Category: Features

APRA tightens the screws on superannuation trustees

Australian Financial Review

14 December 2017

Alice Uribe and Sally Patten

Superannuation funds will be forced to disclose and justify their expenditure on items such as marketing, member education, sponsorship, advertising and media as part of a crackdown by the prudential regulator.

In an effort to stop wasteful spending and force super funds to adopt a more business-like approach, the Australian Prudential Regulation Authority said on Wednesday that it planned to strengthen existing prudential standards and introduce a new standard requiring funds to report annually on ways they could improve their performance.

APRA is proposing to require super funds to demonstrate that all spending is monitored against objectives and is successful in meeting those objectives. It is expected that spending on publications such as online news site New Daily, which is owned indirectly by a group of industry retirement schemes, will be included. The New Daily lost $2.7 million in 2017In September, The Australian Financial Review revealed industry superannuation funds spent more than $37 million last yeato promote themselves in the media. Both retail and industry funds spend thousands of dollars on marketing and conferences.

The launch of a consultation package on the proposed revisions to the standards comes less than two weeks after the Turnbull government was forced to withdraw legislation that would have required funds to be more transparent and appoint more independent directors to their boards.

The prudential regulator wants to know more about how superannuation funds spend their members’ retirement savings as part of an ongoing clampdown on wasteful spending by underperforming funds.

The Australian Prudential Regulation Authority has today released a consultation package it says is designed to ensure trustees in the $2.3 trillion sector go beyond “minimum legislative requirements”

“Every super fund member deserves confidence their fund is delivering quality, value-for-money outcomes. APRA’s proposals, supported by our ongoing supervisory focus, will help registrable superannuation entity [RSE] licensees lift their standards for the long-term benefit of their members,” APRA deputy chairman Helen Rowell said.

APRA also proposes widening a current prudential standard to require super funds to make it easier to opt out of life insurance.

“Such practices include insufficient rigour around decision-making and monitoring in relation to fund expenditure, setting of fees and costs and the use of reserves, and how expenditure decisions are made to secure sound outcomes for members,” APRA said in a discussion paper outlining its proposed prudential framework changes.

APRA has proposed the addition of a new prudential standard that will require all registrable superannuation entity [RSE] licensees to assess every year the outcomes of their members, as well as new practice guides that it says will assist trustees with business planning and “outcome assessment”.

Industry Super public affairs director Matthew Linden welcomed the proposed standards and APRA’s commitment to enhanced transparency and member outcomes but argued that “it was vital the measures demand high standards from all APRA-regulated super funds in respect to all of their members.” He said he was concerned that savers not in default products would not be given the same protections.

“A two-tiered regulatory framework which involves lower standards and expectations in respect to ‘choice’ superannuation products that account for most system assets is no longer appropriate,” he said.

Eva Scheerlinck, chief of the Institute of Superannuation Trustees of Australia, said: “For any outcomes test to be meaningful, it must apply to every superannuation option and have long-term net returns as the number one priority.”

APRA wrote to the boards of Australia’s worst-performing superannuation funds in August summoning them to individual meetings to discuss their failings, and requiring trustees to make “quick” changes or be shut down.

“These registrable superannuation entity [RSE] licensees will be required to develop a robust and implementable strategy to address identified weaknesses within a reasonably short period and to engage more regularly with APRA to monitor the implementation of the strategy,” Ms Rowell wrote.

APRA said its proposals were independent of, but aligned with, the legislative proposals which the government hopes to reintroduce in 2018.

“In considering the final form of the standards being issued for consultation today, APRA will have regard to both feedback from consultation on its own proposals and the final form of any new legislation passed by the parliament,” it said in a statement.

In July, Financial Services Minister Kelly O’Dwyer put trustees on notice that they will face civil penalties for breaches of director duties, be forced to certify every year that they are looking after the financial interests of members and hold annual member meetings as part of government reforms designed to strengthen the governance of Australia’s $2.3 trillion retirement savings system.

The proposed start date for the new prudential measures is January 1, 2019.

Superannuation’s greatest benefits are restricted to industry insiders

The Australian

3 December 2017

Judith Sloan – Contributing Economics Editor

This week in Sydney, the Association of Superannuation Funds of Australia held its national conference. There were nearly 2000 attendees, which tells you a lot.

