Category: Features

Hume shoots down ‘retiree tax’ budget pitches

The Australian Financial Review

12 February 2021

Ronald Mizen

Proposals to tax retiree savings to pay for aged-care services and remove tax concessions for balances over $5 million have been shot down by the Morrison government, with Superannuation Minister Jane Hume saying she did not plan to introduce more taxes.

Speaking at an Association of Superannuation Funds of Australia conference on Friday, Senator Hume rejected the two proposals put forward by ASFA and the Australian Council of Social Services.

“We have no intention of burdening Australians with a retiree tax,” she said.

In a pointed critique of opponents of the government’s suite of changes to the $2.9 trillion superannuation sector, Senator Hume also said the retirement income system was not perfect and should not be mythologised.

And in a thinly veiled swipe at former prime minister Paul Keating, Senator Hume said the debate about super had been treated as an opportunity to shout about philosophy or legacy rather than the merits of reform.

“Every single reform we have proposed has been met with resistance,” she said. “Indeed, superannuation has proven to be the most frustratingly partisan sector of financial services.”

Earlier in the conference, Mr Keating slammed the Morrison government and Treasury for an “anti-super” bias and said the Reserve Bank was in cahoots with Liberal backbenchers.

The government faces a two-front battle over super: the first, whether to increase the contribution rate; and the second over new “your future, your super” legislation containing sweeping industry reforms.

Industry Super Australia, the lobby group for the union-linked super sector, has been a vocal opponent of the reform package and proponent of proceeding with the increase SG rate from 9.5 per cent to 12 per cent.

Senator Hume said Labor had a right to be proud of the compulsory superannuation system, but it was giving vested interests a platform to oppose sensible reforms that were in members’ interests.

“We’ve seen in numerous examples over recent years, too often, the super industry’s lobbyist leviathan has spoken with a megaphone on the floor of our Parliament in opposing efficiency reforms,” she said.

“Having seen behind the curtain, and worked in multiple sides of the industry, I’ve come into the Parliament as a strong supporter of compulsory super, but someone not blind to its faults.”

Also at the conference, prudential regulator chairwoman Helen Rowell called for fund trustees to make the hard but necessary decisions about mergers and acquisitions and call out poorly performing players.

Ms Rowell said it was the Australian Prudential and Regulation Authority’s position that fund trustees had a responsibility to look broadly at what was in the best interests of the sector as well as of members.

“You all know who the poorly governed, poorly performing funds are that are making poor decisions, and so what is it that the industry can do about that, for example, so that we don’t [have to]?” she said.

“But also just acknowledging the issue more publicly, and that it is needing to be tackled and helping us in our work in cleaning the industry up and getting improvements made.”

Problem is the tax on our super is too high

The Australian

Henry Ergas and Jonathan Pincus

12 February 2021

Released by the Treasurer in the midst of the pandemic, the report of the Retirement Income Review has received far less attention than it deserves. While the report covers a great deal of ground, it is disappointing and dangerous in important respects.

To begin with, its discussion of the tax burden on superannuation — which endorses Treasury’s claim that superannuation receives highly favourable tax treatment — is seriously misleading. As a moment’s reflection shows, the primary impact of taxes on savings is to alter how much consumption one must give up today so as to consume more tomorrow. The proper way to calculate the effective tax rate on savings is therefore to assess the impost savers face for deferring a dollar of consumption from the present into the future.

Examined in that perspective, the tax rates on compulsory superannuation are nowhere near as generous as the report suggests. Consider a person who earns $50,000 a year and is planning to retire in 20 years. As things stand, she will be required to put $4750 into superannuation this year, paying a 15 per cent contributions tax on that amount. If her fund earns 3.5 per cent a year — also taxed at 15 per cent — those savings will grow to $7300, spendable in 2041.

However, in the absence of taxes on contributions and on earnings, steady compounding would have increased today’s $4750 to about $9500. As a result, the actual tax rate, which reduces $9500 to $7300, is not the notional or statutory 15 per cent but, at 30 per cent, twice that.

