Category: Features

Ways to sidestep Labor’s ‘unfair and illogical’ tax grab on super

The Weekend Australian

James Gerrard

30 November 2018

Earlier this week, the man who may be our next treasurer, Chris Bowen, reiterated the ALP was not interested in amending its plans to scrap cash rebates for franking credits — a key element of income for many retirees.

The crux of the issue is that retirees, who in good conscience saved money in super, are having the rug pulled from under them. They are being treated as companies, effectively being taxed at 30 per cent on part of their ­income, with their tax-exempt super status being ignored.

I am going to run through several scenarios that would allow an investor to sidestep the franking credit plan, but first it does need to be put in perspective. The Labor Party’s plans to make a retrospective change to super not only ­adversely affects about one million retirees who are not eligible for a part or full age pension, but also undermines the confidence in the system.

Why would the younger generation bother trying to save for retirement by way of extra super contributions when governments (both Coalition and Labor) make tax-grabbing changes that are backward looking?

The result? Less money saved by Australians for retirement and a heavier reliance on the public purse.

Geoff Wilson, founder of Wilson Asset Management, says: “This is bad policy. What Labor doesn’t understand is that all Australians are intelligent. They will adjust their finances to minimise the impact of this money grab from Labor. The $5 billion-plus Labor talk about raising per year is discriminatory, unfair and illogical. The money they believe they will raise is a mirage.”

Wilson is best known among investors for a string of listed ­investment companies such as WAM Capital and WAM Leaders fund. In common with other LICs such as AFIC and Argo, Wilson will face a dilemma if the new rules become reality — the LICs will lose out as investors steer away from products where the franking credit attractions have been removed for retired investors.

Indeed, Wilson said he would be forced to convert all his group’s LICs to unit trusts if the ALP win, and other LICs would no doubt do the same creating legal costs for every LIC in the market.

As professionals such as Wilson think the issue through, the biggest problem is that not all retirees will make the right decision when these changes arrive and some will expose themselves to riskier investments chasing unfranked dividends. Timing is also an issue. With the royal commission putting a dampener on bank share prices, anyone thinking of bailing out of fully franked bank shares to unfranked investments will lock in a loss of 10 per cent over the past 12 months.

For the people thinking about what they can do to counteract the impact of the policy, here are three potential workarounds:

1. If you don’t want to lose your exposure to fully franked blue-chip shares such as the banks, BHP and Wesfarmers, one option is to sell the shares the day before they declare their dividend, known as the ex-dividend date. You then buy the stock back the next day after the share price falls. The problem with this approach is that the share price usually falls by the cash dividend amount alone, not by the total value of the cash dividend and franking credits.

2. An alternative strategy that is gaining traction with retirees is to move into listed property investments via real estate investment trusts, which are seen by many as the closest comparable investment to fully franked bank shares. REITS are property trust structures that trade on the ASX. Unlike normal shares on the ASX, REITS do not withhold tax as all distributions are taxed in the hand of the investor.

3. For the more passive investor, there are several ETFs that can invest in unfranked investments such as Betashares Legg Mason Real Income Fund that holds a portfolio of largely unfranked property, utilities and infrastructure assets.

While it is still too early to panic, the writing is on the wall with regard to the scrapping of cash refunds on excess imputation credits.

James Gerrard is the principal and director of financial planning firm FinancialAdvisor.com.au.

People in the middle lose out in ALP’s franking credit crunch

The Australian Business Review

James Gerrard

23 November 2018
If the ALP comes to power and ­delivers on its threat to scrap cash rebates on franking credits, what could you do?

An investor might reframe the question in this manner: is it better to take drastic action and sell down all self-managed superannuation fund assets, transferring the wealth to the investor personally and in so doing remove the cost, administration and trustee responsibilities attached to running a SMSF?

After the public uproar that ­resulted from the initial policy ­announcement, Labor revised its proposal to allow SMSFs with at least one member receiving a Centrelink pension or allowance as at March 28, 2018 to continue to be eligible for cash refunds of excess franking credits. The outstanding problem with the policy proposal is that it discriminates against people in the middle. People with low income and assets are exempted and people with significant assets in super are only partially affected.

The reason the rich continue to benefit is that with the relatively recent balance transfer caps, only $1.6 million can be held in a tax-free super pension per person.

For those with money in super above $1.6m, the excess needs to be held in the super accumulation account, taxed at up to 15 per cent on income and gains.

In other words, because the ultra rich will still have significant funds in the super accumulation account that attracts 15 per cent tax, they will continue to use franking credits to reduce tax on the accumulation account, and therefore may be largely unaffected by the policy change.

But it is the people in the middle who are hardest hit, deemed too wealthy to receive Centrelink benefits, but not wealthy enough to have more than $1.6m in super. They feel the full force of the Labor imputation credit changes.

For the $1m SMSF with a ­retired homeowner couple as ­trustees and members, they’re over the threshold of $848,000 to receive a part age pension, and thus targeted by the Labor policy proposal. If they held 25 per cent of the super fund in fully franked shares paying an average 6 per cent dividend, that equates to franking credits of about $6500 a year at risk of being lost.

Some SMSF trustees may cop it on the chin, while others may close the SMSF and deal with the money outside super. (This example is typical; the average cash refund cheque is close to $6000).

Exploring that path in more detail, if the investments are transferred out of super into a joint personal investment account and generate an average income return of 6 per cent, with 25 per cent of the income being from fully franked dividends, that equals grossed-up taxable income of $66,428 including $6428 of franking credits.

If each spouse is allocated half of the income, $33,214 per spouse, tax payable is $2872. After franking credits are
applied, there is no tax payable, with $342 in franking credits still to spare.

The big drawback to this approach is that you’re now exposed to capital gains tax personally. So it depends on how you manage your investments as to whether this approach works for you.

If there is moderate turnover of the portfolio with gains being realised each year, not only will your investment income be taxed, but you may end up with a large tax bill due to realised capital gains.

Another consideration is that the policy may change over time. Labor may further water down the policy or even reverse it.

If it works out best to hold money inside super in future, irreversible damage would have been done by those who shunted money out of super, which, due to a combination of contribution caps and work tests for those over 65, makes it extremely difficult for people to get money back in super down the track.

And it doesn’t stop there. ­Estate planning also needs to be considered.

As you can see, what appears a simple policy announcement will have an enormous ripple effect on millions of people in retirement and for their children.

In summary, there are so many variables that working out the best outcome, both now and into the future, is confusing and highly mathematical.

The policy is estimated to bring in $59 billion in savings over the next 10 years for Labor.

But the people most likely to be affected are not the mega-wealthy but the hard-working mums and dads who diligently contributed into super over the past 20 years under the assumption it would be a protected environment that would allow them to draw an income stream in retirement.

James Gerrard is the principal and director of Sydney financial planning firm www.FinancialAdvisor.com.au

Related articles:

http://saveoursuper.org.au/alps-franking-credits-policy-targets-shareholders-with-low-taxable-incomes/

http://saveoursuper.org.au/ways-to-sidestep-labors-unfair-and-illogical-tax-grab-on-super/

ALP’s franking credits policy targets shareholders with low taxable incomes

15 October 2018

Jim Bonham

“Having a non-means tested government payment solely on the criteria that you own shares and giving people a refund when you haven’t actually paid income tax for the year that the refund covers, what’s the economic theory behind that?” asked Opposition Leader Bill Shorten recently, and reported by Phillip Coorey in the Australian Financial Review on 12 October 2018.

