Category: Features

Save Our Super submission: Consumer Advocacy Body for Superannuation

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13 January 2020

The Manager
Retirement Income Policy Division
Treasury
Langton Cres
Parkes ACT 2600

Save Our Super submission:  Consumer Advocacy Body for Superannuation

Dear Sir/Madam

Save Our Super has recently prepared an extensive Submission to the Retirement Income Review dealing in part with the many ‘consumer’ issues triggered by the structure of retirement income policy and the frequent and complex legislative change to that policy.  

That Submission was lodged with the Review’s Treasury Secretariat on 10 January 2020 and a copy is attached to the e-mail forwarding this letter. It serves as an example of the analysis of super and retirement policy and of the advocacy that superannuation fund members, both savers and retirees, can contribute.  Its four authors’ backgrounds show the wide range of experience that can be useful in the consumer advocacy role. 

We note both the policy and the advocacy consultations are running simultaneously, exemplifying the pressures Government legislative activity places on meaningful consumer input.  Consumer representation is necessarily more reliant on volunteer and part-time contributions than the work of industry and union lobbyists and the juggernaut of government legislative and administrative initiatives.

Given the breadth, complexity and fundamentally important nature of the issues raised for the Retirement Income Review by its Consultation Paper, we have prioritised our submission to that Review over the issues raised by the idea of a Consumer Advocacy Body.  This letter serves as a brief submission and as a ‘place holder’ for Save Our Super’s interest in the consumer advocacy issues.

The idea of a consumer advocacy body is worthwhile in trying to improve member information, engagement and voice in superannuation and in the formation of better, more stable and more trustworthy retirement income policy.  It should help government to understand the perspectives of superannuation members.

Save Our Super was formed from our frustration at the evolution of superannuation and broader retirement income policies.  We contributed as best we could to the rushed and heavily constrained Government consultations on, and Parliamentary Committee inquiries into, the complex retirement income policy changes that took effect in 2017. One example of our inputs is http://saveoursuper.org.au/save-supers-joint-submission-senate-committee-two-superannuation-bills/ .

For the consultations on the Consumer Advocacy Body for Superannuation, we limit our comments here to point 1 on the Consultation’s brief web page, https://treasury.gov.au/consultation/c2019-38640 :

Functions and outcomes: What core functions and outcomes do you consider could be delivered by the advocacy body? What additional functions and outcomes could also be considered? What functions would the advocacy body provide that are not currently available?”

Key roles

  • Consult with superannuation fund members on their concerns, including issues of legal and regulatory complexity, frequent legislative change and legislative risk which has become destructive of trust in superannuation and its rule-making.
  • Commission or perform research arising from consultations and reporting of member concerns.
  • Tap perspectives of all superannuation users, whether young, mid-career, or near-retirement savers, as well as of part- or fully self-funded retirees.
  • Publish reporting of savers’ concerns to Government, at least twice-yearly and in advance of annual budget cycles.
  • Contribute an impact statement – as envisaged in the lapsed Superannuation (Objectives) Bill – of the effects of changes to any legislation (not just super legislation) on retirement income (interpreted broadly to include the assets, net income and general well-being of retirees, now and in the future).

The advocacy body should:

  • take a long-term view, and could be made the authority to administer, review or critique the essential modelling referred to in Save Our Super’s submission to the Retirement Income Review. Ideally, the  Consumer Advocacy Body should have the freedom to commission Treasury to conduct such modelling, and/or to use any other capable body.
  • give appropriate representation and support to SMSFs, and be prepared to advocate for them against the interests of large APRA-regulated funds when necessary.  
  • advocate specifically for the very large number of people with quite small superannuation accounts, when their interests are different from those of people with relatively large balances.

The biggest risk to the advocacy body in our view is that it would over time be hijacked by special interest groups, or hobbled by its terms of reference.  Careful thought in its establishment, key staffing choices and strong political support would be helpful to protect against these risks. 

Membership issues

  • Membership of the Body should be part-time, funded essentially per diem and with cost reimbursement only for participation in the information gathering and consumer advocacy processes.  A small part-time secretariat could be provided from resources in, say, PM&C or Treasury. 
  • Membership opportunities should be advertised.
  • Membership of the Body should be strictly limited to individuals or entities that exist purely to advocate for the interests of superannuation fund members. (This would include any cooperative representation of Self-Managed Superannuation Funds.) We would counsel against allowing membership to industry entities which might purport  to advocate on behalf of their superannuation fund members, but might also inject perspectives that favour their own commercial interests.
  • Membership should include individuals with membership in (on the one hand) commercial or industry super funds and (on the other hand) Self-Managed Superannuation Funds.  We see no need to ensure equal representation of commercial and industry funds, though we would be wary if representation was only of those in industry funds or only commercial funds.
  • We offer no view at this stage on whether the Superannuation Consumers Centre would be a useful anchor for a new role, but we would suggest avoiding duplication.

Functions not currently available

The consultation asks what functions the Consumer Advocacy Body for Superannuation could perform that are not presently being performed.  SOS’s submission to the Retirement Income Review and earlier submissions on the changes to retirement income policy that took effect in 2017 shows the range of superannuation members’ advocacy concerns that are not at present being met.  