Moreover, every dollar of superannuation reduces our saver’s entitlement to the Age Pension and to aged-care subsidies. And just as marginal effective tax rates on an additional dollar of income from working are properly calculated taking reductions in transfer payments into account, so must the reductions in eligibility be included in the effective tax rate on superannuation.

Factoring the means testing of those payments into the calculation pushes the effective tax rate on compulsory superannuation towards 40 per cent or more, which no one could sensibly describe as unduly low.

Unfortunately, none of this is reflected in the report. Instead, it simply assumes that superannuation savings should be taxed as if they were ordinary income and on that basis asserts that they benefit from a massive tax “concession”.

Perhaps because it doesn’t realise it, the report seems untroubled by the fact that were compulsory superannuation actually taxed on the basis of its chosen benchmark — a comprehensive income tax — our hypothetical saver would face a 93 per cent effective tax rate on her retirement income.

Given how distorting, unreasonable and politically unsustainable such a tax rate would be, its use as the standard for evaluating the current arrangements is indefensible.

The errors in the report’s tax analysis don’t end there — its discussion of dividend imputation is also deeply flawed.

What is significant, however, is the unstated inference its analysis leads to: that superannuation savings are so heavily subsidised as to real­ly be the property of taxpayers as a whole, making it perfectly appropriate for the government, rather than savers themselves, to determine their use.

That matters because the report repeatedly claims that superannuants do not spend their savings “efficiently”. Precisely what it means by “efficient” is never explained; it can nonetheless be said with some confidence that it is using the word in a sense entirely unknown to economics.

Rather, the report treats “efficient” as a synonym for “what we, the reviewers, think ought to happen” — or to put it slightly differently, as what Kenneth Minogue, a fine scholar of government verbiage, called a “hurrah word”, with “inefficient” being the corresponding “boo/hiss word”.

In this case, the “hurrah” goes to savers who completely run down their savings; the “boo/hiss” to savers who leave bequests. It is, in the report’s strange reasoning, “efficient” for retirees to devote their savings to wine, gambling and song, but “inefficient” for them to leave an inheritance to their children and grandchildren, no matter how great their preference for the latter over the former may be.

That the contention is absurd on its face scarcely needs to be said; the only justification the report provides in its support is the claim that it is not the “purpose” of the system to allow savers to leave bequests — which is merely a convoluted way of saying that the report’s authors don’t believe they should.

We are therefore left with a paradox. The reason repeatedly advanced for compulsory superannuation is that people of working age save much less for retirement than they ought to; now we are told that at retirement the bias is dramatically reversed — from then on, it seems, they save much more than would be desirable.

Quite how or why this miraculous transformation occurs is clearly a mystery that can be penetrated only by greater minds than ours; what is certain is that savers shouldn’t rest easy.

On the contrary, they should feel government coercion coming on: more specifically, a requirement to buy annuities or in other ways exhaust their savings, regardless of their preferences — or be driven to do so by some combination of higher taxes on any remaining savings and harsher means testing of social benefits.

Of course, it may be that the review is right: perhaps savers are utterly clueless, as one government report after the other appears to believe, and thus have to be forced to act “efficiently” by layer upon layer of regulation.

But if savers neither know what they want nor are capable of achieving it, what possible justification can there be for continuing to rely on a super­annuation system based on individual decision-making — and every bit as important, in which individuals bear all the risks?

Why wouldn’t we simply shift over time to a government-run contributory pension scheme, possibly along Canadian or Scandinavian lines, that provides middle-income earners with an assured income in retirement — and does so fiscally prudently and at resource costs far lower than those of our current arrangements?

Or has it become the real goal of our superannuation system to force middle-income earners, who depend on that system most heavily, to subsidise an ever-expanding finance industry — including, should this review have its way, the suppliers of high-priced annuities?

These are serious issues; they merit serious analysis. If the government is genuinely interested in that analysis, the Retirement Income Review won’t help it.

