fund more government spending or to promote ‘fairness’ by taking more from ‘the rich’. To such users of the TES it is nothing but a revenue-raising policy menu — and never mind the defects, judgements and ambiguities in its construction.

The huge amounts of tax expenditures reported for superannuation concessions — against the questionable comprehensive income tax benchmark — were instrumental in the campaign to reduce such concessions.

If the TES reveals distortions, rorts or concessions that have no good reason for being, they should go (in favour of lower tax rates for all, not more spending). But on closer inspection the TES isn’t the Aladdin’s cave it is often thought to be. Many tax expenditures are there for good reason and do not deserve to be labelled as rorts or distortions.

Robert Carling is a Senior Fellow at the Centre for Independent Studies

(emphasis added by Save Our Super)

Age pension: 90,000 lose payments as new assets test bites

The Australian

30 January 2018

Tony Kaye

The new assets test has become an acid test for many who were receiving a part age pension.

Almost 90,000 individuals and couples around Australia who previously received a part age pension payment completely lost their entitlements in 2017 as a ­result of the federal government’s changes to the pension assets test rules.

In addition, hundreds of thousands of individuals and couples who were previously receiving a full pension have had their payments reduced. The revised pension assets test rules also mean many Australians who had based their ­retirement income stream on receiving a part age pension in the future should seek out professional advice urgently to re-evaluate their financial position.

The Department of Social Services has confirmed about 86,600 part-rate age pensioners had their pension cancelled as a result of the assets test changes that came into effect on January 1, 2017. And, as we head into 2018, more retiring Australians will likely miss out on receiving any level of age pension.

The new limits on the amount of assets outside of a family home that could be held by couples or individuals before their pension rate was reduced was introduced last year as part of a wider plan by ­Financial Services Minister Kelly O’Dwyer to reform the pension and superannuation system. The amount of pension received is now reduced by $3 per fortnight for every $1000 over the new limits under the pension taper rate.

Using the latest official government data, it is clear that between the end of December 2016 and the end of June the number of recipients receiving a part age pension under the assets test fell from 486,031 to 321,106, a variation of just over 147,000. The DSS has claimed only part of that difference was due to the actual changes in the assets test, and that no full-rate age pensioners have had their pension cancelled due to the ­assets test changes.

However, between December 2016 and mid-2017, the total number of Australians receiving an age pension dropped from 2.57 million to 2.49 million. The number of couples receiving a full or part pension fell by about 61,000, from 1.43 million to 1.37 million, while the number of singles slipped from 1.13 million to 1.12 million.

How it works now

In terms of assessing the age pension under the assets test, the DSS data shows about 1.18 million recipients are couples owning a home. A further 660,000 are singles owning a home. These cohorts tend to have the highest value level of ­assets outside of their homes.

The pension assets test does not apply to the family home itself, but it does apply to its contents and any other assets owned, including property, vehicles, caravans, boats, superannuation holdings and funds in bank ­accounts.

Average superannuation balances at retirement already put many Australians close to or over the new asset test thresholds. But one of the biggest problems for those in this position is that having higher superannuation retirement savings may actually generate less tax-free income than those relying solely on the age pension. In other words, having more ­assets can potentially be a big disadvantage.

On current age pension rates, a single person receives $23,254.40 a year. A couple receives $17,529.20 each. A couple with $850,000 of personal assets outside their home is not eligible for any age pension, but based on a 4 per cent annual return they will need that amount saved to generate the same level of tax-free income as an individual or couple receiving the full age pension.

As such, the changes to the assets test could deter some individuals and couples from putting money into their superannuation, as even a couple can only hold $375,000 in retirement savings collectively ($175,000 each) before their age pension entitlement begins to fall. The alternative is to ­direct more capital into the principal place of residence, which does not count towards the assets test.

Data released last month by the Association of Superannuation Funds of Australia shows a retired single person needs $43,694 a year and a couple needs $60,063 to be considered as having a comfortable standard of living. To achieve that sort of income, ASFA says singles need $545,000 in their super and couples need $640,000. But having those levels of superannuation could put many singles and couples out of contention for receiving the age pension, depending on whether they own a home.

The assets test changes have led to some people moving around their financial assets so they can receive the age pension, including directing more money into their tax-exempt family home. There are various strategies to reduce your assets, but the secret is to maintain your standard of living using current income sources.

In effect, while low-income earners will get the full age pension as a matter of course, and high-income earners have too many assets to be entitled to any pension anyway, those in the middle income bands have been most affected by the asset test rules.