Mr Shorten is  talking about refundable franking credits, but actually franking credits are means tested (because they’re taxable income and our progressive tax scales are a form of means testing), and you have paid income tax (because franking credits are also pre-paid tax) and, finally, there is an economic theory (to ensure gross dividends are taxed as ordinary income).

Unfortunately, that’s not the way the ALP sees it.

Shadow Treasurer Chris Bowen, said refundable franking credits are “a concession”, “unfair revenue leakage” and “a generous tax loophole” when describing the ALP’s plan to stop the refunding of unused franking credits  (see SuperGuide article https://www.superguide.com.au/smsfs/shorten-retirement-tax-refunds-franking-credits  and and the ALP’s policy document, https://www.chrisbowen.net/issues/labors-dividend-imputation-policy/ )

Those comments are not right either.  Refundable franking credits are part of an unfortunately convoluted and widely misunderstood process, but their function is straightforward: to ensure that Australian company profits distributed to Australian shareholders are taxed in the hands of the owners (shareholders) rather than the company, in exactly the same way as income from any other source.  The company is only taxed on that part of its profit which is kept in the company for internal use, and not distributed.

In our present system of refundable franking credits therefore, there is no concession, no leakage and no loophole.

In the discussion referenced above, the Shadow Treasurer also said “While those people [with low taxable incomes] will no longer receive a tax refund, they will not be paying additional tax” which is a prime piece of Orwellian double-speak.  It’s not correct, and shareholders on sufficiently low incomes will find that their franking credits are simply confiscated as tax – money they get now will no longer be received and they will have less to live on.

Australians on low incomes will lose franking credits, unless they receive a part or full Age Pension. After strong protests that convinced the ALP that its policy would actually harm those on low incomes, they announced the “Pensioner Guarantee” – an exemption from the policy for Age Pensioners who hold shares directly, and for SMSFs where at least one member received the Age Pension or a government allowance before 28 March 2018 – but that still doesn’t help non-pensioner shareholders with low incomes.

In this article, I dig into this subject in more detail, particularly for those who hold their shares directly in their own names, to show what the ALP proposal really means and how it would operate.

I’ll show that the policy can cause very substantial loss of income for direct shareholders, especially those on low or middle incomes.  Retirees will simply not be able to suck up the sort of losses involved and we can expect some creative asset reduction to get under the Age Pension asset test threshold, or a major restructure of the investment portfolio to avoid franked dividends.

Dividend imputation, and how franking credits work

In the bad old days when dividends paid from company profits (taxable in Australia) were double-taxed, it worked like this:  the company paid tax at the corporate rate (currently 30%) on the relevant profit; the remainder (70% at current rates) was sent as a dividend to the shareholders, who then paid further tax on it as part of their ordinary income.

In 1987, the Hawke-Keating government decided to remove this double taxation of dividends, introducing a dividend imputation system similar to what we have today, except that franking credits were non-refundable.

Although the company still paid tax at the corporate rate (currently 30%), any of that tax which was associated with profits paid out as a dividend was reclassified as a “franking credit” and held by the ATO as a pre-payment of tax on behalf of the taxpayer – very similar to the PAYE system

The franking credit was also treated as part of the shareholder’s taxable income.  In other words, the gross dividend, which is the franking credit plus the dividend, was added to any other taxable income when calculating the shareholder’s income tax.  The franking credits, being pre-paid tax, were then subtracted from the calculated tax owing, so that in the end the gross dividend was taxed just like any other income.

For high-income shareholders, whose tax liability exceeded the value of the franking credits, this system had the effect of transferring the liability for tax on company profits from the company to the shareholder.

However, for low-income shareholders the situation was different.  If there were franking credits left over after paying the tax, the ATO simply kept the excess.  (This outcome is what is meant by “non-refundable”). Taxpayers who would have paid no tax at all if the same amount had been earned from employment, actually paid the corporate tax rate on their dividends.  Their dividend income was “taxed in their own hands”, but not taxed like other income.

In 2000, the Howard-Costello government made unused franking credits refundable to the taxpayer, creating the current system in which gross dividends are always taxed as shareholder’s income, regardless of the shareholder’s tax rate.

Here’s a simple example to show how the three systems treat low and high income taxpayers.  For this example, “low income” means too low to pay tax in our current system and “high income” means over $180,000 so the marginal tax rate is 47% (including the Medicare levy).  It’s also assumed that the gross dividend is not large enough to alter the taxpayer’s marginal tax rate, and today’s tax rates are used.

The table shows how much money, after tax, ends up in the shareholder’s pocket as a result of $100 profit earned by the company and distributed as a dividend. Clearly, low-income recipients of franked dividends will be the hardest hit if the ALP re-introduces non-refundable franking credits.

System After tax income from $100 profit
  Low income High income
Double taxation (prior to 1987) $70 $37
Non-refundable franking credits (Hawke-Keating) $70 $53
Refundable franking credits (Howard-Costello) $100 $53

Dividend imputation with non-refundable franking credits  was a have-your-cake-and-eat-it-too system for the government, where that part of a company’s profits distributed as dividends was taxed at either the corporate or the personal tax rate, whichever gave the higher result.  This is the system the ALP wants us to return to – Age Pensioners (mostly) excepted.

So who is most affected by the proposed policy? What is their income? How much income will they lose?  How effective is the Pensioner Guarantee? Let’s look at these questions in some detail.

Significant loss of income under ALP proposal for direct shareholders

People who hold shares directly, outside of superannuation, may be rich or struggling; they may be retired or in their youth; they may rely on dividends from shares for all of their income, or just a part of it; they may have other taxable income from dividends, rental, employment etc.  They might also receive non-taxable income from a superannuation pension, but that has to be looked at separately and does not affect what happens with their taxable income.

Whatever the circumstance, the introduction of the ALP’s policy will result in either a loss of income or, if the shareholder’s income is high enough, no change.  No one gains except the government.

If a shareholder is going to lose income under the ALP policy, the actual amount depends on total taxable income, the amount of gross dividends as a percentage of the total, and whether the taxpayer is entitled to SAPTO (and if so, whether single or a member of a couple).

Incidentally, wherever I use the phrase “entitled to SAPTO”, it is to be understood that the entitlement only applies if the income is below the appropriate threshold.  Above that, the “entitled to SAPTO” and “not entitled to SAPTO” curves in the graphs to follow are, of course, identical.

Fig 1 presents the loss of income which would result from the ALP proposal for a single senior shareholder entitled to SAPTO, where the gross dividends received constitute 25%, 50%, 75% or 100% of the shareholder’s total taxable income.

For example, if gross dividends represent 100% of a taxpayer’s income, the introduction of the ALP proposal will be most financially devastating for single senior Australians earning about $33,000 a year but will also affect those earning up to about $138,000 a year. If gross dividends represent 75% of a taxpayer’s income, the ALP proposal will most severely hurt single senior Australians earning about $33,000 a year  but will also affect those earning up to about $75,000 a year

In all scenarios, single senior Australians with low to moderate incomes will be most affected by the ALP’s proposal to ban franking credits refunds.

Figure 2 shows the same results, but for a senior taxpayer who is a member of a couple.  Note this graph is just one partner’s share of both the income and the loss.  The shapes of the curves are a bit different from those in Fig 1 because of the complicated structure of our tax scales.