Call for $5m cap on super balances

The Australian

Glenda Korporaal – Associate Editor (Business)

10 February 2021

The Association of Superannuation Funds of Australia has called for a $5m cap on the amount of money that can be saved in superannuation, with retirees being forced to withdraw funds above $5m.

In its pre-budget submission, which comes ahead of its annual conference on Wednesday, the association argues that $5m is more than enough to allow ­people to live a comfortable life in retirement.

It argues that people over 65 should be forced to withdraw any amounts in super above $5m, from July next year.

ASFA chief executive Martin Fahy said last year’s Retirement Income Review had highlighted the inequities in the superannuation system, with the largest benefits in terms of tax concessions going to people on high incomes or with large super accounts.

“There is a very strong justification to discontinue the tax concessions that those with very high balances are getting,” Mr Fahy told The Australianon Tuesday.

The Retirement Income Review found there were 11,000 ­people in Australia who had super balances of more than $5m.

ASFA argues that a balance of $5m in concessionally taxed superannuation “cannot reasonably be justified as necessary to support a comfortable lifestyle in retirement”.

The submission also argues that the low income tax offset should be expanded to apply to people earning up to $45,000 a year — up from the current level of $37,000 a year.

It says this is needed to ensure they are treated equitably and do not pay more in terms of tax on their super contributions than the tax rate on their income.

“While the superannuation system is well designed and working for the majority of Australians, ASFA acknowledges there is merit in addressing a number of the concerns highlighted in the RIR about fairness in the system in regard to individuals with high incomes and/or relatively high account balances,” it says. “Superannuation is about ensuring ­people are comfortable in retirement, it is not about excessive wealth transfers.”

But it says it is also “crucial to ensure that superannuation is ­delivering for low to middle income earners”.

The earnings from money in superannuation are taxed at 15 per cent for accounts in the accumulation mode. Once the fund is paying out pensions, the earnings from the fund are tax-free for amounts below the $1.6m transfer balance cap.

While the transfer balance caps limit the amount of money a member can put into pension phase, where earnings are tax-free, the ASFA submission argues that the current system means people on 45 per cent tax rates can have money above the $1.6m transfer balance cap in super taxed at 15 per cent — a 30 per cent tax rate advantage.

“This tax concession can be substantial for large accounts,” it says. “While current caps on superannuation contributions limit the ability for members to build up excessive balances in the future, there is a real question regarding the appropriate treatment of high balances achieved in the context of more generous contribution caps in the past.”

The submission argues that people should be forced to withdraw funds above $5m from super once they reach 65.

The recommendation comes after other superannuation lobby groups have argued against major changes to superannuation tax concessions on the basis that constant change will undermine confidence in the system.

The ASFA submission concedes that the need to remove “excess balances” from super funds could have some liquidity implications for some small super funds, especially those with illiquid assets such as property.

It says this could be addressed by allowing a transitional situation for small or self-managed super funds that could see earnings from balances above $5m taxed at the top marginal tax rate.

ASFA is also recommending that the current $1.6m transfer balance cap not be indexed as currently planned.

Rising tensions plague some retirees

The Australian Business Review

Robert Gottliebsen – Business Columnist

9 February 2021

Many sectors of Australia’s retirees are now enjoying the prosperity that comes from higher sharemarkets and property markets.

But two groups are encountering new levels of tension. The first are those who own a dwelling but have most of their money in the bank. Their wealth is rising but they are becoming income-poor.

The second agitated group are holders of large superannuation balances who are suddenly being declared by young people as “spongers on the system” and “rent-seekers”.

I have encouraging news for both groups.

As people get older they often embrace more conservative investment policies and the bank deposit content of their portfolio rises. In previous years, bank deposits earned reasonable rates of interest, but today there is not much income difference between depositing your money in a bank and putting it under the bed. Banks are merely offering a safe place to store your money.

And so while the wealth of many Australians is rising with the value of their houses, their non-government pension income is falling. Their bank money hits their government pension entitlement and they have less income when their cost of living is rising faster than the CPI, given the high medical content.