Prior attempts to establish consultation arrangements for superannuation members appear to us to have focussed mostly on the disengagement and limited financial literacy of some superannuation fund members.  Correctives to those concerns have heretofore looked to financial literacy education and better access to higher quality financial advice. Clearly such measures have their place.

But in the view of Save Our Super, these problems arise in larger part from the complexity and rapid change of superannuation and Age Pension laws, and in the nature of the Superannuation Guarantee Charge. Nothing predicts disengagement by customers and underperformance and overcharging by suppliers more assuredly than government compulsion to consume a product that would not otherwise be bought because it is too complex to understand, too often changed and widely distrusted.

There needs to be more consumer policy advocacy aimed at getting the policies right, simple, clear and stable, as was attempted in the 2006 – 2007 Simplified Super reforms.

Other issues

In the time available, we offer no views on questions 2,3 and 4, which are more for government administrators.

Yours faithfully

Jack Hammond, QC

Founder, Save Our Super

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Submission by Save Our Super in response to Retirement Income Review Consultation Paper – November 2019

Submission by Save Our Super in response to Retirement Income Review Consultation Paper – November 2019

by Terrence O’Brien, Jack Hammond, Jim Bonham and Sean Corbett

saveoursuper.org.au

10 January 2020

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Summary

  1. The Review’s Terms of Reference seek a fact base on how the retirement income system is working.  This is a vital quest.  Such information, founded on publication of long-term modelling extending over the decades over which policy has its cumulative effect, has disappeared over the last decade.
  2. Not coincidentally, retirement income policy has suffered from recent failures to set clear objectives in a long-term framework of rising personal incomes, demographic ageing, lengthening life expectancy at retirement age, weak overall national saving, low household and company saving and a persistent tendency to government dissaving.
  3. A new statement of retirement income policy objectives should be:
    • to facilitate rising real retirement incomes for all;
    • to encourage higher savings in superannuation so progressively more of the age-qualified can self-fund retirement at higher living standards than provided by the Age Pension;
    • to thus reduce the proportion of the age-qualified receiving the Age Pension, improving its sustainability as a safety net and reducing its tax burden on the diminishing proportion of the population of working age; and
    • to contribute in net terms to raising national saving, as lifetime saving for self-funded retirement progressively displaces tax-funded recurrent expenditures on the Age Pension.
  1. With the actuarial value of the Age Pension to a homeowning couple now well over $1 million, self-funding a higher retirement living standard than the Age Pension will require large saving balances at retirement.  It is unclear that political parties accept this.  It seems to Save Our Super that politicians champion the objective of more self-funded retirees and fewer dependent on the Age Pension but seem dubious about allowing the means to that objective.
  1. Save Our Super highlights fragmentary evidence from the private sector suggesting retirement income policies to 2017 were generating a surprisingly strong growth in self-funded retirement, reducing spending on the Age Pension as a share of GDP, and (prima facie) raising living standards in retirement (Table 1). (Anyone who becomes a self-funded retiree can be assumed to be better off than if they had rearranged their affairs to receive the Age Pension.)  Sustainability of the retirement system for both retirees and working age taxpayers funding the Age Pension seemed to be strengthening. These apparent trends are little known, have not been officially explained, and deserve the Review’s close attention in establishing a fact base.
  1. Retirement policy should be evaluated in a social cost-benefit framework, in which the benefits include any contraction over time in the proportion of the age-eligible receiving the Age Pension, any corresponding rise in the proportion enjoying a higher self-funded retirement living standard of their choice, and any rise in net national savings; while
    the costs include a realistic estimate of any superannuation ‘tax expenditures’ (this often used term is placed in quotes because it is generally misleading – see subsequent discussion) that reduce the direct expenditures on the Age Pension. Such a framework was developed and applied in the 1990s but has since fallen into disuse.
  1. Policy changes that took effect in 2017 have suffered from a lack of enumeration of the long-term net economic and
    fiscal impacts on retirement income trends. They also damaged confidence in the retirement rules, and the rules for changing those rules. Extraordinarily, many people trying to manage their retirement have found legislative risk in recent years to be a greater problem than investment risk. Save Our Super believes the Government should re-commit to the grandfathering practices of the preceding quarter century to rebuild the confidence essential for long-term saving under
    the restrictions of the superannuation system.
  1. Views on whether retirement policy is fair and sustainable differ widely, in large part because the only official analysis that has been sustained is so-called ‘tax expenditure’ estimates using a subjective hypothetical ‘comprehensive income tax’ benchmark that has never had democratic support.
  1. This prevailing ‘tax expenditure’ measure is unfit for purpose. It is conceptually indefensible; it produces wildly unrealistic
    estimates of hypothetical revenue forgone from superannuation (now said to be $37 billion for 2018-19 and rising); and it presents an imaginary gross cost outside the sensible cost-benefit framework used in the past.  It also presents (including, regrettably, in the Review’s Consultation Paper) an imaginary one-off effect as though it could be a
    recurrent flow similar to the actual recurrent expenditures on the Age Pension.
  1. An alternative Treasury superannuation ‘tax expenditure’ estimate, more defensible because it has the desirable characteristic of not discriminating against saving or supressing work effort, is based on an expenditure tax benchmark. It estimates annual revenue forgone of $7 billion, steady over time, not $37 billion rising strongly. 
  1. Additional to the four evaluative criteria proposed in the Consultation Paper, Save Our Super recommends a fifth: personal choice and accountability. Over the 70-year horizon of individuals’ commitments to retirement saving, personal circumstances differ widely.  As saving rates rise, encouraging substantial individual choice of saving profiles to achieve preferred retirement living standards is desirable.
  1. We also restate a core proposition perhaps unusual to the modern ear: personal saving is good. The consumption that is forgone in order to save is not just money; it is real resources that are made available to others with higher immediate demands for consumption or investment. Saving and the investment it finances are the foundation for rising living standards. Those concerned at the possibility of inequality arising from more saving should address the issue directly by presenting arguments for more redistribution, not by hobbling saving.
  1. While retirement income ‘adequacy’ is a sensible criterion for considering the Age Pension, ‘adequacy’ makes no sense as a policy guide to either compulsory or voluntary superannuation contributions towards self-funded retirement. Adequacy of self-funded retirement income is properly a matter for individuals’ preferences and saving choices.
  1. The task for superannuation policy in the broader retirement income structure is not to achieve some centrally-approved
    ‘adequate’ self-funded retirement income, however prescribed. It is to roughly offset the government’s systemic disincentives to saving from welfare spending and income taxing. Once government has struck a reasonable, stable and sustainable tax structure from that perspective, citizens should be entitled to save what they like, at any stage of life.
  1. The Super Guarantee Charge’s optimum future level is a matter for practical marginal analysis rather than ideology. Would raising it by a percentage point add more to benefits (higher savings balances at retirement for self-funded retirees) than to costs (e.g. reduced incomes over a working lifetime, more burden on young workers, or on poor workers who may not save enough to retire on more than the Age Pension)?
  1. The coherence of the Age Pension and superannuation arrangements is less than ideal. Very high effective marginal tax rates on saving arise from the increased Age Pension assets test taper rate, with the result that many retirees are trapped in a retirement strategy built on a substantial part Age Pension.  Save Our Super also identifies six problem areas where inconsistent indexation practices of superannuation and Age Pension parameters compound through time to reduce super savings and retirement benefits relative to average earnings. These problems reduce confidence in the stability of the system and should be fixed.
  1. Our analysis points to policy choices that would give more Australians ‘skin in the game’ of patient saving and long term investing for a well performing Australian economy.  Those policies would yield rising living standards for all, both those of working age and retirees.  Such policies would give more personal choice over the lifetime profile of saving and retirement living standards; fewer cases where compulsory savings violate individual needs, and more engaged personal oversight of a more competitive and efficient superannuation industry.