Note: In particular, for a couple, if gross dividends make up 50% or less of total income, the worst loss occurs at an income (each) of about $22,000.

Finally, Fig 3 shows the same results for a younger taxpayer who is not entitled to SAPTO.

In each of these three graphs the curves are skewed towards lower incomes and the greatest amount of income loss occurs at a taxable income of between $22,000 and $33,000 depending on the individual case.  That’s hardly a huge income, yet in the worst case the ALP proposal will reduce this income by up to $10,000 per year, depending on the percentage of franked shares contributing to taxable income.  The proportional loss is savage.

For those who don’t qualify for SAPTO, the maximum loss of income occurs at lower taxable incomes and is not quite as large, but it is still very significant in relation to the level of income

This is just another slap in the face to seniors who, in recent years, have suffered the doubling of the Age Pension asset test taper rate, dramatic upheaval in the structure of superannuation in retirement and now, for share investors, the threat of losing some or all of their franking credits.

Many retirees must question why they put so much effort in their younger years into saving and learning how to invest, only to have their assets and income so badly trashed by continually changing rules.

What about the Age Pension?

When introducing this policy, the ALP claimed that it would mostly affect wealthy retirees.  A strong backlash led to the Pensioner Guarantee (exemption) and the claim that they were thus protecting those less well off.

However, that did nothing for those who fail to qualify for the Age Pension but still don’t have much income.  We need to see where in Figs 1 or 2 the Age Pension might cut out.

To keep things as simple as possible, we’ll just look at the top curves in Figs 1 and 2, which assume that gross dividends make up all the taxable income.  In both cases, the worst loss occurs for a taxable income of about $33,000, and if we assume a gross dividend yield of 6% (approximately the average for fully franked shares in the ASX 200) the value of the shares needed to generate that income is $550,000.

The upper asset test threshold for the Age Pension is different for singles and couples, and for those who own their own homes:

Asset test upper threshold
Homeowner Not homeowner
Single $564,000 $771,000
Couple (each) $424,000 $511,000

 

None of these figures are very far from $550,000.  What that means is that someone who just fails to qualify for the Age Pension, and so is not excluded from the ALP policy, will probably find themselves facing close to the maximum loss of income.

How will people respond?

With incomes at these levels, nobody’s going to just suck up the sort of losses involved, so expect either (a) some creative asset reduction to get under the Age Pension asset test threshold, or (b) a major restructure of the investment portfolio to avoid franked dividends.

The first alternative, that is, creative asset reduction, is likely to trap the person into permanent dependence on the Age Pension, restricting a person’s ability to improve her financial position in future or to deal with major health or care issues late in life.  The second alternative, restructuring the investment portfolio, could adversely affect the risk of the portfolio producing poor returns, leading to an inadvertent slide onto the Age Pension.

Either way the objective of the ALP proposal is thwarted, which makes it rather pointless to make people jump through these hoops, while putting more people on the Age Pension

SMSFs also hit by ALP proposal

The ALP’s proposal also applies to shares held within a self-managed super fund.

If an SMSF is in accumulation mode, then the tax rate on investment earnings and discounted capital gains is 15%. In such circumstances, if gross dividends make up more than half the total income, some of the franking credits will be lost.  I suspect most people caught in this situation will restructure their investments to bring gross dividends down below 50% of income.  Such a strategy solves the tax problem, but may adversely alter the SMSF’s risk profile.

SMSFs in pension mode are in a much more difficult situation.  They pay zero tax on fund earnings, but under the ALP proposal they would lose all of their franking credits, which could be up to 30% of their current income.  Portfolio restructure is one option to avoid this tax (although it would mean abandoning shares paying franked dividends), as is simply reducing (spending) assets so as to bring their value low enough to qualify for the Age Pension – in both cases with the possible consequences outlined earlier.

Unfortunately, reducing the value of shares held in the SMSF – as a deliberate strategy or simply to supplement income – to the point where a retiree qualifies for a part Age Pension still won’t protect the franking credits. The Pensioner Guarantee does not apply to SMSF members who qualify after 28 March 2018, so retirees in this situation will probably consider closing their SMSF and reinvesting outside super.

SMSFs in pension mode seem to be the main target of the ALP’s proposal, and the Shadow Treasurer’s statement (https://www.chrisbowen.net/issues/labors-dividend-imputation-policy/ ) specifically refers to the fact that some SMSFs get very large refunds of franking credits.  Well yes, some did, but that was largely eliminated by capping superannuation pension accounts at $1.6 million.  Meanwhile, lots of people have relatively small SMSF pension accounts.

If the real problem that the ALP is trying to address is the fact that SMSFs in pension mode pay no tax, then that should be addressed directly with full consideration of context including large funds as well as SMSFs.  It is a fundamental and complex issue and simply changing the way dividends are taxed is not the way to deal with it.

Destructive and unfair tax policy

Halting the refund of excess franking credits is a very destructive policy for those who hold shares directly or in an SMSF, especially in pension phase

Such a proposal puts a severe strain on retirees whose taxable income is fairly low unless they can find a way to restructure their investments or qualify for the Age Pension, but it has little or no effect on wealthier people – unless their investment is through an SMSF in pension mode.

Likely responses to the policy would see some people driven to the Age Pension, at long-term cost to themselves and the government.  Others will close their SMSF purely to get under the umbrella of the Pensioner Guarantee.  Some may decide to remove all Australian shares paying franked dividends from their portfolios – how is this good for themselves or the country?

Income tax is often arbitrary and complex, but the basic principle of dividend imputation with refundable franking credits is simple and sound:  to ensure profits distributed as dividends are taxed as normal income in the hands of shareholders.  Why mess that up?

The ALP policy is the antithesis of a well-designed tax policy, a direct slap in the face to the notion of a progressive tax system, and an extraordinary proposition to have come from the ALP.

Exempting Age Pensioners who hold shares directly from this policy was painted as supporting those on low incomes, but really it was just a way of papering over part of a problem and hoping no-one would notice the rest.

Technical note: All tax calculations in this article use 2018-19 tax rates, and include LITO, LMITO, SAPTO (if relevant) and the Medicare levy.  The Age Pension asset test thresholds are applicable from September 2018. For more information on income tax rates see SuperGuide article https://www.superguide.com.au/boost-your-superannuation/income-tax-rates. For more information on Age Pension assets test, see SuperGuide article https://www.superguide.com.au/accessing-superannuation/age-pension-asset-test-thresholds .

About the author: Jim Bonham

Dr Jim Bonham is a retired scientist and R&D manager, who is deeply concerned about the appalling instability of the regulatory environment around superannuation, retirement funding and investment generally. If the ALP policy is implemented, he will be affected by the loss of franking credits in relation to shares held directly, and within an SMSF. 