Tony Kaye is the editor of Eureka Report, which is owned by financial services group InvestSMART.

Age pension and superannuation changes hit home

The Australian

10 January 2018

Glenda Korporaal

It has been a year since stricter asset tests for the age pension came into force — overshadowed by a flurry of changes to super­annuation that hit mid-year.

But the longer-term financial impact on those affected is now becoming more apparent.

The Self-Managed Superannuation Fund Association threw a spotlight on the issue yesterday.

In a statement, chief executive John Maroney said it was now apparent that the changes to the means test taper rates and thresholds have had “significantly adverse and presumably unintended consequences”.

He said the steeper taper rate that took effect from January 1 last year is now actively discouraging middle-income wage earners from saving to be self-sufficient in retirement.

Maroney argues that the changes have created a “black hole” for people directly affected by the changes that makes them worse off in terms of income — encouraging them to spend up (or cut back on their savings) to reduce their assets to qualify for the pension. He cites the example of a home-owning couple who have a superannuation balance of between $500,000 and $800,000.

For couples in this situation, he says the taper rate (the rate at which higher assets reduce entitle­ment for the pension) is the equivalent of about 7.8 per cent a year. With today’s low interest rates, this is well above the amount that a retiree could expect to be receiving from their investment or time deposit.

(Under the steeper taper rate that came into effect in January last year, retirees lose $3 of age pension a fortnight for every $1000 above a certain assets threshold, compared to losing only $1.50 of age pension for every $1000 over the threshold before January 2017.)

The couple in question is better off spending their money, reducing their assets to enable them to qualify for the pension, or shifting their assets from financial assets into non-financial assets such as the family home and getting as much of the pension as they can.

The pension may not be much, but for those who are eligible, it is a worry-free government guaranteed amount that a retiree can ­depend on rather than an investment, where returns can be vulnerable to market swings as well as administration costs, or cash in the bank or time deposits, which don’t pay much these days.

(A three-month bank time deposit pays about 2 per cent, rising to 2.7 per cent for 24 months.)

And as any retired person knows, there are many more benefits to keeping the pension than just the pension itself.

The SMSF Association agrees that some means test is necessary for the sustainability of the age pension (there has to be a cut-off somewhere), but argues that the current situation is “not appropriately integrated with the broader retirement system”.

Maroney says the government should scrap the assets test and move to a more appropriate, simpler way of integrating superannuation and the age pension.

He supports the idea suggested in the Ken Henry-led Australia Future Tax System Review that has a single means test that ­applies a deemed income rate to financial and non-financial assets.

While it is not likely to happen in this government’s term (the government has indicated it has no stomach for further changes to the pension or super system within the lifetime of this parliament at least), it does raise a longer-term debate about fairness.

The SMSF Association’s comments yesterday follow the very vocal comments made for some time by the Melbourne-based Save Our Super group that was set up in response to the sweeping superannuation changes announced in the 2016 budget.

Online publication Super­Guide has been working with Save Our Super to highlight what it calls the regressive impact of the stricter assets tests. The group argues that there is a “savings trap” as a result of last year’s asset test changes that particularly hits ­people with assets of more than $400,000 and below $1 million.

In an article published on the Save our Super website ( in November, writer Trish Power argues that a single person who owns their own home would be better off in terms of total retirement income having $300,000 in super than by having $400,000, $500,000 or even $600,000 in super. Power points out that a home-owning single person is hardest hit when they hold $550,000 in super. At this level they receive less total income (super pension plus age pension payments) than a single person who has $300,000 in super.

Power argues that the January 2017 changes “ambushed more than 300,000 retirees who could do little to mitigate their circumstances” and “threw into disarray the retirement plans of many hundreds of thousands of Australians within five years of retirement”.

Save Our Super, which describes the situation as Retirementgate, has engaged in a letter-writing debate over the issue with federal Assistant Treasurer Michael Sukkar that can be read on their website.

Sukkar challenges the assumptions in the Save Our Super paper, arguing that it is not the role of the age pension to support retirees with a higher level of assets to maintain their capital base.

He argues that the steeper taper rate was introduced to encourage people to draw down their private savings more rapidly.

Whether it is a “black hole” or a “savings trap”, those hit by the 2017 changes should by now have at least assessed if they can re-­arrange their affairs to minimise the adverse impact of the changes.

There is no appetite for more radical changes to super in the short term, but the SMSF Association comments yesterday could revive the debate over the fairness of the current super and pension situation.