About the authors

Terrence O’Brien is an honours graduate in economics from the University of Queensland, and has a master of economics from the Australian National University. He worked from the early 1970s in many areas of the Treasury, including taxation
policy, fiscal policy and international economic issues. His senior positions have also included several years in the Office of National Assessments, as resident economic representative of Australia at the Organisation for Economic Cooperation and Development, as Alternate Executive Director on the Boards of the World Bank Group, and as First Assistant Commissioner at the Productivity Commission.

Jack Hammond LLB (Hons), QC is Save Our Super’s founder. He was a Victorian barrister for more than three decades.
He is now retired from the Victorian Bar. Prior to becoming a barrister, he was an Adviser to Prime Minister Malcolm Fraser, and an Associate to Justice Brennan, then of the Federal Court of Australia. Before that he served as a Councillor on the Malvern City Council (now Stonnington City Council) in Melbourne.

Jim Bonham (BSc (Sydney), PhD (Qld), Dip Corp Mgt, FRACI) is a retired scientist (physical chemistry).  His career spanned 7 years as an academic followed by 25 years in the pulp and paper industry, where he managed scientific research and the development of new products and processes.  He has been retired for 14 years has run an SMSF for 17 years.

Sean Corbett has over 25 years’ experience in the superannuation industry, with a particular specialisation in retirement income products. He has been employed as overall product manager at Connelly Temple (the second provider of allocated pensions in Australia) as well as product manager for annuities at both Colonial Life and Challenger Life. He has a commerce degree from the University of Queensland and an honours degree and a master’s degree in economics from Cambridge University.

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Retirement Income Review Consultation Paper (November 2019)

H:\MCD\Publishing\Graphic Design Services Team\Projects\2019\Retirement Income Review 29901\proofs\Retirement Income Review Cover_final.jpgRetirement Income Review Consultation Paper

November 2019

© Commonwealth of Australia 2019

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Super effort to achieve what workers really want

The Australian

30 November 2019

Judith Sloan – Contributing Economics Editor

It was all going so well for the industry super funds. The election of a Labor government and they would be home and hosed.

There would be no talk of cancelling or deferring the legislated increase in the superannuation contribution rate from 9.5 per cent to 12 per cent. Those pesky requests to improve the governance of the funds by having more independent trustees would fade away.

Life and total and permanent disability insurance would remain an effective compulsory part of superannuation; after all, the opt-out arrangement had been introduced by Bill Shorten when he was the responsible minister. There would be some pretence about dealing with multiple accounts but no real action.