There is no doubt that superannuation is one of the biggest gravy trains in Australia. With more than $2 trillion under management, the industry supports an army of fund managers, administrators, trustees, lawyers, accountants and executives.

It’s a truly beautiful industry, with guaranteed cashflows coming in like the tide courtesy of the superannuation guarantee charge, now set at 9.5 per cent of earnings. The industry is wont to slap itself on the back. Australia’s superannuation arrangement is among the best in the world, if not the best. Mind you, this assessment tends to be from the point of view of the providers rather than the beneficiaries. But what’s not to love about a privatised industry based on obligatory saving on the part of the vast majority of workers?

There is a lot of ex post rationalisation that goes on about superannuation in Australia, and there was plenty going on at the conference. The reality is that compulsory superannuation began in this country as a result of a high-level industrial relations stitch-up that had nothing to do with rational retirement incomes policy.

In exchange for forgoing a pay rise, workers were awarded 3 per cent of their pay in the form of superannuation. It had always stuck in the craw of then treasurer Paul Keating that only better-paid workers and public servants received the benefit of superannuation while lower-paid blue-collar workers received nothing. In the context of what was a relatively derisory Age Pension, it was not difficult to appreciate his concern. (The Age Pension is now much more generous.)

There was also some economic nonsense put out at the time that superannuation was a means of solving Australia’s saving problem. The Labor government even commissioned a report on the issue by economist Vince FitzGerald. It turned out that in the context of a floating exchange rate, the argument that there was a need for government policy to boost saving (to finance the current account deficit) evaporated. We don’t hear any more about the role of superannuation in promoting saving.

And let’s not forget that while superannuation may promote saving in the form of superannuation, it also can encourage offsetting incentives for people to take out bigger house mortgages than would otherwise be the case, for instance. The argument is that because people know they will receive a hefty lump sum from superannuation on retirement, they can use this, or part of it, to pay down the mortgage. There is clear evidence that more and more people have outstanding mortgages into their 60s. Of course, this
partly undermines the principal purpose of superannuation, which is to fund retirement incomes.

The development of the superannuation industry in this country has been essentially chaotic and ad hoc. Few details were worked out initially, particularly in relation to who would manage the funds, how they would be managed and taxation arrangements.

The union movement clearly saw an alternative business model and pushed the industry super funds to have pole position. This was achieved by virtue of the default fund status given to them in industry awards and enterprise agreements. This protected position continues although self-managed superannuation has eroded their dominance.

The changes that have occurred through the years are almost impossible to track. We have moved from the 3 per cent contribution rate to 9.5 per cent. The industry — as opposed to the members — is desperate to see that figure lifted to 12 per cent, a move that was delayed by Joe Hockey as treasurer. The full 12 per cent is not slated to become compulsory until July 2025.

Aghast at this prospect, ASFA chief executive Martin Fahy told the conference that “all the vocal criticisms of financial services, and within that superannuation, means that superannuation is vulnerable to short-term populist thinking, where somebody would try to appeal to people with an offer to have a sudden increase in take-home pay at the cost of long-term retirement funding. We need to be conscious of that because the 9.5 per cent super guarantee levy won’t get us there. We need to get to 12 per cent.”

This raises the question about where we are going when it comes to superannuation. It was only after more than two decades of compulsory superannuation that the government decided to legislate the purpose of superannuation “to provide income in retirement to substitute or supplement the Age Pension”.
Whether this objective really gets us anyway is unclear because a dollar supplement to the Age Pension would meet the test. The government is forcing people to give up 9.5 per cent of their current pay (and the industry wants this to rise — good luck with that in the context of low wage growth) to provide a potentially meagre supplement to the Age Pension. It is understandable why people may be querying the whole basis of superannuation.

The industry is also frightened at the prospect of being dragged into the banking royal commission. But superannuation is, after all, providing financial services, banks are involved in superannuation and there is even talk of superannuation funds providing debt finance for companies and home buyers. It would be an artificial distinction to exclude the broader superannuation funds from the inquiry.