Superannuation rackets and fee mysteries

The Australian

22 December 2017

Robert Gottliebsen – Business columnist

One of the most important issues of 2018 is going to the management and behaviour of our non self-managed superannuation funds.

And there is no better time to get it right than when the share market is rising and there are good news stories to tell.

As things now stand what is happening is a national disgrace. So let’s put four items on the agenda for superannuation change in the year ahead.

  • Total disclosure of all fees paid to employers and unions in the case of industry funds and all fees paid to banks, AMP and other retail fund owners, plus all other management fees
  • An end to the current racket that stops people choosing funds and being ripped off with multiple fees as a
  • The unravelling of the “Great Investment Fee Mystery” where it looks like some of the wealthiest investment managers and advisers in Sydney are donating their services to superannuation for no That can’t be right. This smells of yet another bank scandal for the banking royal commission to look at.
  • At least make a start on getting investment managers to think about the long-term interests of members rather than short-term profit forecasts. I will elaborate on this theme during 2018 because it’s vital to members of non-self managed funds and the nation.
  • An end to the racket where those who chose funds see their money held by the so-called “manager of choice” for one or two months and then passed onto the fund of This certainly happens in the retail area and may happen in industry funds. The money should go straight from the employer to the fund of choice. It’s just another racket that reflects a sector that is lazy in protecting members’ interests.

During 2017 I wrote many commentaries demanding that industry superannuation funds disclose all direct and indirect payments to employer groups and unions. It’s important that fees disclosed cover situations where money is drafted into low cost so-called “my super” funds and where members make a choice of fund. If I make a choice I need to know the fees, including owner fees, being charged on my money. To me that’s elementary and I can’t believe we are debating this.

Somehow under the proposed and ill-fated legislation the government required fee disclosures on the so-called “my super” funds, but nowhere nearer the same level of disclosure in the “choice funds”. It made no sense.

Now it so happens that 80 per cent of industry funds were based on the “my super” schemes (where there must be backer disclosure) whereas in the retail area it was the reverse— roughly 80 per cent were “choice” funds (no disclosure) and 20 per cent “my super”.

The industry funds tell me that they are happy for full disclosure of all direct and indirect payments to their backer, but it must apply industry-wide to both the “my super” and “choice” sectors, not just the sector where they dominate. And they are absolutely right. The minister, APRA or the royal commission need to fix it. Frankly the retail funds and the industry funds should together volunteer full disclosure.

It so happens that overall costs of industry funds are much lower than in retail funds so full disclosure in the retail sector is very important.

But the industry sector has its own set of bad practices.

People, usually on low incomes, are forced or shepherded into different industry funds when they work for, say, a pub and a retailer. The low income earners with two or more funds are then slugged multiple fees. There must be an ability to chose your fund so that retail workers who have a fund from their work in the pub can easily stay with one fund. The industry funds are proposing a scheme that will help reduce this fee racket and that’s good but fund choice is vital.

Now to the “Great Investment Fee Mystery”.

What makes it such an enthralling saga is that by reputation the characters in our tale have magnificent houses and drive fast luxury cars. How do they get this money? Either the investment managers have family money, a generous banker lending them vast sums, or they are on a high income. Clearly I am jesting but it’s a joke with a serious twist.

In the superannuation figures required by APRA there is a column called “investment fees” and that’s where we should look for clues as to the source of this well-displayed wealth.

In the industry funds there are some very large disclosed sums. For example, Australian Super public offer funds paid $418 million in investment expenses but to be fair this represented only 0.4 per cent of their assets. The health employees paid $101 million in investment fees but the ratio was only 0.28 per cent. All the funds have disclosed a figure and while there are percentage charges above and below, most fall into those brackets.

The point is that there is disclosure.

Now we go to the public offer retail funds. It looks like there are roughly about 80 retail funds. But about half of them have what looks like the deal of a lifetime because they pay no or token investment fees. Among those who do not pay investment fees are the heavy hitters like AMP, Commonwealth Bank’s Colonial, and NAB’s MLC, while Macquarie’s costs are 0.03 per cent of assets.

And so where do those fast cars and luxury houses come from?

Clearly there are side deals and somehow, some way, in parts of the retail sector investment charges are contracted out to others and not disclosed. I am sure the industry funds contract out as well but at least on the surface it would seem they and many of the retail funds include those costs in investment fees. But let’s get it all out in the open.

Remember this is not employer body, union or bank money — we are looking at funds owned by ordinary Australians who are members of non self-managed funds. Self-managed funds know exactly what they pay and APRA should want the same privilege for non self-managed funds. APRA needs to stop turning a blind eye to those funds showing no or token investment fees.