As for removing the quasi-monopoly position of industry super funds nominated as default funds in the modern awards, all discussion would abruptly end. And why would the ambition end there? Fifteen per cent sounds better than 12 per cent when it comes to a guaranteed regular flow of money to the funds.

All those dreams are now a fading memory as industry super funds confront a government that is not entirely convinced of the rationale for compulsory super and is determined to fix problems in the system that disadvantage far too many workers and retirees.

We don’t hear so much these days about our superannuation system being the envy of the world.

These claims were always made by those with deep vested interests in the system; in particular, the vast industry that hangs off the management of funds and their administration.

Some of the core problems of our superannuation system have been highlighted by various reports of the Productivity Commission. They include:

• The unclear purpose of superannuation.

• The excessive costs attached to investment and administration.

• The problem of multiple accounts leading to balance erosion.

• Unwanted (and sometimes worthless) insurance.

• Unaccountable governance with too many trustees having inadequate skills.

• The continuation of poorly performing funds.

Don’t get me wrong; superannuation has been a great product for some people, most notably those with earnings in the top quarter of the distribution. However, this observation is not sufficient to justify a system of compulsory superannuation. Moreover, it is clear any savings on the age pension have to be weighed against the cost of the variety of superannuation tax concessions that apply.

It also needs to be noted here that, on average, the investment performance of the industry super funds has been very good and sup­erior to most retail funds, although there is the qualification of the ­absence of like-with-like comparison. Self-managed superannua­tion funds also generally have produced very good returns.

The government has been attempting to deal with some of the problems in the system after the remedial efforts that were made in its previous term were largely thwarted. Two changes have been implemented to merge inactive low-balance accounts with active ones and to make insurance an opt-in product for young workers and for those with low-balance accounts. Both changes were opposed by the industry super funds.

Neither of these changes deals comprehensively with the problems of multiple accounts or forced insurance but they are a start. More surprising have been the recent boasts of Superannuation, Financial Services and Financial Technology Assistant Minister Jane Hume about recent merger activity of industry super funds. Examples include the linking of Hostplus with Club Super and First State Super with VicSuper. Certainly the issue of failed mergers was raised in the Hayne royal commission into banking.

However, the issue of fund consolidation is actually two separate issues. One relates to funds that are clearly of sub-optimal size, leading to a failure to capture economies of scale. The second is about poorly performing funds and the need to remove them from the pool of default funds.

The work of the Productivity Commission makes it clear that a member who lands in a poorly performing fund and stays there by dint of inertia stands to lose up to several hundreds of thousands of dollars in terms of the final balance. It’s not apparent, however, whether the recent spate of fund mergers will deal with the problem of poorly performing funds.

In the meantime, the mergers of some large industry super funds could potentially lead to an anti-competitive configuration of a small number of behemoths that will be able to dictate many aspects of corporate behaviour given their large shareholdings. It’s hard to see how the government would regard this as a desirable outcome.

The hottest topic in super­annuation remains the fate of the legislated increase in the super­annuation contribution rate. Unless the statute is changed, this rate will be ratcheted up by 0.5 percentage points every year from July 1, 2021. A rate of 12 per cent will apply from July 1, 2025.

Every annual increase will cost the government about $2bn a year in forgone revenue given the cost of the tax concessions. This is a significant sum in the context of the likely tight position of the budget in that period.

The superannuation industry is highly committed to these legislated increases going ahead. Some absurd pieces of research have been released to suggest that higher superannuation contribution rates do not involve any reduction to wage growth, something that is contradicted by the theory and actual practice, including on the part of the Fair Work Commission.

In the context of low wage growth, it will be a big call by the government to ask workers to forgo current pay rises in exchange for higher superannuation balances in several decades.

Moreover, for many workers, these higher superannuation balances will simply have the effect of knocking off their entitlement to the full age pension. For them, compulsory superannuation is effect­ively just a tax — lower current consumption now and the loss of the full age pension in the future. It’s not clear what the government’s real thinking on this important matter is. The Prime Minister and Treasury are maintaining their support for the legislated contribution increase but may be happy to include the Future Fund in the mix of investment options to improve the competitiveness of the industry.

Other members of the government favour a cancellation of the increase or smaller rises across a longer timeframe. There is also some support for making the increase voluntary; workers could choose between a current pay rise or a higher super contribution rate.

The bottom line is that superannuation remains a dog’s breakfast from a policy point of view. The government has made some small strides to improve some aspects of the system, but the high fees and charges imposed by the funds remain a significant issue.

Far from being the envy of the world, it has become apparent that our system of compulsory superannuation was a serious policy error enacted for short-term reasons to fend off a wages explosion. It may be too late to turn back but thought needs to be given to significantly reforming the system in ways that reflect the preferences of workers as well as generating a better deal for taxpayers.

Super: PM knows too many are still missing out

The Australian

29 July 2019

Jim Chalmers

For three decades compulsory superannuation has afforded Australians the best chance of simultaneously providing a decent retirement for us all while building a fighting fund of capital for our nation to invest in its own future.

Already the $2.8 trillion pool of savings is bigger than our gross domestic product, and bigger than the GDP of all but seven countries, just behind India but bigger than Italy and growing fast.