One useful line of inquiry would be to examine the excessive fees and charges that the superannuation funds impose on members, thereby limiting their final payouts and incomes in retirement. By international standards, these fees and charges remain extremely high even though they have come down slightly with the rise in funds under management.

And let’s not forget superannuation’s role in insurance where members are forced to take out death and disability cover unless they undertake the laborious process of opting out. This arrangement was a clear favour given to the industry by the previous Labor government — thanks, Bill Shorten — but creates a clear distribution of benefits to older, better-paid workers from young, low-paid workers who really don’t need insurance in most cases.

Then there are the complex arrangements in relation to taxation and contribution limits that this government has made much worse. By lowering the concessional contribution cap to $25,000 a year, the proportion of the population who will be totally self-reliant in retirement in the future will probably drop even further from its modest projected figure of 20 per cent.

In combination with other restrictions, superannuation has clearly lost its allure as an investment vehicle for many individuals. And the clear message is that the government is not to be trusted in this area. After all, Financial Services Minister Kelly O’Dwyer, speaking at a previous ASFA conference, described superannuation tax concessions as a gift from the government.

There was a strong message in this statement and it raised fears that future governments would seek to impose higher taxes on present and future superannuation members.

The bottom line is that superannuation in Australia has grown like Topsy but with little rhyme or reason. It’s the best game in town for those who are employed directly or indirectly in the industry, and it’s a great arrangement for trade unions, which continue to haemorrhage paid-up members. Whether it’s a boon to present and retired superannuants is an open question.

(emphasis by Save Our Super)

How to save less and retire seven years earlier

The Australian

2 December 2017

James Gerrard

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(emphasis by Save Our Super)

“The Uncertain Path of Superannuation Reform” by Peter Costello

SuperRatings & Lonsec
Day of Confrontation 2017
Grand Hyatt, Melbourne

12 October 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

I will come back to that in a moment.

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

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

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

Average Retirement Benefits

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What could be done?

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

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

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

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

(c) Private savings.

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

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

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

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

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

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

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

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

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

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

The Concentration in Australian Equity Markets

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

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

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

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

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

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

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

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

Banks never have to fear a flight of Australian investors.

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

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

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

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

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

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

Peter Costello

Former Treasurer of Australia – (1996 – 2007)

In superannuation reform, O’Dwyer must heed Costello

The Australian

17 October 2017

Judith Sloan – Contributing Economics Editor


You’ll have heard that our system of compulsory superannuation is the envy of the world. But dig a little deeper and you’ll discover that the people making this claim are the beneficiaries of the system, rather than the superannuants.

The superannuation funds, the trustees, the fund managers and the workers more generally who are employed in the industry think compulsory superannuation is the bee’s knees. But the reality is that superannuation is a dud product for pretty much every present and past superannuation member and, deep down, the government knows this.

In effect, compulsory superannuation is a tax-gathering mechanism that knocks off many people’s entitlement to the Age Pension, full or part, while forcing them to forgo valuable current consumption — think buying a house, paying school fees, taking a holiday.

It is a form of compulsory saving that is taxed on the way in, taxed while it is earning, and taxed, implicitly or explicitly, on the way out.

We should be clear on one thing: governments should use compulsion as sparingly as possible. Think compulsory vaccination, compulsory schooling, compulsory military service, compulsory helmet-wearing for cyclists. Sometimes these interventions are debatable, and rightly so.

The arguments that were used to justify the introduction of compulsory superannuation were twofold: Australia needed to raise its rate of savings, as well as overcome people’s short-sightedness in order to provide for a comfortable, dignified retirement. The alternative was to compel people to save to achieve this outcome.

The first rationale was quickly discredited and is no longer used as an economic argument. The second line of reasoning has a series of weaknesses, most of which were discussed last week by former treasurer Peter Costello.

Costello, now the chairman of the Future Fund, made the point that the system of compulsory superannuation is reaching maturity but is failing to meet its intended objectives. The present final balances of superannuants are relatively meagre, on average $148,000 for men aged 60 to 64 and $124,000 for women.

He notes that the average balance for men and women is worth “less than the value of six years of the Age Pension”. Nice, but no cigar.

Moreover, 80 per cent of those 65 or older rely on the pension, in full or in part.