The head of the bank industry body, Anna Bligh, proudly has set out new rules for bank conduct. That’s good. But let’s start by disclosing what is really being paid in investment expenses.

When people say the cost is “nil” when it is clearly not “nil”, it usually means there is something to hide. Let’s get it out into the open.

Have a wonderful Christmas and see you in the New Year.

Robert Gottliebsen has spent more than 30 years writing and commentating about business and investment in Australia. He has won the Walkley award and Australian Journalist of the Year Award, two of journalism’s highest honours. He is an economic writer at The Australian, and he appears on television and various radio stations.

My 2018 checklist for investors

The Australian

16 December 2017

James Kirby

Looking out 12 months is never easy, but most investors would agree conditions are as promising as we have seen them in many years. As an active investor the summer break is a good time to review what you have been doing in the last 12 months and, importantly, make some key decisions for the year ahead.


Here’s my checklist for 2018.

Explore borrowing at low rates

Official rates remain at 1.5 per cent. In order to reach levels that central bankers regard as “normal” they would have to double to 3 per cent. In reality banks have tried everything to push the actual rates borrowers pay in the market higher. Home mortgage rates are close to 4 per cent or higher if you are an investor or interested in interest-only loans. Nonetheless, this extended era of low rates means that many investors can remain comfortable with borrowing to leverage their performance in any investment class, and that includes shares. (Remember negative gearing is not just for property).

ETFs remain market darlings

With the majority of brokers forecasting strongly positive returns on the ASX for 2018, it is a year which may very well suit index funds, or exchange traded funds. Brokers are looking at stock price increases across the market of 9 per cent with an additional 4 per cent from dividends. If the market is going to offer on average 13 per cent or anything near it, then there is a very compelling argument for ETFs, which simply reflect the performance of the index. Certainly, there are flaws in non-discerning approach of  ETFs, but for the year ahead they would seem to answer a lot of questions.

Don’t miss a mining a rebound

It’s been a while since the miners were front and centre of the investment scene — last year the mining index outpaced the wider market: The mining index returned close to 17 per cent against around 10 per cent for the wider market. What’s more, there is every reason to believe the miners can do it again in 2018 with synchronised 3 per cent-plus global growth expected to push all resources higher.

Under this scenario household names such BHP and Rio are perfectly placed. On top of that there is the dramatic requirements that EVs (electric cars) are expected to place on selected resources: nickel, lithium, cobalt and graphite. Junior miners that supply into the EV battery market such as Syrah, Orocobre, Iluka and Galaxy are expected to benefit as electric cars move towards representing one in five cars by 2020.

Stick with residential property

Is it a soft patch or the long-anticipated disaster gloom merchants would have us believe? It looks for all the world like a soft patch engineered by the macroprudential restrictions regulators imposed on the banks this year. Yes, house prices are expected to be flat in 2018, but that is not a signal to sell property, rather it is a signal to hold on.

There is undoubtedly weakness in Sydney market and risks of further weakening in Melbourne. At the same time there are convincing signs that Perth will have a better year in 2018 than it did in 2017. There will be problems in inner city apartment projects and second-grade properties across all cities, particularly Brisbane. But with low interest rates and unemployment levels at less than 5.5 per cent, it does not represent a threat to mortgage servicing patterns … that’s the heart of the housing market.

Know your retirement sweet spot

Earlier this year the government announced major changes to superannuation which included new contribution caps coupled with subtle but severe restrictions on pension access. These changes have changed the dynamics of retirement savings. The system is absurd and now so poorly structured that you can quite literally get more income by saving less. Put simply in terms of annual income don’t be in the middle zone! Wealth writer James Gerrard has estimated that the annual income of a couple who own their home with $400,000 get an income $52,395 a year thanks to Centrelink, a couple in the same position with $800,000 get $42,251.

Yes, of course it is better to have your own savings, but it is surely galling to know you can have a higher income if you save less.

Find your non-correlated assets

This is a bull market — know it when you see it. US and Australian shares are expected to return 10 per cent-plus in the year ahead. Tech stocks are selling at remarkable prices and then there is the unprecedented excitement around bitcoin. Sooner or later we will get a correction and eventually we will get a sharemarket crash. Non-correlated assets are assets that are expected to “perform well” when this happens. The last time the markets crashed in 2008 we found out the hard way that many of the newer breed non- correlated assets did not work — this would include hedge funds and a variety of products which are exposed to weakness in securities markets. There are two enduring non-correlated assets which have proved themselves in all weather: cash and gold.