Much of that wouldn’t exist without compulsion, but remarkably it’s still not enough.

A just-released analysis from the Association of Superannuation Funds of Australia shows there continues to be a significant gap between the $640,000 it considers necessary for a comfortable ­retirement for couples and what people are actually accumulating.

That’s why it’s so critically ­important that the superannuation guarantee is lifted from 9.5 per cent to 12 per cent on the currently legislated timetable.

Analysis by actuarial firm Rice Warner shows that without that further lift in super, most working Australians will be forced to rely on the Age Pension for most of their retirement income. But a gradual rise to 12 per cent would provide most with ­adequate ­income after they finish working.

Industry Super Australia has shown that the substantial difference between 9.5 per cent and 12 per cent for today’s 30-year-old worker on about average full-time earnings would be $90,000 by retirement. In this environment it beggars belief that Liberals in the Morrison government want to freeze the superannuation guarantee at 9.5 per cent. When the additional 2.5 per cent could go into super or wages, they want it to go to neither but instead to further pad the extraordinarily high company profits that have fuelled a record stockmarket.

The superannuation guarantee has been frozen since 2014 and since then wages have barely moved either. When savings are inadequate and wages growth is sluggish, Liberals want to rob almost 13 million Australians of the super increases they need, deserve and were promised. The party of wage stagnation and rampant wage theft is now coming after workers’ super as well.

The same party opposed universal compulsory super; froze it multiple times; tried to abolish the low-income super contribution scheme; and even tried to weaken penalties for employers who don’t pay the right amount. Now some want to freeze super and, worse, others want to make it voluntary for some workers. They want to take the compulsory out of compulsory super.

Australians never heard a peep about these plans during the election. Coalition members and candidates wandered around the country crying crocodile tears for retirees at the same time as they harboured extreme plans to cut super and attack pensions. Then, after the election, when the Prime Minister told his partyroom to stop commenting publicly on these plans, the cam­paigning only intensified — a direct and deliberate challenge to his authority.

These Liberals’ latest attack is built on one heavily contested and disputed think tank report that claims an increase in super would lower living standards for some Australians. This conclusion is partly driven by the tougher pension ­assets test which penalises retirees for saving, and which the government introduced with the Greens to cut the pension for 370,000 pensioners and kick 88,000 pensioners off the pension altogether.

Australians will see through these faux concerns for low-­income earners and weak wages growth, and the Coalition’s crocodile tears for retirees. They know these are just excuses to undermine and diminish a super system that the Liberals and Nationals never believed in from the beginning.

Super was conceived as a trade-off between wages and savings but most Australians will not be convinced that much or any of the 2.5 per cent of forgone super in today’s climate will find its way into the pockets of low-income earners as wages.

Nor will Australians be comforted by the weasel words of Scott Morrison and Josh Frydenberg who, in one week, refused to guarantee the legislated super ­increases, then committed to them, and now say they will be subject to a retirement incomes review. A review that could become a stalking horse for these proposals and worse, such as including the family home in the pension assets test.

On behalf of the government, the Treasurer needs to give a far more definitive statement in support of the legislated increases to the superannuation guarantee on the current timeframe. Anything less risks a repeat of the national energy guarantee debacle, when extremists on his own backbench forced him into a humiliating retreat and proved that in the Liberal Party the tail wags the Treasurer.

Australia’s retirement savings system is the envy of the world. It has its imperfections, but lifting the guarantee rate to 12 per cent by 2025 is not one of them. When the adequacy of retirement ­incomes is a pressing challenge, and when our ageing population puts pressure on pensions, Australians need more super, not less.

Jim Chalmers is the opposition Treasury spokesman.

Backbench bid to block super guarantee increases

The Australian

22 July 2019

Adam Creighton – Economics Editor

Josh Frydenberg is facing growing backbench calls to ditch the superannuation guarantee ­increase to 12 per cent as the government prepares to launch a­ ­­­far­-reaching review into the effectiveness of the $2.8 trillion savings pool.

Seven Liberal MPs in the four biggest states, including chairmen of two parliamentary committees, have criticised the increase as unfair and inefficient, urging the government to halt the legislated increase from 9.5 per cent, or wind it back for low-income workers.

The MPs include Andrew Hastie, chairman of the house intelligence and security committee; Jason Falinski, MP for Mackellar; Amanda Stoker, who succeeded George Brandis in the Senate; and the newly elected senator for Queensland, Gerard Rennick.

Their remarks follow a series of reports that have questioned the efficiency, fairness and effectiveness of the savings system ­established in 1992 by the Keating government.

Mr Hastie told The Australian said he would prefer more people retired owning their homes.

“I’d rather have people have more of their own money to pay down their existing debt such as their mortgage and ease the cost of living now,” he said.

The superannuation guarantee requires employers to pay 9.5 per cent of workers’ gross ­incomes into retirement saving accounts they can access at 60.

Senator Rennick said lifting the compulsory saving rate drained money from the regions, which needed it, to the funds management industry in Sydney and Melbourne, which didn’t need it.

“The money doesn’t go into greenfield investments; they just buy existing shares rather than contribute money to the economy by starting infrastructure projects,” he said.

“There’s enough going to super now, and the best people to decide how they earn their money are the people who earn it,” he said.