There are a number of home loan products on the market, but one that is not often considered is the “Government Pension Loan Scheme”, which dates back to the Keating era but has fallen into disuse. Only about 3000 people took it up last year.

What the government is prepared to do is lend people starting in their 50s — but especially 70-year-olds and above — amounts of money that are not limited by your assets or income. The loans are secured on real estate, usually the family home. They are delivered fortnightly and the amount that is allowed is capped at 1.5 times the aged pension. The percentage of the value of a house that can be borrowed depends on people’s age. It gets very high in the nineties.

The loans are repaid when the family home is sold. While that does lessen later flexibility, many older people who are reluctant to borrow on their house are living in virtual poverty despite their wealth. A clear weakness in the loan scheme is the interest rate has not been adjusted to today’s world and is still 4.5 per cent, but my guess is that before the year is out it will be reduced.

A large number of people have seen a 10-20 per cent rise in the value of their dwelling in recent times. The government scheme supplements income but it does mean that there is less money for children to inherit. But I think it’s reasonable that some of the wealth that is being created in the housing boom is shifted into older people’s living standards.

Big super balances

The second group are in an entirely different situation.

Over a period of years there has been a switch in attitudes to the large amounts of superannuation held by older people. For a long time superannuation rules encouraged people to invest large sums in superannuation. This ALP and Coalition government policy deliberately created some very large superannuation balances, which are very difficult to achieve under today’s rules. The policy of maximising the amount of money people held in superannuation continued right through the Abbott/ Turnbull Coalition years.

Indeed, one of the most successful policies to retain the large superannuation sums was a Coalition government brainchild to freeze many superannuation plans issued prior to 2006-07, and allow the frozen money to be released via retaining large superannuation balances.

The Coalition’s policy was therefore to encourage people to use their personal money and leave large sums in super. That’s not today’s agenda, so one of the controversies in superannuation is how much people should withdraw in their 60s and 70s.

Current Superannuation Minister Jane Hume thinks that not enough money is being withdrawn and people’s living standards are suffering.

While this is might be true, many people are nervous about the amount of money they will need in their 80s given the rising costs of medicine, etc. And of course people in their 80s and 90s are required to take large sums out of superannuation. The level of under-withdrawal of superannuation money by people under 80 depends on what graph you look at. If all superannuation is counted, including zero balances, it is clear that people do withdraw their money. But if you take out the zero balances then there is a conservative rate of withdrawal in the 60s and 70s.

It’s important for the government to honour its election promises and not make major changes in this area — especially given its recent policies to actively incentivise the retention of large sums in superannuation.

But on an overall community basis, people have the fitness to spend money on travelling and other areas in their 60s and 70s, which they might not have in their 80s and beyond.

APRA heat maps put performance of super funds under spotlight

The Australian Business Review

16 December 2020

Glenda Korporaal – Associate Editor (Business)

The federal government’s push for more mergers in the superannuation industry and weeding out underperforming funds takes another step forward this week, with the release of the second annual “heat map” on performance by the Australian Prudential Regulation Authority.

Friday’s announcement will focus on the $750bn MySuper sector with the release of the latest heat maps, which will assess more than 80 MySuper funds by their investment performance, fees and “sustainability” for the financial year to the end of June.

This week will be the second year in which APRA has released the so-called heat maps (which colour-code funds in terms of how good or bad they have ranked) in the three areas.

More specifically, the maps will cover a fund’s investment performance over three and five years, administration and total fees and a fund’s sustainability, including net cashflow.

There is also speculation that APRA might include other measures of investment performance, possibly to support the proposed eight-year performance metric to be used in the upcoming Your Future, Your Super comparison tool announced in the October budget.

Rice Warner superannuation specialist Steve Freeborn says the new heat map details will reflect funds’ investment performance that includes the first months of COVID-19, when markets suffered a sharp downturn before recovering.

They could also provide insight into whether funds have been able to reduce their fees in the year since the last heat maps.