  • Cash: In Australia cash deposits have the exceptional advantage that they are guaranteed by the government at up to $250,000 (per person, per bank). Moreover, cash rates though historically low are inching
  • Gold now has a rival in bitcoin but it would be a brave investor who would depend on cryptocurrency when the RBA deputy governor Guy Debelle just this week blasted the cryptocurrency craze warning it was “a speculative mania”.

Gold — the bullion not gold shares — proved to be a very effective non-correlated asset after the GFC and it will no doubt do it again in the future.

(Emphasis added by Save Our Super)

How to save less and retire seven years earlier

The Australian

2 December 2017

James Gerrard

It shouldn’t be this way but our new superannuation system with its series of caps and reduction in pension access has thrown up some unlikely outcomes — the contradiction that you may be better off having less money saved if you want a more comfortable retirement.

If you play your cards right and work the rules, you can hit a savings sweet spot and maximise your retirement income through a mix of private savings and age pension. Not only that, but you also may be able to retire seven years earlier than you thought.

In 2006, the super changes brought in by the Howard government simplified the retirement system that over time had built up a large number of complexities such as reasonable benefit limits.

Save Our Super head Jack Hammond, a retired QC, says: “The rules were set in a strategic framework of lengthening life expectancies, rising incomes and expectations of higher retirement living standards, so that people could save for themselves, with declining reliance on the age pension.”

The more you saved, the more you would have in retirement. The age pension would kick in to supplement your base level of income but wasn’t designed to replace the incentive to save and become self-funded.

Today, Hammond believes super and Centrelink changes are counter-intuitive and “short-sighted, lacking proper long-term modelling, and have resulted in the odd way we have with the way retirement income is received”.

“It’s been a race to the bottom as both major political parties turn superannuation at best into a budget proposition rather than a longterm savings policy that it was designed to be,” he says.

From January 1 this year, the means testing of pension benefits was changed. The government reduced the maximum amount of assets you can have while still receiving a part age pension. In addition, it accelerated the rate of reduction in pension entitlement for those with assets over the cap for a full age pension. They changed from $1.50 reduction in fortnightly pension for every $1000 of assets over the cap to $3 reduction for every $1000 over.

People in retirement usually generate income from two sources. The first is accumulated savings, such as investment property, term deposits and super accounts; the second is the age pension. For a homeowner couple who meet all other eligibility rules, assets below $380,500 (excluding the family home) result in a full age pension, while a part age pension is received with asset levels up to $830,000. Previously, up to $1,178,500 in assets could be held before the pension was cut off completely.

The result: retirees who have reached age pension age are caught in a trap where they are penalised for having built up more savings by having their age pension cut off much faster, and at much lower asset levels.

Save Our Super, with the help of Sean Corbett, an economist with more than 20 years’ experience in the super industry, has modelled retirement income levels based on a mix of age pension benefits and drawdown of super at a rate of 5 per cent a year, the legislated annual minimum drawdown percentage for those 65 and older.

They found that depending on your marital status and housing situation, there were optimal levels of savings to maximise retirement income via a mix of super and age pension benefits.

● Single person with home — no more than $300,000 in super to get $33,958 a year income.

● Single person renting — no more than $550,000 in super to get $42,549 a year income.

● Couple with home — no more than $400,000 in super to get $52,395 a year income.

● Couple renting — no more than $650,000 in super to get $60,833 a year income.

To highlight the disadvantage of having more assets: for a couple who own their house and have $800,000 in super, their estimated annual income is $41,251, whereas if they have only $400,000 in super their estimated annual income increases to $52,395. This is because a couple with $400,000 in super would get 94 per cent of the full age pension payment, while a couple with $800,000 in super would get just over 1 per cent of the full age pension payment.

So here is a legitimate strategy: to access super tax free, you must be over 60, fully retired and receive a super pension, technically known as an account-based pension. But to receive the age pension, for those born after January 1, 1957, you must be 67.

Knowing where your savings sweet spot is likely to be at 67 allows you to plan early and potentially have an early retirement, drawing down on super in those earlier years of retirement to hit the sweet spot by 67. In other words, if you had $800,000 in super at 60, you potentially could retire at 60, spend $400,000 on living expenses, travel and renovating your home. When you reach 67, you have worked your super balance down to $400,000, which is the savings level sweet spot for a couple who own their home.

Crucially, this is if you’re happy with the sweet spot income, which is $52,395, you are willing to rely on the government not changing the rules again, and you do not aspire to having substantial savings that you can dispose of as you like.