In 2013, the Abbott government delayed by two years Labor’s timetable to increase the rate, which is now on track to reach 12 per cent by July 2025 following an increase to 10 per cent in July 2021.

The Treasurer has welcomed the Productivity Commission’s recommendation for an inquiry into the ­impact of super on ­national savings and the Age ­Pension.

“What we need to fully understand with this (legislated) increase is what is happening to retirement incomes, what is happening to the nation’s balance sheet,” Mr Frydenberg said recently, reiterating that the government had “no plans” to stop or delay the increase.

The review, yet to be formally approved by cabinet, puts the ­Coalition on course for a historic clash with the union movement and financial services sectors, which influence and manage the nation’s superannuation savings pool.

The super sector fears the forthcoming inquiry could recommend against lifting the compulsory saving rate, as the Henry tax review did in 2010 — advice the Rudd government ignored.

The tax concessions cost the government more in revenue than offsetting reductions in Age Pension outlays, it found.

Tim Wilson, chairman of the House of Representatives economics committee, said workers should have the option to opt out.

“I struggle with the idea that we should compel business to increase super contributions for the distant tomorrow when people are facing wage and debt pressure today,” he said.

Super accounts incurred more than $30 billion in fees in 2017, ­according to the Productivity Commission’s review of the efficiency and competitiveness of super, completed last year, which found a third of accounts were unintended and “evidence of ­excessive and unwarranted fees”.

Senator James Paterson said he hoped the review would look at the “wisdom of forcing workers to lock away even more of their income”. “All the evidence shows it comes at the cost of their take-home pay today and might not even improve their standard of living when they retire,” he said.

Mr Falinski said the super system was opaque. “Like many Australians, and the Productivity Commission, I am unconvinced the system is serving its customers, much less its intended purpose,” he said. “So in those circumstances, how can you possibly support an increase?”

A Grattan Institute analysis earlier this month found workers faced a $30,000 hit to their lifetime income if the rate increase went ahead, from a combination of lower wages during their working life and reduced access to the Age Pension later in life.

Craig Kelly, the MP for ­Hughes since 2010, said the increase would not need to be compulsory if it were a good deal for workers.

“If you want to go to 12 per cent, everyone is free to do so,” he said, referring to $25,000 concessional contribution caps that let workers to make voluntary super contributions.

“And there’s a strong argument for workers on lower incomes to be able to access it now, especially if it’s not going to change their pension entitlement,” he said.

An estimated 7 per cent of employees, including a fifth of those under 30 on low incomes, would prefer to take their 9.5 per cent super contributions as wage and salary income, according to the Parliamentary Budget Office in a policy costing released last year.

Senator Stoker said wage rises “must take priority” over higher superannuation contributions.

“This is an urgent economic and political imperative,” she added.

Two Nobel prize-winning economists, Eugene Fama and Richard Thaler, were critical of superannuation late last month, singling out the high fees and inferior default arrangements compared with systems abroad.

A typical member’s balance would be $165,000 higher in retirement, or about seven years’ worth of Age Pension, were un­interested workers contributions put into better performing funds, the commission found.

Economist Nicholas Morris found Australian super funds were about four times more expensive than equivalent funds in the US and Europe.

Keep it simple, or we can kiss those super benefits goodbye

The Australian

22 July 2019

Graham Richardson

Superannuation remains a complet­e mystery to me. The myriad rules and regulations under which it struggles to operate are beyond me as well.

In fact, it is hard to believe that many of the people who see the amount that goes into super taken out of their wages have ­little or no idea what happens to it. What is truly scary about this is that the Australian Prudential Regulation Authority had to concede that three funds out of a total of 11 had serious problems.

Few will even know the problem exists because years ago most of us knew our eyes were glazing over when some expert was trying to explain this arcane system.

Now trillions of dollars is being put into cash, equities and god knows what else and we don’t even question the wisdom of these investment decisions.

Instead, we have blind faith it will all work out in the end. We place our trust in trustees we don’t know and will never meet. With all this apparent success, there seems little need for concern. Sadly, the government is desperately searching for ways to curb the industry funds.

Conservative thinking in Australia has it that union officials are inarticulate, violent thugs and therefore there must be something corrupt about industry funds, even if they can find no evidence of wrongdoing. The fact that industry funds continually produce the kind of results that make them the best performers drives the conservatives to distraction. Mind you, for many of them that is a very short trip.

What I have not seen is any reduction in the take-up rate of pensions, yet the basic purpose of super is to give the workers a ­better retirement and lower the burden on the public purse.

Scott Morrison should be smart enough to forget about finding fault with industry funds and work co-operatively with them. There are times in politics when you have to admit failure, and this is one of them.

The current push is to allow people to use their super early: they want access to it to help put a deposit down for a house or unit or they may just be ill and need access to pay medical expenses.

In my view, we should be very wary of this approach. We have bank accounts we can draw on for these purposes but our super is something else again. If you pour all your prospective retirement income into your house, there will not be enough left to live with so you want to dip into your super again if there is sufficient still remaining. Convenient though this may be, it undermines the basic purpose of super to provide something extra in later years.

Putting on a new porch may seem important at the time but it is not the main purpose of super. If we allow a practice to develop whereby we can use super to improve our homes, a whole new field of rorts will be opened up.