And even in the context of a lift in the rate of the superannuation guarantee charge — from the existing 9.5 per cent to 12 per cent, heaven forbid — the rate of reliance on the pension doesn’t change overall, although more retirees will be on part pensions.

But here’s the real kicker. Because of the way the income and earnings tests for the pension work, there is an effective 50 per cent tax rate on higher superannuation balances after a certain point. In other words, for every extra dollar you have in your superannuation account, you lose 50c of income from the pension. This is a shocking deal.

What super amounts to is a compulsion on citizens to knock off their entitlement to the pension while having their contributions and fund earnings taxed in the meantime.

It really is highway robbery — and I haven’t even mentioned the excessive fees and charges by the funds that are part and parcel of the way the system operates.

It gets worse. For citizens whose incomes are high enough potentially for them to become self-funded retirees, this government has decided to increase their tax burden and limit concessional contributions to the point that many will simply give up the quest and shoot for the pension, at least in part. This is seriously dumb.

The package of superannuation taxation measures implemented by Revenue and Financial Services Minister Kelly O’Dwyer is so complex and counter-productive that the likely medium-term outcome is less net revenue (and I’m not even talking here about doing your political base in the eye — which is, of course, seriously stupid).

And don’t you just love this: one law insists that employers must pay 9.5 per cent of a worker’s pay into superannuation and another law insists that the worker must remove any amount above $25,000 a year if the worker’s superannuation balance is high enough.

But the government seems incapable of doing anything about this inconsistency.

Indeed, apart from raising taxes and vastly increasing the regulatory burden on superan­nuation, particularly self-managed superannuation schemes, O’Dwyer has been incapable of effecting any real reform of a system replete with perverse features.

For instance, her effort to achieve a better balance of trustees of superannuation funds, with one-third of directors (including the chair) being independent, has come to nothing. She has been faffing about in relation to what should happen to the default arrangements — these give an egregious leg-up to the union industry super funds. There is a long list of other required changes, including enforcement of the sole purpose test for super funds, but it remains just that — a list.

This is where the importance of Costello’s speech comes in. He is proposing that the Future Fund, or a body similar to it, be used as the destination for default funds, which are the superannuation contributions made on behalf of workers who don’t make an explicit choice.

It is estimated that upwards of 75 per cent of workers who could make a choice don’t. Note, however, that in most enterprise agreements (which cover close to 40 per cent of workers), a single superannuation scheme is generally nominated and it is the one associated with the trade union linked to the workplace. (Kelly, you must outlaw this — put it at the top of your list.)

Let’s be clear, Costello is not proposing the nationalisation of superannuation. Rather, he is saying it would make sense for the default funds to flow to a national investment body — think Canada, Singapore — where the economies of scale and scope can ensure lower fees and charges as well as a global reach of investment. One of the biggest flaws of the investment side of our system is the overweight position of local equities, particularly the big banks.

Sadly, it seems unlikely that our system of compulsory superannuation will be dismantled anytime soon, even though it cheats so many people. In all likelihood it has induced higher levels of household debt as people anticipate being able to use their final superannuation balances to pay down outstanding debts, including mortgages.

The key now is to ensure that the super charge remains where it is (at 9.5 per cent); that we have a better way of directing default funds; and that the raft of other reform measures is acted on — sooner rather than later.

Challenging new estimates on what funds a comfortable retirement

The Australian

14 October 2017

James Gerrard

A new estimate for a comfortable retirement puts the mark at $824,000

How much is enough for a comfortable retirement? The estimates keep climbing higher. The actuarial consultant Accurium Ltd has now lifted its estimate from $702,000 to $824,000, but is this on the mark?

The actuaries argue lower investment returns are here to stay and consequently many SMSF trustees are now further away from achieving their retirement goals than ever before.

So what does a “comfortable” retirement look like?

The Association of Super Funds of Australia says “it enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel”: That’s a pretty thorough definition.

Now, in terms of what it costs to be comfortable, they calculate that if you’re single you’ll need an annual income of $43,695 and for a couple, you’ll need $60,063.