There is also a breakthrough point on the upper end whereby you can generate more than the savings sweet spot level of income, but the wealth needed is quite a jump. For a homeowner couple, to generate more than $52,395 a year income you are estimated to require at least $1,050,000 in super.

James Gerrard is the principal and director of Sydney financial planning firm

(emphasis by Save Our Super)

“The Uncertain Path of Superannuation Reform” by Peter Costello

SuperRatings & Lonsec
Day of Confrontation 2017
Grand Hyatt, Melbourne

12 October 2017

Award superannuation approved by the Australian Conciliation and Arbitration Commission is now 30 years old. Superannuation implemented by the Commonwealth under its tax power – the Superannuation Guarantee Charge – is now 25 years old. We have quite a deal of experience to judge how the system is performing. It is no longer in its infancy. It is maturing, if not a fully mature system.

The origin of Award superannuation was the ALP – ACTU Accord Mark II of September 1985. It was agreed there that a 3% wage rise should be paid, not to employees, but into superannuation on their behalf. The then Government also pledged that:
“before the expiration of the current parliament the Government will legislate to: – establish a national safety net superannuation scheme to which employers will be required to contribute where they have failed to provide cover for their employees under an appropriate scheme”

Taken together the proposal was:-
(a) employer/employee schemes would be certified by the Arbitration Commission where there was agreement;
(b) outside that there would be a national safety net superannuation scheme;
(c) a 3% contribution would be a safety net, not to replace the Age Pension but to supplement it.

Neither the contribution into the Fund nor the earnings of the Fund were to be taxable. That was introduced later, in 1988, when the Government needed revenue, so it decided to bring forward taxation receipts otherwise not payable until there were end benefits. With few lonely exceptions, Governments have been hiking superannuation taxes ever since.

There had been various proposals throughout the 20th Century to set up a funded retirement scheme in Australia The Chifley Government introduced the National Welfare Fund Act of 1945 to impose an additional tax levy which, along with a payroll tax paid by employers, would pay for such benefits. The money was separately accounted for but nonetheless treated the same as consolidated revenue. It was formally abolished in 1985. No individual benefits were ever paid from it. When I became Treasurer in 1996, people were still writing to me asking about their entitlements in the National Welfare Fund! There was nothing to look for.

In 1973 a National Superannuation Committee of Inquiry was established and in 1976 it reported and recommended a partially contributory, universal pension system with an earnings – related supplement. This was rejected by the then Fraser Government.

The first leg of Award superannuation, Consent Schemes were endorsed by the Arbitration Commission to come into operation where there was Employer – Union agreement from 1 July 1987.

The second part – a national safety net scheme was never followed through.

What the Government, in fact, did was to introduce the Super Guarantee System which provides that unless an employer pays a superannuation contribution into an approved Superannuation scheme it is liable to pay an equivalent or greater charge to the Tax Office. No sane employer would give money to the Tax Office when they could use it to benefit employees. As a result money was forced into the superannuation system under the Commonwealth taxation power.

When I became Treasurer (1996), the SG was 5% for small business and 6% for big business. When I left office (2007) it was 9% for both. In 2014 it went to 9.5% where it is today. It will start to increase again in 2021 as the legislated table shows:

1 Year starting on 1 July 2013 9.25
2 Year starting on 1 July 2014 9.5
3 Year starting on 1 July 2015 9.5
4 Year starting on 1 July 2016 9.5
5 Year starting on 1 July 2017 9.5
6 Year starting on 1 July 2018 9.5
7 Year starting on 1 July 2019 9.5
8 Year starting on 1 July 2020 9.5
9 Year starting on 1 July 2021 10
10 Year starting on 1 July 2022 10.5
11 Year starting on 1 July 2023 11
12 Year starting on 1 July 2024 11.5
13 Year starting on or after 1 July 2025 12

The SG  system was superimposed (no pun) on the existing landscape – Industry Funds that had been agreed on and certified by the Arbitration Commission, and private – sector company or public offer plans.

After the idea of a national safety net scheme was dropped, there was little interest in a financial structure that would maximize benefits for those compulsorily enrolled in the scheme under threat of taxation penalties. Yet since this is such a valuable stream of income, mandated by the State, there has always been a very vigorous argument between potential recipients about who should receive it.

I will come back to that in a moment.