The adage keep it simple, stupid, should be rigidly applied in this case.

Maximise retirement savings

The Australian

22 July 2019

Editorial

After decades in which successive governments have shifted the superannuation goalposts, the last things savers want is the Morrison government’s forthcoming review to recommend changes that could shrink their nest eggs. But savers would be the winners if reforms are enacted to save them fees and make the $2.8 trillion sector more efficient. As Adam Creighton reports today, Josh Frydenberg is facing concerns from a broad group of Coalition backbenchers who believe the government should ditch the legislated rise in the compulsory superannuation guarantee. The guarantee is scheduled to increase to 10 per cent in July 2021 and reach 12 per cent in July 2025. The group includes the chairmen of two influential parliamentary committees — Victorian MP Tim Wilson and West Australian MP Andrew Hastie.

If the size of the guarantee is to be reviewed it would make sense to factor the matter into the review, which will have much to consider. A recent study by the Grattan Institute showed that raising compulsory superannuation in stages would leave many workers poorer, as they would forgo wage rises, some of which would stimulate demand and economic activity. On the other hand, almost 30 years after the Keating government brought in compulsory super, taxpayers are still carrying most of the burden of providing retirement incomes for our ageing population. In 1992, 80 per cent of retirees received government income support; the same percentage still receive full or part pensions. On current settings, Treasury analysis shows the proportion not drawing a pension will remain static at 20 per cent in 2047. What is changing slowly is that fewer people are receiving full pensions. So far, despite vast growth in the super savings, the goal of more Australians becoming financially independent remains elusive.

Part of the problem, as Nobel prize-winning economists Eugene Fama and Richard Thaler identified recently, is that Australia’s funds have some of the highest costs in the world.

Any systemic changes must put workers’ and retirees’ needs first, which has not been the case for a long time.

Doing sums to manage your longevity risk

The Australian

13 July 2019

Scott Francis

Longevity risk is important to think about in planning around financial futures — the risk of outliving our assets.

To make some sort of assessment about managing this risk, indeed about managing our investments and income, we need to be able to build a set of financial assumptions that provide an estimate of the future.

The key input into this process is the rate of return that is assumed for the investment portfolio earnings.

Given that this is effectively a forecast for the future, it is clearly not possible to know what that number will be — the challenge is in making the best estimate of the range of possible earnings that we can.

This estimate is especially important for people who might be contemplating a long retirement. They might retire in their 50s and live into their 90s or beyond.

Let’s consider a person who is now 60 and looking to retire.

Let’s assume they have a generous investment portfolio of $1,500,000. They know they will not receive any part age pension to supplement their investment income.

From an asset allocation perspective, let’s then assume they are targeting $75,000 per year to live on, and want to keep four years of living costs, $300,000 in cash and fixed interest assets, and invest the remaining $1,200,000 in growth assets (an 80 per cent growth, 20 per cent defensive split).

Historical data suggests an attractive rate of return from cash investments in Australia compared to what is currently available.

For example, from 1990 to 2018 the average annual return from cash investments was 5.5 per cent per annum (according to Vanguard), against an inflation rate for this period of 2.5 per cent, suggesting an after-inflation (or real) rate of return of 3 per cent a year.

However, for realistic expectations with the RBA cash rate at 1 per cent, and the best cash and term deposit accounts not providing a return significantly higher than this, a more realistic assumption for the long-run return from the cash and fixed-interest investments in a portfolio would be a real return of about 1 per cent a year.

Insuring for the future

Jeremy Siegel, Wharton finance professor and author of Stocks for the Long Run, has long been a proponent of maths that suggests the long run real (inflation adjusted) return from the sharemarket is 6-7 per cent a year.

Let’s make this an optimistic calculation of an expected return to start with, and use the 7 per cent real return.

We now have a real return of 1 per cent per annum from the 20 per cent cash/fixed interest part of the portfolio, and a 7 per cent real return from the growth (shares) part of the portfolio, to provide a total real return of 1 per cent x 20 per cent, and 7 per cent x 80 per cent, creating a total combined return of 5.8 per cent per annum.

The average real return from Australian shares over the period 1900 to the end of 2018 has been measured at 6.75 per cent per annum.

This is not much different from the Siegel figure and would provide a total real return for the portfolio of 5.6 per cent.

One note of caution worth sounding is that the Australian sharemarket returns have been world-leading over this period (1900 to 2018).

The average return from world markets, calculated for the Credit Suisse Global Investment Returns Yearbook, was a real return of 5 per cent a year.

In our range of scenarios, it is worth considering the possibility that future Australian returns will be similar to the average world return.

For a portfolio that is made up of 20 per cent cash and fixed interest investments, and 80 per cent growth investments, the total real return will be 4.2 per cent a year.

Over the 1900 to 2018 period, the Australian sharemarket was an outperformer.

But what if there was a period of underperformance?

If the world average return is 5 per cent a year, and the Australian sharemarket were to underperform world markets by 20 per cent, that would provide a return of 4 per cent a year.

Of course, one of the key ways of insuring against Australian underperformance is exposure to international shares, but let’s assume that the portfolio is largely Australian and underperforms the 5 per cent per annum real return by 20 per cent, providing a real return of 4 per cent a year.