Copyright: Jim Bonham owns the copyright to this article. Copyright © Jim Bonham 2018

First published on 15 October 2018 on SuperGuide: https://www.superguide.com.au/retirement-planning/alps-franking-credits-policy-targets-shareholders-low-taxable-incomes

On 16 October 2018 Jim Bonham sent the following email to Bill Shorten and Chris Bowen:

From: Jim Bonham [mailto:jim@bonham.id.au]
Sent: Tuesday, 16 October 2018 9:19 AM
To:Bill.Shorten.MP@aph.gov.au‘ <Bill.Shorten.MP@aph.gov.au>
Cc:Chris.Bowen.MP@aph.gov.au‘ <Chris.Bowen.MP@aph.gov.au>
Subject: Franking credits

Dear Mr Shorten,

I was dismayed to read the following quote, attributed to you, regarding refundable franking credits:

“Having a non-means tested government payment solely on the criteria that you own shares and giving people a refund when you haven’t actually paid income tax for the year that the refund covers, what’s the economic theory behind that?”  (https://www.afr.com/news/bill-shorten-promises-biggest-preelection-policy-agenda-since-gough-whitlam-20181011-h16ju0 )

The facts are:

  1. Refunds of franking credits to shareholders with low taxable income are means tested, because franking credits are taxable income and the progressive nature of income tax system effectively applies a means test.
  2. You have paid income tax, because the franking credit is treated by the ATO as a pre-payment of tax.  The refund to those on low taxable incomes occurs because the pre-payment is an over-payment.
  3. There is an economic theory.  The dividend imputation process was designed to ensure that company profits distributed as dividends are taxed in the hands of the shareholder (the company is only taxed on profits retained for internal use).  Refunding franking credits in excess of the shareholder’s tax obligation is essential to ensure that the gross dividend is taxed in the same way as other income.  Failing to refund excess franking credits, as the ALP is proposing, forces those on low taxable incomes to pay a higher rate of tax on gross dividends than they would if the same income were earned in any other way.

 

Please abandon the policy of making franking credits non-refundable.  It hits those with low taxable incomes the hardest, and makes living in retirement on your own resources far more difficult for self-funded retirees.

Jim Bonham

How did both major parties get super so wrong?

The Australian

1 October 2018

Robert Gottliebsen – Business Columnist

Both the government and the opposition have the same problem — they both have difficulty in devising sensible superannuation and retirement policies.

And this raises the question of why can’t they get it right? Why do they make so many mistakes?

In the Weekend Australian I set out how shadow treasurer Chris Bowen simply got his franking credits policy wrong.

But go back a few years and the then treasurer Scott Morrison and his assistant Kelly O’Dwyer put forward a set of horrendous superannuation policies and even went as far as saying they were not retrospective when of course everyone knew they were.

Those bad policies almost cost the Coalition the election. They were lucky because many of their backbenchers took the trouble to talk to people and understand what was happening and forced through policy adjustments that were at least a substantial improvement on the original ideas.

And in the current ALP fiasco my understanding is that, in a similar way to the Coalition, intelligent backbenchers are talking to the voters and are starting to understand the looming disaster and are desperately looking for a way around the problem without admitting error.

Let me help them. The best way is to abandon the policy altogether, but if you need a compromise then limit the amount of cash franking credits that can be claimed to, say, about $15,000.

The cap being floated in ALP circles is $10,000 but I think that is too low. But whether it be $10,000 or $15,000, the problem is we are introducing legislation that is complex, will raise very little money and makes retirement just that much more complex.

We can fix that over time, and a $15,000 annual cap to cash franking credits will solve most of the problems among the battlers who are struggling to fund their own retirement. The problem both the Coalition and the ALP face in superannuation matters is that, in the first instance, the politicians have very generous super arrangements and don’t do their homework on the rest of the population. Even worse, in the public service the people at the top are mostly on incredibly generous benefits and are members of the so-called “$10 million club” with benefits that are way in excess of what is available to the general public.

While that has been changed for the most recent recruits, the people at the top of the public service are mostly living in a different world to the rest of the country. So when they look at super and retirement matters they simply have no idea what is taking place. My understanding is Chris Bowen, when devising his super franking credit disaster, actually went to the public service to have it evaluated and they came back with the thumbs up, which made him confident that the concept was a legitimate tax arrangement that would take money from the rich.

As we all now know, the policy is a savage blow to ordinary Australians trying to fund retirement, with about 1.4 million people in the ALP’s sights and hardly a rich person among them.

I believe we are looking at a phenomenon that cripples both parties. The first step in solving the problem is that ministers in areas like superannuation need to understand that the public service is of limited value to them.

They have to send their people out into the real world and, as the Coalition found, the best advice came from the backbenchers who usually have the time to be in touch with the electorate.

Ministers and shadow ministers in Canberra (and also in state governments) surround themselves with ministerial staff who second-guess the public service. Too often the ministerial staff are “yes” people with no depth to their knowledge outside of politics.

This situation has caused many talented people to either leave the public service or simply not join it. Once we had a proud public service that was as far as possible independent, but we are now seeing in so many areas public service advice simply doesn’t have the same standards it once did.

Nothing is going to happen in the short term, but down the track ministers are going to have to think about how they restore the quality of public service advice so that they don’t get caught in situations as we have seen in superannuation and retirement from both parties. When Australians reach their 40 and 50s they make long-term plans for their retirement in accordance with rules that exist at the time. When past governments changed rules the old rules were grandfathered so they were not retrospective.

It was the Coalition that decided there should be retrospective legislation. At least Bowen is being honest and is saying he is changing the rules retrospectively, but that doesn’t validate his policy. For what it is worth I admire the shadow treasurer for the fact that he is open about the tax measures he is planning to undertake.

Traditionally opposition treasurers keep their mouths shut and introduce the nasties once they get into office.

The 2016-2017 adverse superannuation changes; a Grattan Institute/Turnbull Government recipe for loss of trust and increased uncertainty?

Address by Jack Hammond QC, founder of Save Our Super.

Tuesday, 18 September 2018 at La Trobe University Law School, City Campus, 360 Collins Street, Melbourne, lunch-time seminar, “Australian Superannuation: Fixing the Problems”.

INTRODUCTION and DECLARATION OF INTEREST

In 2016-17, the Turnbull Government made a number of superannuation policy and legislative changes which adversely affected many Australians. Those changes were made without appropriate ‘grandfathering’ provisions even though they amounted to ‘effective retrospectivity’ (a term coined in February 2016 by the then Treasurer, Scott Morrison). ‘Grandfathering’ provisions continue to apply an old rule to certain existing situations, while a new rule will apply to all future cases.

I am a retired barrister and am adversely affected by those 2016-17 superannuation changes. That, in turn, has led me to form the superannuation community action group, Save Our Super.

The Turnbull Government, assisted and encouraged by the Grattan Institute in Melbourne has, without notice and at a single stroke, changed the superannuation rules and the rules for making those rules. They have turned superannuation from a long-term, multi-decades, retirement income system into, at best, an annual federal budget-to-budget saving proposition. That is a contradiction in terms . It is unsustainable.

Further, it is a recipe for a loss of trust and increased uncertainty for all those already in the superannuation system and those yet to start.

Save Our Super has three proposals which we believe will redress the 2016-17 superannuation policy and legislative changes and prevent a recurrence.