Australia’s retirement system therefore consists of three parts:
1. The Commonwealth Age Pension currently fixed at 27.7% of Male Total Average Weekly Earnings – maximum rate of $23,254 p.a. for an individual and $35,058 p.a. for a couple . This is income tested and asset tested. It is totally unfunded. It is paid out of tax revenues received in the year it is paid or (if the Budget is in deficit) paid out of a combination of tax revenue and Government borrowings for that year.

2. The Superannuation System. This is a defined contribution scheme. It guarantees no defined benefit. It is fully funded, but subject to investment risk.

3. Income – whether by way of defined benefit or from defined contributions – over and above the SG system. Voluntary contributions are usually the subject of a tax incentive. As we know both sides of politics have recently combined to reduce the tax incentives to discourage larger amounts in private savings.

Average Retirement Benefits

According to APRA’s Annual Superannuation Bulletin, the average balance in the Age Bracket 60 to 64 (coming up to retirement) in an APRA regulated entity with more than four members as at 30 June 2016 was:
Male- $148,257
Female- $123,690

These figures would include those who have made voluntary contributions, that is, those under both the second and third stream above.

Those who have only received the SG payments (with no voluntary contributions) would have considerably less.

If you were born in 1956 you could have been in the SG system since age 30 – for 30 years. This is not a system still in infancy. We are now starting to get people who have spent nearly their whole working lives in it. On average (male and female) the balance is $137, 144.

That balance is worth less than the value of 6 years of Age Pension. Yet life expectancy for males at age 60 is 26.4 years and for females 29.1 years.

The SG system will not provide anyone with average life expectancy a retirement income for life, not at a comfortable level and not at all.

What the SG system will do, is supplement a person’s Age Pension. And it is particularly harsh in that respect.

The Age Pension is subject to income and assets test. Roughly, for each $100,000 of assets (after the first), a pensioner will lose $2,000 of pension. They will lose 50 cents in pension for each dollar of income or deemed income over the threshold. It is an extraordinary high effective marginal tax rate.

Superannuation can give a person extra up to the threshold in assets and income, but after that every dollar they get back results in 50 cents being clawed out of their pension.

The Commission of Audit, which reported in February 2014, noted that around 80% of Australians of pension age are reliant on the Age Pension. It then looked at what would happen if contributions were lifted to 12%. It found that with a 12% SG over the next 40 years, the same number – roughly 80% would be still be on the pension. The difference is that the SG would reduce many of those now on full pension to a part pension (about 20%).

The SG system does not take people off the pension. It supplements it.  And as it supplements it, it reduces their pension 50% for each dollar (above the threshold). In February, APRA reported there were total superannuation industry assets of $2.1 trillion as at 30 June 2016. “Small funds which include SMSFs, small APRA funds and single member – approved deposit funds accounted for 29.7 per cent of total assets. Retail funds held 26.0 per cent of total assets, industry funds held 22.2 per cent, public sector funds held 17.0 per cent and corporate funds held 2.6 per cent.”

Over the last 10 years the fastest growing sector of the superannuation Industry was the SMSF sector. While total superannuation industry assets increased 132% SMSF assets increased 206%. This is the truly voluntary sector of superannuation. These are the people aiming to, and the people likely to, fund a retirement that will take themselves off the Age Pension entirely and for life.

This works out to be a great saving to the taxpayer.

Of course, this is the sector the Government has targeted with new tax increases, particularly through caps on contributions.

What could be done?

Let us think of how this system of fully funded pension supplement could have been differently structured.

Canada is a country that shares many similarities with us – population 36 million with a similar level of per capita income. Like us it has a three tier retirement income system consisting of :

(a) Old Age Security Pension (lower than ours)income tested and unfunded;

(b) The Canadian Pension Plan (CPP), a defined benefit Plan with compulsory contributions, that is partially funded;

(c) Private savings.

The contributions into CPP are currently 9.9% The employer and the employee pay half (4.95%) each. It is planned to go to 11.9% soon. The CPP makes pension payments to contributors when they reach 65 equal to 25% of the earnings on which contributions were made over 40 years. At present the average is around C$7,839 and the maximum is C$13,370.

Like our SG scheme it is an occupational scheme. Unlike ours (because it is DB) it is not fully funded. In another respect the CPP is very different. It is managed and invested by a Government body, the Canadian Pension Plan Investment Board (CPPIB). CPPIB currently has C$300B in investments. It has economies of scale. It is extremely active in Australia. It would be one of the most respected investors in the world.

Let me say that I believe that, subject to safeguards, people should be able to choose who should manage their superannuation. But the reality in Australia is there is a very large cohort of people that don’t.

Their money goes into so-called “default funds” that get allocated to an Industry Fund under an Industrial Award or union agreement, or to a private sector plan by an Employer.