Rice Warner has observed that a number of funds that were highlighted as having relatively high fees in last year’s heat map have undertaken reviews of fees.

But as they have only implemented them after June 30, changes will not be reflected in the latest heat map results.

A number of other larger funds, Freeborn notes, have continued to promote the benefits of their scale and cut their fees, particularly their MySuper investment fees.

In theory, heat maps are supposed to provide guidance to super fund trustees on how their funds are performing relative to other funds in the market.

Together with member outcome statements that need to be produced by super funds, they are supposed to provide the basis for conversations between APRA and the funds over their relative performance.

But critics argue that the maps provide no accountability for risk.

A fund could achieve good returns in one year, with some risky investments in a rising sharemarket, while other investors may decide to opt for lower performance but ones that make safer investment bets.

Higher returns can be correlated with higher risk (think bitcoin), which is not something that all super fund members wish to bear.

The now annual APRA heat maps are just the start of the super fund battle ground between the industry and regulators of the $2.9 trillion super sector.

The first few months of next year will see if the federal government decides to move to overturn legislation that would result in the compulsory superannuation guarantee levy rising from 9.5 per cent to 10 per cent in July.

The Morrison government has paved the way for an argument against it, on the grounds that it could cost workers wage rises that are better off in their own hands than locked up in super savings.

But there is also a realisation that despite the relief-driven optimism of the closing months of 2020 as Australian borders open up, 2021 is not going to see wage increases for many workers.

The argument now gaining ground, particularly with the union movement, is that it’s better to see a 0.5 per cent guaranteed increase in super contributions than no wage increase at all next year.

While the super levy has stayed steady at 9.5 per cent for the past few years, it has not been accompanied by rising wages.

The Morrison government is not an enthusiast for compulsory super, but the fact that the increase is already legislated could make it hard to stop the rise to 10 per cent in July.

But it could well move later to overturn the subsequent stepped rises to 12 per cent by 2025.

The May budget is also shaping up as another test of the Morrison government’s views on super.

After a drain of almost $40bn in early access to super allowed because of COVID-19, there is a concern that the budget could allow early access to super for deposits for first-home buyers.

But such a move would not do much for housing affordability and risks undermining the concept of super as a compulsory savings system that needs to be preserved until retirement.

Next year will also see more detail on the federal government’s push for more aggressive comparisons of super fund performance.

The government announced a package of changes to super in the October budget designed to improve the efficiency of the sector and provide consumers with more transparency to be able to compare fund performance.

Under the changes outlined in the budget, super funds will need to compare their investment performances against certain announced benchmarks, depending on which sector they invest in. The comparisons will need to be made over an eight-year period.

Funds that underperform their constructed benchmark by more than 50 basis points will need to write to members and tell them of their “underperformance”.

If they underperform for two years in a row they can be blocked by APRA from accepting new members into their default My­Super product.

While the move is aimed at discouraging underperforming super funds, the details have prompted criticism from fund managers, who argue that they will encourage super fund trustees to take safe bets and follow an index rather than take risks with a goal of achieving better performance over the longer term.

The new legislation to bring in these comparisons is still in the consultation phase, but is set to come into force from July 1.

The early access to super and some falls in financial markets have seen the first annual fall in super fund assets this year, after decades of continuous growth.

The latest figures released by APRA show super fund assets of $2.9 trillion at the end of the September 2020 quarter, a 1.6 per cent fall over the year.

The figures show it was the low-budget MySuper sector that has been most affected by early-access withdrawals.

Total assets in MySuper products totalled $754bn at the end of the September 2020 quarter — a 3.3 per cent fall in total assets in this sector over the prior year.

The MySuper heat maps will reflect a volatile investment markets in the six months to the end of June.

The latest APRA figures show super fund investment earnings were positive in the September 2020 quarter, at 1.9 per cent on average for funds, following a 6 per cent increase in the June quarter.

This has helped the recovery from the negative 10.3 per cent average return in the March quarter.