The total real return from this portfolio will be 3.2 per cent per annum, and provides us with a “conservative case” figure for calculations.

Assuming that the person in the case study only wants to spend their investment returns each year — and remember they hoped for $75,000 a year — the range of estimates for their spending is between $51,000 and $87,000 a year.

There remain other issues to consider, including fees, taxes (although you would assume in retirement this level of assets should be able to be structured to be tax-free) and the tendency for investors to achieve lower-than-market average returns through efforts at market timing and stock selection.

Separately, there is the possibility of a sharp downturn from which the portfolio struggles to recover and, on the positive side, the added benefit of franking credits in the Australian tax system.

There is also the question of whether the retiree might be prepared to withdraw some of their portfolio capital to add to the investment returns.

All of this is not easy to quantify.

Starting with a reasonable understanding of the possible range of investment returns is important.

Revealed: the new SMSF generation

The Australian

13 July 2019

James Kirby – Wealth Editor

For a moment there it looked like the entire self-managed super fund scene was in a tailspin: thriving industry funds, woeful tales of bad financial advice and a deeper sense that for many the entire experiment in self-directed retirement had lost its way.

Yes, growth in the SMSF sector is slowing.

But the SMSF scene is alive and well. Moreover, SMSF operators are getting younger, they are starting funds with less money than previously and importantly they are double-dipping in a very smart way, with almost half of those launching new funds making sure to retain investments in their original employer funds.

Our picture of the sector gets better each year, with better data. The latest Vanguard/Investment Trends survey, which is based on no fewer than 5000 SMSF operators and 300 specialist planners, offers an exceptional snapshot of the market.

There are 20,000 new SMSF funds opening each year (against 40,000 a decade ago). However, there is every chance this number will grow from here now that the Morrison government has been returned and the threat of a pro-industry fund ALP regime has been removed.

More importantly, the big development this year is what might be tagged as the “hybrid approach” — keeping two funds going for different purposes. The new generation of SMSF operators are not “anti-industry funds” — it would seem they are much too smart to take an entrenched position of that sort when there are advantages to having one foot in the APRA-regulated fund ­sector.

Until very recently, the choice between SMSF and big funds was seen as binary — you went one way or the other. But now it is common to use both formats for different purposes. The survey shows that almost half (49 per cent) of people who started SMSFs last year held on to money inside their former funds as well. What’s more, that figure is climbing fast — it was only 29 per cent in 2017, then 34 per cent in 2018. Investors are holding on to money inside the larger funds primarily to keep their access to cheaper life insurance: big funds get better rates than if you are operating by yourself in an SMSF.

However, Michael Blomfield, chief executive of Investment Trends, also says people are leaving money inside industry funds to diversify, especially to get access to unlisted investments such as infrastructure and private equity.

“It’s what you might call a core and satellite approach,” says Blomfield.

Indeed, this trend has been exploited by industry fund Hostplus, which has just launched a range of funds that SMSFs can access without actually becoming members of Hostplus.

If this so-called self-managed option experiment at Hostplus succeeds, no doubt a string or rival industry funds will copy the initiative in the years ahead.

Younger and younger

Separately, the survey shows a median SMSF commencement age of 47 (down from 52 in 2010) and a median starting amount per capita (per trustee) of $230.000.

This is surely a healthy development and suggests the sector is going to become more mainstream and less heavily identified with wealthier, older Australians than it has been in the past.

Just to look at the trend a little closer, the median amount trustees have when starting a new fund has dropped consistently — it was $420,000 before the global financial crisis and $320,000 in 2014. So much for analysts suggesting you need $500,000-$1 million to start a fund. SMSFs are for people who want to control and manage their own money.

This new research also attempts to answer one of the most commonly asked questions about SMSFs, which is how much time do they take to run? The easy response might be “how long is a piece of string?” After all, the more complex a portfolio the longer it is going to take to manage. Nonetheless, it is suggested on average the whole business takes eight hours a month (we’ll assume the survey did not try to measure that most elusive figure — time spent “thinking” about investment allocation).

Among the most obvious developments in the area is the steady and welcome diversification away from Australian shares and cash — though notably the average cash holding is still a whopping 25 per cent and it has barely changed even as rates have slid to historically low levels. Indeed, the allocation increased slightly over the past 12 months.

In terms of where the diversification is taking place, it is in the exchange-traded funds market, which is emerging as the key gateway to the wider world for private investors. There are 190,000 investors using or planning to use ETFs, up from 140,000 a year earlier.

There is also a consistent lack of confidence in the financial advice sector shown in the survey, which may improve in the months ahead as new standards are introduced in relations to educational qualifications for advisers.

Similarly, it would seem confidence levels on market returns are low, too. “Investors’ outlook for market returns is very low at 1.4 per cent, far below the expectations of many economists, including our own,” says Robin Bowerman, head of market strategy at Vanguard Australia.

One last thing: despite the gloom and doom among SMSFs, it looks like there has been a lot more talk than action. Examining the intentions of SMSF operators for the future, the survey found one in five had considered closing their funds over the past year — a fourfold increase on the numbers in 2013. But in reality, the actual figure was less than 10,000.

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