But first, how did we get here and in particular, without appropriate ‘grandfathering ‘ provisions? Those type of provisions have accompanied all significant adverse superannuation changes over the past 40 years.1

BACKGROUND CHRONOLOGY

29 November 2012 Lucy Turnbull appointed a director of the Grattan Institute, Melbourne.2
May to June  2015 Scott Morrison, whilst Minister for Social Services in Abbott Government, makes 12 ‘tax-free superannuation’ promises.3
2014 to 2015 Malcolm and Lucy Turnbull donate funds to Grattan Institute.4
15 September 2015 Malcolm Turnbull replaced Abbott as Prime Minister. Scott Morrison becomes Treasurer.5
24 November 2015 Grattan Institute publishes Report ”Super Tax Targeting” by Grattan Institute CEO John Daley and others. Dismisses need for ‘grandfathering’ provisions6 and observes ‘…that taxing earnings for those in the benefits stage may raise concerns about the government retrospectively changing the rules’. 7

No mention of the possible consequential of loss of trust and uncertainty that retrospective changes may bring.

Note that the Grattan Institute material shows, on its front page, an image of three of the bronze pigs on display in the Rundle Street Mall, Adelaide.8

We, and other self-funded superannuants, believe that the Grattan Institute’s prominent use of that image of those bronze pigs was not merely a juvenile attempt at humour.

It was a none-to-subtle insulting implication that Australians whom had faithfully conformed with successive governments’ superannuation rules and had substantial superannuation savings were, nonetheless, greedy pigs with their ‘snouts in the trough’.

See also 9 November 2016 entry below.

2015-2016 Malcolm and Lucy Turnbull donate further funds to Grattan Institute.9
18 February 2016 Scott Morrison, as Treasurer, gave an address to the Self Managed Superannuation Funds 2016 National Conference in Adelaide.

Draws attention to ‘effective retrospectivity’ and its ‘great risk’ in relation to super changes.

“Our opponents stated policy is to tax superannuation earnings in the retirement phase. I just want to make a reference less about our opponents on this I suppose but more to highlight the Government’s own  view, about our great sensitivity to changing arrangements in the retirement phase.

One of our key drivers when contemplating potential superannuation reforms is stability and certainty, especially in the retirement phase. That is good for people who are looking 30 years down the track and saying is superannuation a good idea for me? If they are going to change the rules at the other end when you are going to be living off it then it is understandable that they might get spooked out of that as an appropriate channel for their investment.

That is why I fear that the approach of taxing in that retirement phase penalises Australians who have put money into superannuation under the current rules – under the deal that they thought was there. It may not be technical retrospectivity but it certainly feels that way.

It is effective retrospectivity, the tax technicians and superannuation tax technicians may say differently. But when you just look at it that is the great risk.”10

3 May 2016 Scott Morrison, as Treasurer, announces in his Budget 2016-17 Speech to Parliament a number of adverse ‘changes to better target superannuation tax concessions’ .

No ‘grandfathering’ provisions announced.11

See also, Budget Measures, Budget Paper No 2, 2016-17, 3 May 2016, Part 1, Revenue Measures, pp 24-30.12

5 September 2016 John Daley, CEO Grattan Institute, said:
“Winding back superannuation tax breaks will be an acid test of our political system. If we cannot get reform in this situation, then there is little hope for either budget repair or economic reform” (AFR 5/9/16)13
9 November 2016 To give effect to the Budget 2016-17 superannuation changes, Scott Morrison presented the Turnbull Government’s package of 3 superannuation Bills to Parliament.

To publicly explain and justify those superannuation changes to Parliament, Scott Morrison and Kelly O’Dwyer circulated and relied in Parliament upon a 364 page “Explanatory Memorandum”.

The Explanatory Memorandum states on its front page “Circulated by the authority of the Treasurer, the Hon Scott Morrison MP and Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP.

In turn, the Explanatory Memorandum expressly refers to, and provides links to, the Grattan Institute’s 24 November 2015 Media Release and Report (see 24 November 2015 entry, above).

As noted above, that Grattan Institute material shows, on its cover, an image of three of the bronze pigs on display in the Rundle Street Mall, Adelaide.14

Bronze pigs in Rundle Street Mall, Adelaide 

23 November 2016 The Turnbull Government, with the support of Labor, rushed through Parliament two of its three superannuation Bills.
29 November 2016 Those two Bills were assented to on 29 November 2016 and are now law:

Superannuation ( Excess Transfer Balance Tax) Imposition Act 2016 (C’th) (No 80 of 2016);15

Treasury Laws  Amendment (Fair and Sustainable Superannuation) Act 2016 ) (C’th) (No 81 of 2016)16

The third superannuation Bill, the Superannuation (Objective) Bill, remains stalled in the Senate.17

1 December 2016 Lucy Turnbull retired as a director of the Grattan Institute.18
24  August 2018 Malcolm Turnbull resigns as Prime Minister.19
Scott Morrison becomes Prime Minister.20

SAVE OUR SUPER’S THREE PROPOSALS FOR THE FUTURE
Save Our Super has three proposals which we believe could redress the 2016-17 superannuation policy and legislative changes and prevent a recurrence.

First,  Scott Morrison, in his new capacity as Prime Minister, should request the Treasurer, Josh Frydenberg and/or through him, the Assistant Treasurer, Stuart Robert, to revisit the Turnbull Government’s 2016-17 superannuation changes.

A discussion paper and advice from Treasury should be requested. It should include the effect of the Turnbull Government’s 2016-17 superannuation changes on superannuation fund taxes in 2017-18 and over the forward estimates.

To restore trust and reduce uncertainty in the superannuation system, the Morrison Government should introduce into Parliament legislation which will retrospectively provide appropriate ‘grandfathering’ provisions in relation to the Turnbull Government’s 2016-17 adverse superannuation changes.

Those ‘grandfathering’ provisions to be available to those significantly adversely affected and whom wish to claim that relief. 

Secondly, Save Our Super proposes to create a Superannuation and Retirement Income  Policy Institute, independent of government , funded, at least initially, by private donations/subscriptions.

Its role will be to advocate on behalf of those millions of superannuants and retirees whose collective voice needs to be heard.

Thirdly, Save Our Super will advocate for an amendment to the Australian Constitution, to have a similar effect in relation to superannuation and other retirement income, as does section 51 (xxxi) has in relation to the compulsory acquisition of property.

That section empowers the federal Parliament to make laws with respect to the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws (emphasis added).

Thus Parliament’s power to make laws in relation to superannuation and other retirement income should not be affected. However, any significant adverse change to existing situations will need to be on just terms, for example, by providing appropriate ‘grandfathering’ provisions as part of that federal law.