With default funds we are dealing with the money of people who make no active choice about where they want the their money to go or how it should be invested.

Instead of the Government arbitrating between Industry Funds and private funds, there is a fair argument that this compulsory payment should be allocated to a national safety net administrator – let us call it the Super Guarantee Agency – a not for profit agency, which could then either set up its own CPPIB – like Investment Board – the SGIA – or contract it out – the Future Fund Management Agency could do it. There would be huge economies of scale. It would end the fight between the Industry and the profit sector over who gets the benefit of the default funds. Neither sector has been able to attract the money voluntarily. It exists by reason of Government fiat. The Government has decided it should go into the Super system. It could show some interest in managing it in a cost – efficient way.

Default contributions are now spread between many Funds. They allocate them to equity products, fixed income products etc. Sometimes the different superannuation funds use the same managers each paying the fee to do so. Those fees would be reduced if the money were pooled together, if there were one default fund making larger allocations, if market power were used to reduce costs.

It is the other side of the investment equation that particularly interests me. One side is how it comes in, the other side is how it is invested out. You all know that the biggest variable in the benefit that a retiree will receive from Super is the investment return. A bigger pool with economies of scale and access to the best Managers would likely drive down costs and drive up returns. It would be in the interest of all, except of course the mangers, and those interested in using administration fees for other purposes.

CPPIB is an example of how a long term Sovereign Fund investing defined contributions can get global reach, and valuable diversification in asset class and geography.

It also adds to the National skill base that Canada has: – a Sovereign Institution of sophisticated investors operating in global markets. The feedback and expertise developed is very valuable to national decision-makers.

The Concentration in Australian Equity Markets

Now I know that Super Ratings is releasing or has just released its ratings on performance of various funds.

The year ended 30 June 2017 was a good year for superannuation returns. I congratulate those of you who have done well.

For Balanced Funds (growth assets ratio between 60% and 76%), the top quartile return was 11.15% and the bottom quartile was 8.28%. It would be wrong to conclude this means there is a 3% return for skill. Inside this category – Balanced Funds – there is a large variation for growth assets – 15%. We would expect allocation further up the risk curve to do better – and in fact that was the case.

What made returns good this last year was the bounce on global equity markets. You know and I know that the most important factor in return is the overall market movement – Beta.

And what worries me is that the Australian Market is overwhelmingly influenced by Bank Stocks. Bank Stocks make up 25% of the ASX 200. They are either the four largest companies on the Australian Stock Exchange or 4 out of the top 5 – depending on the price of BHP.

There would not be another Western Country where the Stock Exchange is so dominated by financials and in particular by the main banks – the quadropoly as I have previously described them.

We therefore have a situation where superannuation returns are unduly influenced by the returns of the big four Australian Banks. I do not think it is healthy to have retirement incomes so significantly concentrated in this way.

I have no doubt it is an enormous advantage for the Banks. It means that every Australian in a super scheme that holds growth assets (and every working Australian is in a super scheme by virtue of Government legislation, and every person short of nearing retirement will be in growth assets), is invested in Banks.

Banks never have to fear a flight of Australian investors.

By reason of their size and by reason of compulsory pool of savings, Australian superannuation funds with their compulsory rivers of gold have to hold them.

The four big banks are privileged. They are immune from takeover. They cannot merge. They have an ever ready supply of superannuation money flowing in to their stocks. You can see why an air of impregnability and complacency has seeped into the management in Australian banks. Market discipline is negligible. And the returns on equity are hardly matched anywhere else in the world.

Again judging from the experience of CPPIB, the ability to accumulate and diversify with economies of scale might be good for superannuation members and it might also be good for the banking system – not so much in price – but in introducing a little more competition and market discipline.

The big mistake in developing our pension supplement (the occupational contributory superannuation system), is that all the focus was on getting money into it, with not enough thought about the optimal way of managing it. I do not say it has caused it, but it has contributed to concentration of financials in the Australian Stock Market.

The interaction of the tax and welfare system (particularly very high withdrawal rates) means compared to reliance on the Age Pension alone, the system does not bring anything like the benefits touted. To really calculate the benefit of SG, you need to deduct foregone age pension it will trigger.

The system has created an industry. It has certainly delivered benefits for those working in it. But it does not exist for them. It exists for those who are forfeiting wages month in month out in the expectation that in 10, 20, 30 or 40 years they will get to enjoy the fruits of their labour.

Peter Costello

Former Treasurer of Australia – (1996 – 2007)

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