If you have $824,000 at age 65, assuming you can get 7 per cent investment return, that’s enough to get a couple through a comfortable 20-year retirement before depleting super to zero. Coincidentally, the Australian government actuary calculates that the average life expectancy for a 65-year-old is approximately 20 years so that’s all fine if you’re planning to die when the government says you should, but if you plan to bat beyond the averages, you may need to some tricks up your sleeve.

A big ask for anyone

For those who aspire to retire in their fifties, Accurium calculates that you’ll be pushing north of $1.2 million in super to allow this. And if you want it all, that is, to retire in your fifties and live off $100,000 a year, you’ll need to put away $2.6m in super. Putting aside the sheer difficulty of saving $2.6m on most people’s wages, the main problem is that the government will only let you contribute $25,000 a year into super via pre-tax contributions. For a single person to contribute $2.6m using pre-tax contributions, it would take 104 years, which doesn’t leave much time to enjoy retirement.

But coming back to the question posed — or at least prompted by the actuaries — is it possible to have a comfortable retirement with less than $824,000?

Sydney financial planner Peter Lambert thinks so and says there are several things that can help prolong the longevity of our retirement funds.

Centrelink kicks in as your super balance falls. Mr Lambert says “if you own your house and have more than $821,500 in assets, don’t expect anything from the government. However, once you start to dip below this amount in assets, you’re likely to pick up a part Age Pension in addition to the pension concession card, which can cut your expenses by thousands with concessions on medicines, utilities and rates”.

Another factor is the significant difference in outcomes made by small differences in investment returns. On a simplistic level, if one were to invest their whole super in National Australia Bank shares, which pay a grossed-up dividend of 9 per cent, the

$824,000 calculated by Accurium would last 30 years instead of 20. In other words, if you can get a better investment return, you don’t need the $824,000. You could drop your retirement savings goal by $150,000 to $674,000 by making an extra 2 per cent a year from your investments.

The Bureau of Statistics show that 82 per cent of couples over the age of 65 own their house outright. This also gives most retirees flexibility and options to save less for retirement. Effective downsizing can free up hundreds of thousands of dollars. Alternatively, renting a room on Airbnb has become popular for many of my retired clients over recent years and can add hundreds of dollars a week in income. Lastly, some people may opt to take out reverse mortgages or equity-release products to maintain their retirement lifestyle without having to sell their house.

Open doors to income

For those willing to open up their doors to strangers, an extension to the Airbnb strategy means that you can end up making a profit while on holiday. My parents-in-law are spending a month overseas and have rented their house out while away. Even though they are staying in five-star hotels and enjoying the best that Southeast Asia has to offer, they’ve been surprised that the short-term rental income they’re getting on their Sydney home is more than covering their airfares, hotels and spending money. In short, they’re thinking about taking more holidays.

There’s also a growing trend in people working for longer. Workforce participation has doubled over the past 15 years for older Australians, with 12.6 per cent working past the age of 65 and most loving what they do, reducing the amount they will need to accumulate for retirement.

If $2.6m seems like an impossible amount to save, let alone $824,000, by the age of 65, then don’t worry. Although modelling and projections have been conducted to show what lump sum is required to enjoy a comfortable retirement, it’s not the be all and end all.

What the numbers don’t show are the many considerations and options that people have to still enjoy that prized comfortable retirement but with lower amounts of money saved up in super.

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

No more super tax changes, Libs vow

The Australian

26 August 2017

Glenda Korporaal

The federal government would not be making any more changes to the tax treatment of superannuation, the federal Minister for Financial Services, Kelly O’Dwyer, said yesterday.

“The Coalition has done the job that we needed to do on the taxation of superannuation,” she said at a speech to the Tax Institute in Sydney. “The job has been finished and legislated.

“We have no further plans.”

The undertaking paves the way for super to become an issue in the next federal election, with O’Dwyer arguing that the government’s opponents will be the ones promising higher taxes on super.

But there is also expected to be some scepticism about the longevity of the promise, given that former Prime Minister Tony Abbott won the 2013 election with a promise of no unexpected negative changes to super — a promise broken by the Turnbull government in the budget of May 2016.