1. [http://saveoursuper.org.au/super-changes-grandfathering-rules-must-considered]
2. [https://grattan.edu.au/wp-content/uploads/2014/03/Grattan_Institute_Annual_Financial_Report_2013.pdf (pp 2-3)]
3. [http://saveoursuper.org.au/scott-morrison-12-superannuation-tax-free-promises]
4. [https://grattan.edu.au/wp-content/uploads/2015/11/Grattan-Institute-Annual-Report-on-Operations-30-June-2015.pdf (p 19)]
5. [https://en.wikipedia.org/wiki/First_Turnbull_Ministry]
6. [https://grattan.edu.au/wp-content/uploads/2015/11/832-Super-tax-targeting.pdf (p 7)]
7. [https://grattan.edu.au/wp-content/uploads/2015/11/832-Super-tax-targeting.pdf (pp 68-9, para 6.5)]
8. [https://grattan.edu.au/wp-content/uploads/2015/11/832-Super-tax-targeting.pdf (front page)]
9. [https://grattan.edu.au/wp-content/uploads/2016/11/Grattan-Institute-Annual-Report-on-Operations-30-June-2016.pdf (p 24)]
10. [Scott Morrison, Address to the SMSF 2016 National Conference, Adelaide]
11. [https://www.budget.gov.au/2016-17/content/speech/html/speech.htm]
12. [https://budget.gov.au/2016-17/content/bp2/download/BP2_consolidated.pdf]
13. [https://grattan.edu.au/wp-content/uploads/2017/11/Grattan-Institute-Annual-Report-2017-Web.pdf (p 6)]
14. [The Explanatory Memorandum refers to the Grattan Institute’s 24 November 2015 report “Super tax targeting” by John Daley and Brendan Coates: (see page 275, paragraph 14.12, footnote 2). Click on the link on footnote 2, 2 Grattan Institute, media release, ‘For fairness and a stronger Budget, it is time to target super tax breaks’, 24 November 2015,  http://grattan.edu.au/for-fairness-and-a-stronger-budget-it-is-time-to-target-super-tax-breaks/”.
Click on the link at foot of that page Read the report“. That link will take you to the Grattan Institute report “Super tax targeting “ dated 24 November 2015 by John Daley and others. The report’s front page shows the image of those bronze pigs in the Rundle Street Mall, Adelaide. Note: The Grattan Institute’s website has been updated since the publication of that document. However, the article itself and the image of the 3 pigs remain.]

15. [Superannuation ( Excess Transfer Balance Tax) Imposition Act 2016 (C’th) (No 80 of 2016)]
16. [Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 ) (C’th) (No 81 of 2016)]
17. [Superannuation (Objective) Bill]
18. [https://grattan.edu.au/wp-content/uploads/2017/11/Grattan-Institute-Annual-Financial-Report-2017.pdf (p 3)]
19. [https://en.wikipedia.org/wiki/Malcolm_Turnbull]
20. [https://en.wikipedia.org/wiki/Scott_Morrison]

Banks take wooden spoon as super’s underperformers

The Australian

20 July 2018

Anthony Klan

Superannuation funds run by the Big Four banks and other major ­financial institutions were among the worst performers of the nation’s biggest funds last financial year, while so-called industry funds took out every place in the top 10 returns table.

The latest data from SuperRatings, widely considered to be one of the nation’s best super ratings data sets, shows super funds run by CBA, ANZ, NAB, Westpac, AMP and IOOF were consistently among the worst performers over the past 15 years, the longest time frame for which the most complete data is available.

The SuperRatings data shows the major industry funds, those funds run by employer and union groups, were overwhelmingly the best performers, not just last year but over three, five, 10 and 15 years.

The data looks at the “balanced” options of the nation’s 50 biggest super funds by number of members.

 

SuperRatings releases only the top 20 performers on the list, saying it is its “long standing policy” to do so, however The Australian has obtained the full list of 50 from a separate source, revealing the underperformance of the “retail”, or for-profit, funds.

Like SuperRatings’ general ­announcement yesterday, the Productivity Commission’s recent 563-page report into superannuation also did not disclose the names of the worst performers in the super sector in its rankings.

The banks and financial institutions aggressively fight against the ranking of their funds by the best analyst groups because their funds, with more than five million member accounts, consistently underperform, largely due to bigger fees and charges they levy on super account balances.

The top three performers in 2017-18 were the balanced options of industry funds HOSTPLUS, AustSafe Super and AustralianSuper. Those three funds also ranked in the top four performers over five, seven and 15 year timeframes.

The eight worst performing ­investment options on the list of 50 obtained byThe Australian were the balanced options of funds managed by ANZ, CBA, Westpac and AMP.

The overall performance of funds run by the major banks and financial institutions was likely even worse than reported, however, because those funds report only less than half of their products to SuperRatings, with those unreported products far more ­likely to be their worst performers.

According to the Productivity Commission report, in 2015, 100 per cent of industry fund super ­assets could be accounted for by data provided to SuperRatings.

But only 44 per cent of the super assets of retail funds could be accounted for by data those funds had provided to the agency.

The Productivity Commission report found that the further back in time, the less likely retail super funds were to report their performance to ratings agencies.

Data provided to SuperRatings by the banks and financial institutions accounted for 47 per cent of all super assets they managed in 2015, but that figure fell to 33 per cent when looking at 2010 and 27 per cent for assets managed in 2005.

There is more than $150 billion held in so called “legacy” funds, which are funds managed by banks and financial institutions that people joined before 2013, ­before new laws were introduced.

 

The funds are “closed” to new investors but continue to fully ­operate, generally charging far higher fees than funds are able to charge in today’s market, because scrutiny has increased.

As revealed by The Australian this week, Australian Prudential Regulation Authority data — which captures all super investments because funds are ­required, by law, to provide it with audited data regarding the performance of all their underlying “investment options” — further shows the systemic underperformance of retail super funds.

The APRA data shows the biggest funds operated by each of the Big Four banks, IOOF and AMP delivered returns lower than even the risk-free “cash” rate over the past decade.

Those six funds delivered total average annual returns to members of 2.1 per cent to 3.1 per cent a year in the 10 years to June 30, 2017, roughly half the market rates for similar mixed investments.

It’s simple: big fees lead to low returns, experts say

The Australian

19 July 2018

Anthony Klan

One of the world’s top experts on superannuation has called out claims from the major banks and financial services giants AMP and IOOF that it is “factually incorrect” or “misleading” to use the officially audited data, which they are legally required to file with the regulator, to judge their ­performance.

University of NSW Business School academic Kevin Liu, who earned his PhD investigating superannuation fund performance — and is a former internal researcher for banking and super watchdog the Australian Prudential Regulation Authority — said that the data was in fact the most accurate way to ­determine the performance of major funds.

“The theoretical argument is there can be many reasons for the underperformance of the retail funds … such as that analysis ‘doesn’t compare apples with apples’,” Dr Liu told The Australian.

“But we have created performance benchmarks … and this is not difficult and the methodology is not new. This systemic underperformance is not (due to) asset allocation. It’s not an investment manager’s skills. It’s fees and charges.”

Audited super-fund data provided to APRA by law shows that the biggest single-umbrella super funds operated by each of the CBA, Westpac, NAB, ANZ banks and AMP and IOOF performed vastly below market rates over the 10 years to June 30, 2017.

Those major funds have five million member accounts and hold $260 billion of the public’s money raised through the compulsory super scheme.

They have performed about half as well as the major so-called not-for-profit “industry” funds, and about half as well as super schemes that three of the major banks operate for their own staff members.

 

CBA’s Commonwealth Bank Group Super, which is open to CBA staff and their spouses, and which has 74,009 members with $11.06bn invested, delivered an average return of 5.4 per cent a year over the decade to June 30 2017.

By contrast, the biggest fund CBA sells to the public, the $72.1bn Colonial First Choice Superannuation Trust, which has 783,474 members, delivered ­overall average returns of just 2.9 per cent a year for the decade.

ANZ’s $36.2bn OnePath Masterfund, which is sold to the public via its vast network of financial advisers, and which had 949,486 members at June 30 last year, earned an overall return of 2.7 per cent a year over the decade.

However, the ANZ Staff Superannuation fund, which reported 31,688 members with retirement nest eggs worth $4.23bn, earned overall average returns of 4.7 per cent for the same period.

The major banks, AMP and IOOF have aggressively fought against this data being used to compare their performance and have provided a wide range of reasons why it is incorrect to do so.