Just how each MySuper fund has performed amid this volatility will be under the spotlight this week, setting the scene for ongoing debates between government, regulators and the industry.

Commonwealth Budget 2020-2021 Superannuation Announcements

On 6 October 2020, Treasurer Josh Frydenberg delivered the Commonwealth 2020-2021 Budget.

For the superannuation announcements please click on the following links:

https://budget.gov.au/2020-21/content/factsheets/download/your_future_your_super_factsheet.pdf

https://treasury.gov.au/sites/default/files/2020-10/p2020-super_0.pdf

https://treasury.gov.au/publication/p2020-super

Boomer incomes fall as younger generations enjoy benefits surge

The Weekend Australian

1-2 August 2020

Patrick Commins – Economics Correspondent

Baby boomers are alone among the generations to suffer a fall in income through the COVID-19 crisis, according to Commonwealth Bank analysis of three million households who bank with the lender.

The unprecedented level of government support in response to COVID-19 and the massive take-up of the early access to super schemes boosted average household income overall by 4.2 per cent over the year to the June quarter, the research shows.

Salary income dropped 6.6 per cent on average as the health crisis put hundreds of thousands of Australians out of work. But a 54 per cent surge in average incomes from government benefits versus a year ­earlier, and a 64 per cent jump in “investment income” — which captures payments from the first withdrawal of up to $10,000 from super under the special early-­release scheme — has led to what CBA senior economist Kristina Clifton called a “positive income shock”.

Still, spending was down close to 9 per cent in the June quarter from a year before as households hunkered down amid the first ­recession in close to three decades.

“We can see that on average people are saving a lot of money at the moment,” Ms Clifton said.

While the average income among the three million households has climbed, a breakdown by generation reveals that ­boomer households have on ­average experienced a 1.4 per cent drop. Meanwhile, the two youngest cohorts — Generation Z and millennials — enjoyed the biggest increases, at 8.9 per cent and 6.7 per cent respectively. The ­average income among Generation X households climbed 3.2 per cent over the year to the June quarter, while older Australians had an ­increase of 2.8 per cent.

Ms Clifton said boomers had not received as much of the emergency government support packages. Nor had they made as much use of the special rules allowing early access to their retirement savings.

The bank’s data showed a 50 per cent average surge in government benefits across households, but boomers had received a comparatively lower 24 per cent boost. The three younger generations received in the order of 40 per cent more from the government in over the three months to June versus the same period a year before.

And while the overall average household’s level of spending fell substantially from last year to this, Gen Z spent nearly 4 per cent more, and millennials an extra 1 per cent. Last week Treasury ­released figures suggesting part-time and casual workers on the $1500 JobKeeper payment were being paid in aggregate $6bn more than they were earning ­before the crisis.

Retirees warn of hit to their incomes worth tens of billions of dollars

13 June 2020

Sydney Morning Herald

Shane Wright – Senior economics correspondent for The Age and The Sydney Morning Herald.

Retirees are facing a massive hit to more than $100 billion worth of vital income streams as the coronavirus pandemic crushes their superannuation, personal savings and share dividends.

Older Australians say the retirement system is in crisis and leaving them financially vulnerable, forcing them to call on the Morrison government to consider changes in areas such as the age pension, deeming rates and access to the Commonwealth Seniors Health Card.

The Alliance for a Fairer Retirement System, representing millions of retirees and older investors, has written to key finance and welfare ministers urging reforms including to measures previously introduced to take pressure off the federal budget.

In the letter, obtained by The Sun-Herald and The Sunday Age, the alliance says the coronavirus pandemic has dramatically hit retirees dependent on investment income to such an extent it now put the nation’s economic recovery at risk.

“Retiree spending, and willingness to spend, will have critical impacts on the economy in any post-stimulus recovery phase,” the alliance said.

“However, under the current market conditions, there is a risk older Australians will further withdraw from the economy, slowing the recovery. Retirees are unlikely to have the confidence to spend if they continue to face significant impacts on their income.”