Changes that came into effect this July have cut the annual contributions that can go into super on a concessional basis from $35,000 to $25,000 a year. The amount that can be put into super on a post- tax basis has been cut from $180,000 to $100,000 a year.

The changes also set a cap of $1.6 million on the amount of money that can go into a super account that is tax-free in retirement mode. The changes have also reduced the attraction of transition-to- retirement plans.

While the tougher measures are estimated to raise some $6 billion a year, the package also included a range of concessions worth some $3bn, including making it easier for people with low super balances to add several years’ worth of “catch up” contributions from next year.

The government also removed the “10 per cent rule”, making it easier for people who work part-time or in small businesses to get a tax deduction for their super contributions.

Ms O’Dwyer’s promises of no further tax changes will be welcome by the industry, which has been complaining that constant tinkering has undermined confidence in the system.

She said the federal government “legislated a comprehensive package of structural reforms to the tax treatment of super to improve the sustainability, flexibility and integrity of the system.

“The measures ensure that superannuation tax concessions are well-targeted and balance the need to encourage people to save to become self-reliant with the need to ensure long-term sustainability.”

She said there would be no more changes to taxation of super but other changes to improve governance were planned.

While the government has claimed the super changes only had a negative effect on a small percentage of people, the extent of the changes provoked strong criticism from some people with larger super balances who had been actively putting substantial sums of money into super ahead of their retirement.

Ms O’Dwyer told The Weekend Australian that future governments might look at the five-year intergenerational reports as a platform to examine the sustainability of the super system.

Ms O’Dwyer said the tax undertaking would “give Australians certainty and the industry stability about the Coalition’s superannuation tax policy”. “It stands in stark contrast to the Labor Party and the Greens, who will slug superannuants significantly more in tax as they prepare for their retirement,” she said.

She said the Greens’ “so-called ‘progressive super’ tax plan” would “seek to extract up to $11bn in extra taxes over four years”.

“Labor have admitted that their superannuation policy will cost superannuants an additional $1.4bn,” she said.

Emphasis added by Save Our Super

[Superannuation] money matters top of mind as Peter Costello contemplates 60

The Age Businessday

27 July 2017

CBD – Colin Kruger

He may be just weeks away from his 60th birthday, but our former treasurer and Nine Entertainment chairman, Peter Costello, showed he still knows how to play an audience at the Financial Services Council Leaders Summit in Sydney.

Actor Rob Carlton joked in his introduction for Costello that our former treasurer is not an Australian citizen. Costello replied that he had always thought he was an Australian citizen, but he looked into it this morning and discovered he was in fact the son of Bill Gates, and he was going to send him a bill.

Gates turns 62 in October and may be better with his arithmetic than the Future Fund chairman. And if he isn’t, well, he better beware given Costello managed to blow our once-in-a-lifetime mining boom with very little to show for it.

Digging into his trove of political anecdotes, Costello mentioned that the bureaucrats originally proposed to call our bank regulator, APRA, the Australian Prudential Regulation Insurance Commission or APRIC.

He asked them how you’d pronounce it, and they said “a prick”. Costello said he didn’t think that was a good idea.

“I don’t miss politics,” Costello said. “The bad thing about politics is you have to spend a lot of time in Canberra and I don’t miss Canberra. Since I’ve left politics, I think I’ve been back to Canberra three times.”

That may explain why the television networks are having so much trouble getting rid of the licence fees. Honestly, what is Nine paying him $425,000 a year for?

And Costello could not resist a swipe at Malcolm Turnbull’s government and its miserly attitude to superannuation reforms, which kicked in from July 1 this year.

“I don’t see what’s wrong with giving people a tax break to put money into super,” he said. “The government gets it back eventually when you take them off the pension, but that theory seems to have fallen out of favour.”

Is the thought of retirement a little closer to home now that someone is about to turn 60?

(Emphasis added by Save Our Super)

Tax experts blast super changes

The Australian

8 August 2017

Pia Akerman | Reporter | Melbourne | @pia_akerman


Psychologist Maureen Burke is one of thousands of Australians upset by changes to the superannuation system. Picture: Lyndon Mechielsen

Tax lawyers, accountants and fin­ancial planners have attacked the government’s changes to superannuation regulations, declaring it a “shemozzle” with widespread confusion about details affecting thousands of people.