However Dr Liu said not only were these claims incorrect, but that using this data provided “the most reasonable and accurate assessment performance” of a fund “because it reflects the overall ­efficiency of the firm as an independent operating entity”.

Further, APRA had long been aware this was the case: Dr Liu was the co-author of the peer-­reviewed APRA paper that proved it, and contained those exact words, in July 2010.

Dr Liu, then completing his PhD on the subject, had been employed as a researcher and his co-author, Dr Bruce Arnold, was at the time APRA’s head of policy, research and statistics.

APRA chairman Wayne Byres and deputy chairman Helen Rowell have repeatedly declined to comment when contacted about these issues by The Australian in recent weeks.

In a statement, an NAB spokeswoman said it was “inappropriate and misleading” to compare its performance using the legally audited APRA data.

The data shows that the super fund NAB operates for its own staff delivered vastly higher overall average returns over the past decade than a major fund it operated for the public.

“As we have previously stressed, to compare the performance of the MLC Superannuation Fund, which is a composite view of members’ individual investment choices, to the NAB Staff Super Fund, which is one investment option, is inappropriate and misleading,” the statement said.

The major umbrella funds, or “master trusts”, operated by the major banks, AMP and IOOF, typically have many underlying “funds”.

These funds in turn have hundreds of thousands of “investment options”, which invest in the actual assets, such as cash, shares, or government bonds.

Law turns blind eye to fund managers as SMSFs hit

The Australian

14 July 2018

Anthony Klan

The managers of $1.2 trillion of the nation’s retirement savings — the fourth biggest pool of pension money in the world — face no penalties under the law for any wrongdoing, facilitating gouging of the nest eggs of millions of Australians over the past 25 years.

The Weekend Australian can reveal the laws governing super trustees enacted in 1993 under then prime minister Paul Keating carry serious penalties for members of the public who operate self-managed super funds, but carve out those penalties in relation to corporate and “industry” funds that manage the life savings of about half of all Australians. The legislation states super “trustees”, the legally designated protectors of super, must legally exercise “care, skill and diligence” in overseeing those funds and to always act in the “best interests” of members, or face up to five years’ jail and “punitive” financial damages.

But while those wide-ranging laws apply penalties to members of the public who run self-managed super funds, they do not apply penalties to the trustees managing more than $1.2 trillion in super.

The loophole, evident via a reading of the Superannuation Industry (Supervision) Act, has been allowed to continue ­despite the federal government overhauling super laws in 2016, in a move it said would “enshrine the objective of legislation” into law.

Every federal government over the past 25 years has publicly boasted that the nation’s super system is secure and the envy of the world.

However, these investigations show that while there are many, descriptive and specific “criminal” and “civil” laws governing ­superannuation, the trustees of the bulk of the ­nation’s super cannot receive even a $10 fine for breaking the law.

But self-managed super fund trustees, who are in the vast ­majority of cases the owners of their super, can face up to five years’ jail, restitution of losses and even “punitive” costs for the wrongdoing.

Financial Services Minister Kelly O’Dwyer said the government had reforms before the Senate, introduced last September, but they had been “frustrated” and the law had not passed ­because of “lobbying against them by vested interests within the industry”.

“The Members Outcomes Package of reforms, currently ­before the Senate, includes a measure to extend the civil and criminal penalty rules in the Superannuation Industry (Supervision) Act 1993 to cover breaches by directors of their covenant ­duties,” a spokesman for Ms O’Dwyer said.

“From the time the Members Outcomes legislation receives royal assent, the court may make a civil penalty order against a ­director in breach of their trustee obligations and may issue them with a fine of up to 2000 penalty units.

“In addition, serious breaches of the directors’ duties (such as those involving intentional or fraudulent contraventions) will constitute a criminal offence punishable by up to five years’ imprisonment.”

A report in The Australian this week showed financial services giant IOOF, which manages $26 billion of the public’s super, has been accused by almost 100 of its own employees of fee gouging.

In a May 4 letter, almost 100 of the 150 financial advisers working for Bridges Financial Services, the biggest network of advisers ­responsible for funnelling the money into IOOF, accused the group’s management of “unfathomable” behaviour by attempting to increase the fees it charges its 350,000 member accounts.

In a letter to IOOF managing director Christopher Kelaher and IOOF chairman George Vernados, the group of financial planners said the gouging was “quite simply” a move to “increase revenue to IOOF”.

The group had told all investors, or their financial advisers, that it planned to introduce “exit” fees — making existing investors in super products less likely to leave those products, and raising more money for IOOF when they eventually did — and lift its fee for managing simple, risk-free, cash investments by 33 per cent, for no disclosed reason.

The Bridges planners said the moves by IOOF were particularly egregious given they occurred amid an active royal commission into financial services, which ­includes examining superannuation fund managers. Hearings into super will start on August 6.

Following the backlash by Bridges, IOOF told Bridges planners their clients would be exempt from several of the new fees.

Any person can become a government-certified financial adviser, with a “diploma of financial planning” requiring no exams and taking four days to complete.

People are not even required to have completed Year 10 of high school to complete that brief course, governed by the Australian Securities & Investments Commission, which consists of some multiple-choice questions and some “short-answer” questions, which can be completed online with no supervision.

The Australian revealed on Wednesday that the 340,000 member ­accounts in the IOOF Portfolio Service Superannuation umbrella, had earned an average annual return of just 2.1 per cent a year on their ­retirement savings in the 10 years to June 30, 2017.

The nationally recognised return on risk-free “cash” investments — based on the returns on simple short-term deposits paid by the nation’s big four banks and the amount the government pays in its guaranteed “bonds” it sells to investors — was 66 per cent higher over the past decade.

The returns on those 340,000 super member accounts was even less than the rate of inflation, meaning despite hundreds of thousands of investors paying between 9 per cent and 9.5 per cent of every pay packet in government mandated super, those nest eggs have actually lost money.

Both Mr Kelaher and Mr Vernados have repeatedly declined to comment when contacted by The Australian in recent days.

The most recent overhaul of superannuation laws passed the Senate in 2016.

“On 9 November 2016, the government introduced the Superannuation (Objective) Bill 2016, which will enshrine the ­objective of superannuation in legislation,” the government said at the time.

“It sets out a clear ­objective for superannuation: to provide ­income in retirement to substitute or supplement the Age Pension.”

The Coalition and major banks — and IOOF and AMP — fought against the royal commission into financial services.

Super funds ‘skimming over $700bn in fees’

The Australian

13 July 2018

Adam Creighton – Economics Editor

For two decades the superannuation industry has extracted more than $700 billion in fees above what typical super funds charge overseas, equivalent to almost 40 per cent of the nation’s annual GDP, ­according to new analysis.

Super funds charged fees more than four times higher than similar funds in Canada, Europe and the US, with workers thousands of dollars worse off each year, the study says.

“If members’ contributions between 1997 and 2016 had been invested in a passively managed fund with typical expenses and allocations, they would now be valued between $700bn and $800bn larger,” University of NSW economist Nicholas Morris said. The total pool of superannuation assets, $2.6 trillion in March, would now be more than $3.3 trillion.

Declaring superannuation a “policy failure”, Professor Morris, a joint founder of the highly regarded Institute of Fiscal Studies in London, said high fees meant the retirement system in Australia had delivered income replacement rates that were barely above 40 per cent, compared with an average of 63 per cent across OECD countries.