Retirees are facing a string of inter-related hits to their finances. Company dividends are being slashed by many listed firms in a development that JPMorgan estimates will cut income to investors by $68 billion in 2020.

Falling interest rates, while beneficial to those with mortgages, are leaving people dependent on their savings cash-strapped.

Interest rates on savings and term deposits continue to fall. In the past week, the average rate on a five-year term deposit edged down to a fresh record low of 1.09 per cent.

On a one-year term deposit, the average interest rate fell a quarter of a percentage point last week to a record low of 1.2 per cent.

Income from rental properties have also collapsed with many tenants unable to cover their rent.

The alliance said it all meant many retired Australians’ incomes were being stripped away by the impact of the coronavirus and the situation “could extend for years”.

The government has already reduced the deeming rates – the assumed rate of return made on investments that affects the pension income test – due to the fall in global interest rates caused by central banks trying to protect their economies from the pandemic.

But the alliance wants the government to go further, starting with another cut in the deeming rate.

It also wants an automatic revaluation of assets used by Centrelink to determine the pension accessibility for retirees, arguing the last revaluation was done at the peak of the share market before the start of the pandemic.

The alliance has also called for the government to re-think the taper rate changes it introduced in 2017 that helped save billions in pension payments. The alliance says those changes now mean that couples who may have almost $900,000 in assets are up to $1000 a month worse off in income compared to a couple with $450,000 in assets.

While people of retirement age are entitled to the Commonwealth Seniors Health Card if they have an income of less than $55,808, the alliance argues many self-funded retirees are unaware of their eligibility to the scheme. It wants all retirees to have access to the card and for the government to promote its availability.

The federal government is nearing the end of a review of the retirement income system, prompted by a Productivity Commission review of the superannuation sector, although its reporting date has been pushed back to July 24 due to the pandemic’s impact on agencies.

SMSFs suffer $70bn hit in virus shock

The Australian Business Review

27 May 2020

Gerard Cockburn – Business Reporter

Self-managed super funds suffered a $70bn hit from the market turmoil in the March quarter, putting further strain on the retirement savings of investors already battling a crash in interest rates and a rental freeze.

New figures released by financial regulator APRA outline the damage to superannuation with nearly $230bn sliced from to the nation’s super pool, putting the sector back 12 months in total assets under management.

Industry funds, which are generally more exposed to infrastructure, suffered a $54bn hit to asset values in the three months to the end of March, while retail super funds with their higher exposure to riskier assets such as shares were savaged with an $80bn drop in asset values.

But SMSF investors, who generally are exposed to property, shares and cash, suffered the worst hit since the global financial crisis with total assets falling by 9.4 per cent in the March quarter.

The global meltdown in markets triggered an aggressive policy response from central banks around the world, slashing already rock bottom interest rates to new lows.

APRA’s latest figures show the country’s $3 trillion superannuation industry contracted 7.7 per cent, with $227.8bn being lost over the March quarter.

The figures don’t capture the federal government’s early withdrawal of super scheme, which allows Australians to access up to $10,000 both this financial year and the next.

Industry funds are expected to see an additional outflow of funds into the June quarter.

National Senior Australia chief advocate Ian Henschke, said self-funded retirees were still coming to terms with the economic shocks sparked by COVID-19, with some members only just recovering from losses incurred during the global financial crisis.

“They (self-funded retirees) feel they are being forgotten and must simply accept this,” Mr Henschke said.

“They are not necessarily wealthy, but receive little or no assistance and despite the huge hit to their income are not eligible for the pension because their asset values have changed little so far.”

Mr Henschke noted some SMSF retirees were being forced to sell shares at low prices just to supplement foregone income — including relief on rental properties — further diminishing the size of their portfolios.

SMSF Association policy manager Franco Morelli said APRA’s figures were lower than expected within the industry, which had estimated the hit to the sector could see assets fall by as much as 30 per cent.

“The next quarter up to June will be interesting, as there is so much uncertainty,” Mr Morelli said.