Under changes that came into effect on July 1, a $1.6 million transfer cap has been imposed on the total amount of superannuation that can be put into a tax-free retirement phase account.

Any excess funds now need to be put into an accumulation phase fund — where earnings are taxed at 15 per cent — or withdrawn from the super system.

Despite being a key part of the government’s superannuation reforms, details about the balance transfer cap’s application were still being finalised in June, with industry experts voicing frustration about the uncertainty.

The Tax Institute, representing tax professionals, has warned that further sticking points are likely to emerge as a result of the rush to implement the reforms, which were first announced in last year’s federal budget. “Since May 2016, this has been a real debacle,” institute superannuation committee chairman Daniel Butler said.

“The industry is just up in arms about it. It’s proving to be an absolute disaster in practice.”

The government was forced to backflip on its initial plan for a $500,000 “lifetime cap” on non-concessional contributions following uproar from backbench MPs, parts of the super industry and many conservative voters, instead reducing existing annual non-concessional contributions cap from $180,000 a year to $100,000 a year.

Industry bodies told The Australian that although Treasury and the Australian Taxation Office had worked diligently to confer about how the changes would apply, too much reform was implemented too fast.

While the balance transfer cap is the main issue, there is also some confusion around eligibility for one-off capital gains tax relief available for self-managed super funds to partially offset capital gains arising from complying with the $1.6m cap.

Financial Planning Association policy head Ben Marshan described the reforms as “a bit of a shemozzle” with elements of the transfer balance cap still being legislated in the month before it was due to take effect.

“Consumers need to take a good look at their superannuation and make sure it’s in order to make sure they’re not breaching any of these new laws,” he said.

Brisbane psychologist Maureen Burke had to set up a new superannuation accumulation fund because she hit the $1.6m cap after selling her family home and putting the proceeds into super.

Dr Burke, who had planned to retire at the time of the global fin­ancial crisis but kept working part-time to maintain financial security, said she was angry at the cost of seeking financial advice and maintaining another superannuation account.

“Superannuation was to help Australians work towards a self-funded retirement,” she said. “Now they are pulling the rug from under us and accusing us of being tax dodgers. It has eroded any trust and certainty in the system.”

A spokesman for Revenue and Financial Services Minister Kelly O’Dwyer said industry bodies had been regularly consulted since late last year and SMSFs had received some administrative concessions while they adapted to more onerous reporting requirements.

Self-managed Independent Superannuation Funds Association director Duncan Fairw­eather said Ms O’Dwyer had rejected the association’s earlier request for an amnesty period to the end of 2017.

Budget 2017: Coalition is ‘wrecking’ public trust in super system

The Australian

11 May 2017

Pia Ackerman

The Turnbull government has “wrecked” Australians’ trust in superannuation, with changes announced in the budget failing to restore faith in it or in the responsible minister Kelly O’Dwyer, according to a group targeting the Victorian frontbencher.

Melbourne QC Jack Hammond, who founded the Save Our Super group in response to super changes last year, said the new tax on the major banks’ profits would flow to customers who also faced uncertainty over super conditions.

“Banks will pass back to whoever they can,” he said. “Any cost to any business always runs the risk of going back to the customers. Eventually it will be felt by the community at large.”

A proposal to allow $300,000 from the sale of a family home to be shifted tax-free into superannuation, ostensibly lifting the super balance cap from $1.6 million to

$1.9m, needed further clarity.

“The trust and certainty that was present in superannuation has been wrecked by this government,” Mr Hammond said. “This just further complicates it.’’

Save Our Super has attracted mostly Liberal voters outraged by the super changes, with many living in Ms O’Dwyer’s seat of Higgins in Melbourne’s inner south- eastern suburbs. Ms O’Dwyer, the Revenue and Financial Services Minister, is on maternity leave.

Mr Hammond said the budget had not addressed the group’s concerns about superannuation.

“There is no evidence that Kelly has sought or succeeded in making any changes which many of her constituents would like to see,” he said. “Who would now put any money into superannuation with any sense of security that the rules when you’re putting it in now will be the same in 10, 20, 30, 40 years when you’re pulling it out?”

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