“Twenty-six years after compulsory superannuation began, you have a system that delivers an income replacement rate for retirees that is among the lowest in the OECD, forces fund members to bear risks they are ill-equipped to manage, and provides significantly poorer returns on investment than could reasonably have been expected,” Professor Morris told The Australian.

The Keating government made superannuation compulsory in 1992. The compulsory rate is scheduled to rise from 9.5 to 12 per cent by 2025.

 

Professor Morris’s analysis follows a recent Productivity Commission report that revealed system-wide annual fees had surpassed $30bn a year. The landmark report found one in three super accounts was unintentional, draining almost $3bn a year in fees, and millions of workers were set to retire with $600,000 less in savings because of chronic underperformance.

The study avoided inter­national comparisons, but Professor Morris’s analysis of 256 large super funds around the world — comparing actual performance against benchmarks based on underlying investment allocations from 2004 to 2012 — showed Canadian and US funds, on average about 10 times as big as Australian funds, performed far better than local options.

Domestically, “retail” fund fees were twice as high as non-profit “industry” fund fees. The best performing funds were closed, in-house corporate and public-sector funds, managed for staff, including those for the Commonwealth and Reserve banks, Goldman Sachs and Telstra. The worst-performing fund was the Australian Christian Superannuation Fund.

“The greater the degree of separation between managers and beneficiaries, the worse the performance seems to be, partly because less attention is given to how the members fare, partly because there are more layers of cost,” Professor Morris said.

Funds open to the public exhibited costs three times those of closed funds.

“There are multiple regulators with insufficient responsibility for controlling overcharging and other rent-seeking behaviour, with no-one taking responsibility for the efficiency of the industry as a whole,” he added.

The Turnbull government in May announced it would cap management fees at 3 per cent of members’ balances, and make life-insurance policies “opt-in” only for members under 25.

The analysis also showed international funds that used low-cost, passive investment strategies beat the relevant benchmark by 0.28 per cent a year, while those that managed funds “actively” ­underperformed by 2.92 per cent.

Australian funds are beefing up their teams of active fund managers. Sun Super, which oversees $55bn, is reportedly set to lift the number of investment manager bankers from 29 to 50 by 2021.

After six years studying the super industry, Professor Morris launched a book in April warning other countries against adopting systems of compulsory saving — Management and Regulation of Pension Schemes: Australia — A Cautionary Tale.

He said the poor Australian performance also arose from poor choice of assets, driven by tax rules; unnecessary “churn” of assets, generating fees; and erosion of legal requirements for directors to act in members’ best interests.

We name superannuation funds at the top of their game

The Australian

9 June 2018

James Kirby – Wealth Editor

The biggest idea in superannuation in a generation is the plan that everyone just has one fund for the rest of their life. Better still, that the single fund will be chosen from a “best in show” selection of funds that would be compiled by a new independent panel.

Will it ever come to pass? Already powerful forces in superannuation, such as the Financial Services Council, are lobbying against it. They say having a set of funds pinpointed as the very best would cause all sorts of problems. I guess so, especially for the funds that don’t make it to the top!

Being realistic, it might be a long wait for this “best in show” concept to get going. But, as someone once said, you can’t stop the power of a good idea.

There are a variety of lists of the top funds in Australia, but let’s go with a benchmark list as defined by the Australian Prudential Regulation Agency. To find, say, the top five publicly accessible funds is not that hard; you just have to ignore the “staff-only” funds, such as the Goldman Sachs Staff fund or the CBA Group super fund. And to be sure none of these funds have been just lucky over a short time­frame, let’s also focus on the 10-year figures that include how they performed during the GFC. Here’s the list:

UniSuper

One of the biggest and certainly one of the most influential funds, UniSuper is a $63 billion fund with a 10-year return of 5.8 per cent. Unlike the rest of the toppers on the APRA list (mostly industry funds) UniSuper is not strictly a “public offer fund”. It might be described as semipublic in that you can join if you work in higher education or you have a relative among its 421,000 members.

Care Super

This is a typical public offer industry fund that covers general workers in just about every industry. It is one of the smaller funds in the top league with $16bn under management (compared with $123bn at the King Kong of industry funds, AustralianSuper). A quiet achiever, Care Super has about quarter of a million members and a 10-year return of 5.5 per cent.

REST

With a 2 million membership base, REST is among the biggest funds. Such a major presence and $47bn in assets under management can restrict performance, but REST has impressed with an ability to still top the performance tables year after year — it has a 10-year average return of 5.5 per cent.

Cbus

With its constant advertising and previous public endorsement by a former RBA chief, Bernie Fraser, Cbus is perhaps the best known of the industry funds. As with any industry fund, there is union links, including with the CFMEU, which is a “sponsoring organisation”. The fund has $40bn under management and returned a 10-year average return to its 750,000 members of 5.4 per cent.

BUSSQ

This relatively small fund punches above its weight. It has emerged from the building industry but with just 85,000 members it could almost be described as a boutique operation. Nevertheless, it has been very successful in investing the $4bn or so under management with a 10-year average return of 5.2 per cent.

So there’s the top five — the best in show — according to APRA. The issue, of course, is what defines the best in show; those numbers will change in the future. The best funds of the past may not be the best funds of the ­future.

What’s more, some people will want more than raw numbers, they may want a fund that follows their principles closely — that might mean the fund is actively investing in renewables, or it might mean the fund should have no links to trade unions, it might just mean that the fund plays fair and by the rules. Retail funds from the big banks and insurers might tick the boxes on independent directors, but it’s not much consolation if they have higher fees and get beaten endlessly in terms of returns from industry fund rivals.

If you want to draw up your own list of “best in show” options for making the right choice in super I’d suggest picking from one of these choices.

Big funds: The APRA top five (UniSuper, Care Super, REST, Cbus and BUSSQ) along with perennial outperformers AustralianSuper, HostPlus and Sunsuper.

Big retail funds: If you insist on a fund that is not linked with ­unions then among the top retail funds (over 10 years, according to Superratings) you would have AMG Super-Corporate Super, smartMonday PRIME, Macquarie Super Options-Super Plan, Colonial First State (First Choice Wholesale Personal Super) and Mercer Super Trust — Corporate Superannuation Division)

Specialist funds — ethical and environmental: It’s your money and you may want to do more with it than hand it over to whoever tops the charts. Australian Ethical is the best known of the specialist funds group, while Future Super is also a key player. According to super ratings the top five sustainable balanced funds over 10 years are: Hesta’s Eco Pool, AustralianSuper’s Socially Aware option, VicSuper FutureSaver-Socially Conscious Option, Care Super-Sustainable Balanced UniSuper Accum (1) Sustainable Balanced.

Roboadvisers: ING Living super, SixPark, Stockspot, Ignition. If the remarkable success of passive investing in the wider funds management industry is anything to go by, then the biggest threat to the current power structure in super are the new digital operators designed from the ground up to keep fees low and to create funds that match the market. The roboadvisers are still too new to offer 10-year track records.

SMSFs: If you really want to run your own super then an SMSF is the best way possible to do it. There has been some negative publicity around SMSFs, but the SMSF system remains very attractive. The Productivity Commission suggests you need $1 million to succeed with an SMSF, but industry experts and active investors disagree with this estimate. A starting point of $200,000 is entirely feasible.

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