However, he said the SMSF sector could react quicker to rebalance than other sectors. “We have a much larger cohort of individuals allocated to more liquid funds,” Mr Morelli said.

The halving of the pension drawdown rate by the federal government in March has helped self-funded retirees to top up their pension.

Total superannuation assets at the end of the March quarter stood at $2.73 trillion — nearly twice the nation’s economic output.

Public sector funds were the relative best performers during the March quarter with total assets falling just under $10bn to $523.6bn.

Industry funds make up the single biggest sector with $717bn under management, while the collective assets held by SMSFs fell back to $675.6bn. Retail funds totalled $558bn at the end of March.

Superannuation contributions rose 6.9 per cent to $121.1bn compared to the same quarter in the previous year, while the total paid in benefits was $85.8bn, a rise of 14.5 per cent.

Net inflow of funds compared to March last year increased by 27.7 per cent to $45.4bn.

Self-managed Independent Superannuation Funds Association managing director Michael Lorimer said the impacts to financial markets were experienced at the tail end of the quarter. He said APRA’s next round of data would likely show some signs of recovery, as market performance had started to rebound.

Retirees facing financial as well as health risks in coronavirus pandemic

The Australian

21 May 2020

Peter Van Onselen

Spare a thought for self-funded retirees in these difficult times. Not only are they in the age bracket most at risk from the virus, but their financial wellbeing in retirement is being put at substantial risk.

The collapse in the stock market, including among most blue chip stocks, is just the start of their financial pain. These big businesses, even if they survive, aren’t likely to pay out the dividends they once did for years to come, if ever.

The financial plans of self-funded retirees are built around dividend projections which therefore no longer apply, and with interest rates so low its not as though they can simply transfer their saving into cash accounts and do any better.

The RBA cash rate is at a record low.

The difficulties self-funded retirees face in low interest rate environments is the flip side to the benefits those of us with homes loans get from lower rates for borrowing.

Lower interest rates has become a way of life, but the prospects of rates surging north again anytime soon seems unlikely. Even if it does happen, it will only be in conjunction with inflation, which erodes spending power at the same time.

On the policy front, there isn’t much there for self-funded retirees to cushion the blow. While Jobseeker and JobKeeper are doling out tens of billions of taxpayers dollars to keep working age Australians in jobs or at least above the poverty line, self-funded retirees are getting no such support.

Even pensioners have received a boost to their pensions to help them get through these tough times. But the self-funded retirees who voted en-masse against Bill Shorten and his franking credits policy have become the forgotten people among Coalition supporters.

Their loyalty hasn’t translated into being looked after now. And because Labor is still licking its wounds from last year’s May election defeat, it hasn’t exactly been inclined to highlight their plight and put pressure on the government to do something to help this large voting cohort.

Rather, Labor has focused its attention on the plight of many casuals who are missing out on JobKeeper, and the university sector which isn’t eligible for the payments. Or childcare users who would benefit from free childcare continuing for longer. Or workers for foreign companies ineligible for JobKeeper. Or indeed anyone who might benefit from Newstart not returning to the low levels it was pegged at previously.

What about self-funded retirees? They truly are the forgotten people in this crisis. Taken for granted by a government that would not have won the last election had it not been for their support. Forgotten by an opposition that has written them off politically.

While I have long been critical of the unsustainable tax breaks for many older Australians, especially those with very large savings, the self-funded retirees who only just miss out on a part pension and concession card benefits are the ones caught in the middle right now.

As Ian Henschke from National Seniors has pointed out, some self-funded retirees — because of this crisis — are now drawing on an annual payout from their investments lower than the annual pension. To survive they would need to draw down their savings right at a time when their value has been halved. He wants to see discussion about legislating a universal pension in the wake of this crisis to ensure that can’t happen.

Whether that is a long-term solution or not is debatable — indeed whether it is fiscally viable is highly debatable. But there is little doubt this cohort of senior Australians deserves more than the cold shoulder.

Especially from a Coalition government.

Peter van Onselen is a professor of politics and public policy at the University of Western Australia and Griffith University.

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