The Australian

28 October 2021

Patrick Commins – Economics Correspondent

Five of the 13 super funds that failed this year’s inaugural ­investment performance test are actively looking to merge with other funds, APRA has said.

The Australian Prudential Regulation Authority chairman Wayne Byres told a Senate estimates committee hearing on Thursday that “the trustees of those 13 products now face an important choice: they can ­urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes for their members”.

APRA figures from August 31 show there were one million members in the 13 super funds that failed the performance test, with assets totalling $56bn.

The trustees of the failed products included some big names, including Colonial First State and Asgard, alongside ­others such as Maritime Super and Christian Super.

The 80 MySuper products that were subject to the test represented 134 million members, with a combined $844bn in ­assets under management.

Recently appointed APRA member Margaret Cole said the actions the regulator was taking in regards to funds that flunked the test were “intensified supervisory activity and a great deal of contact with those trustees of those failed funds”.

Ms Cole said APRA had ­already received or expected to receive shortly “contingency plans” that would show how the trustees planned to improve their investment performance and pass next year’s test.

The Your Future, Your Super reforms, which kicked off on July 1, require APRA to conduct an annual performance test for ­MySuper products, which are also ranked via an online tool ­offered by the Australian Taxation Office.

From July 1, 2017, all member accounts in default investment options have been required to be invested in MySuper products, which are now subject to annual performance tests and ranked online. A fund that fails the performance test in two consecutive years is not able to take on new members, and will not be able to reopen to new members until their performance improves.

Ms Cole said the “biggest lever” trustees could pull to ­improve their performance would be to reduce fees – a key objective of the YFYS legislation.

Superannuation Minister Jane Hume noted that since the Morrison government introduced the reforms, 37 of 81 MySuper funds had cut their fees.

Ms Cole said “where it ­appears there will be difficulty passing next year’s test”, the regulator was pushing trustees to make an “appropriate” merger.

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.

The Australian

27 January 2020

Glenda Korporaal – Associate Editor (Business)

The Save Our Super lobby group has called on the federal government to grandfather any future negative changes to superannuation and abolish the $1.6m cap on the amount of money that can go into tax-free super retirement accounts.

In its submission to the federal government inquiry into retirement incomes, Save Our Super argues that the fall in interest rates since the 2016 budget has significantly reduced the income retirees can earn from savings since the $1.6m transfer cap was announced.

The submission argues that the cap, which was announced as part of a broad package of changes, including cuts to super contribution limits, should be either abolished or raised.

“The interest earnings from $1.6m is now almost 40 per cent lower than it was in early 2016,” the submission says.

“With the continuing drift of interest rates towards zero, whatever unexplained calculations arrived in 2016 at the $1.6m on the superannuation in retirement phase should be re-examined with a view to grandfathering the cap, raising it or abolishing it.”

Save Our Super was set up to lobby against the 2016 budget changes to super by a group including retired Melbourne QC Jack Hammond.

The organisation has consistently argued that it is a basic principle of the Australian taxation system that there should be no negative retrospective changes to tax and superannuation.

The 2106 changes were announced after the Tony Abbott-led Coalition went to the polls in the election of September 2013 promising not to make any negative changes to super during the first term of its government.

The Save Our Super submission argues any future negative changes to super must be grandfathered so that “those people who committed in good faith to lawfully build their life savings are not blindsided by policy changes with effectively retrospective effects”.

“Citizens need assuring that any future changes in policy will not have any significantly adverse effects on lawful prior savings,” it says.

Federal Treasurer Josh Frydenberg announced a review of retirement incomes policy last September.

The review is expected to report in June this year.

The SOS submission argues that the current compulsory super system should be recognised as a success in encouraging saving for retirement in Australia and reducing the number of people on the full Age Pension.

It argues that any assessment of the impact of super policies should consider the benefits of the compulsory super system and not just the narrow annual cost of super tax concessions.

“Instead of cost-benefit work, we see reporting which highlights only the estimated gross costs of retirement policy — expenditures on the aged pension plus problematic estimates of the ‘tax expenditures’ on superannuation,” it says.

“There is no measure anywhere of the fiscal and broader economic benefits in moving, over time, significant numbers of those age-eligible for the pension to a higher living standard in self-funded retirement from increased saving,” it says.

It argues that the review’s “highest priority” should be in establishing a fact base on the situation around retirement income in Australia that would include long-term economic modelling of retirement income trends and their social costs and benefits.

It argues that the current focus on the tax forgone from super tax concessions is “misleading” and “hugely overstates gross costs” and ignores other positive outcomes such as encouraging saving for retirement and reducing a potential drain on the Age Pension.

The submission also argues for a reform of the current compulsory super guarantee system.

It says the compulsory 9.5 per cent contribution to super, which is set to rise to 12 per cent, is too high for people on low incomes.

It says the current income level threshold for super contributions has been kept at the low level of $450 a month — a level set when the super guarantee system was introduced at 3 per cent in 1992.

The Australian

24 March 2019

Michael Roddan

Federal cabinet ministers have deliberated on confidential new Treasury modelling of the nation’s reliance on the Age Pension, which shows the amount of money spent on retirees will fall faster than previously expected, amid calls to dump the planned increase in the superannuation guarantee to 12 per cent.

The Australian can reveal the results of Treasury’s new modelling system, known as MARIA (Model of Australian Retirement Incomes and Assets), outlining the “adequacy and equity” of retirement incomes, has been provided to cabinet on several occasions in recent months, according to Freedom of Information requests.

The Treasury has been developing its MARIA model since 2017 in a generational overhaul of its systems, which provide long-term projections of Age Pension expenditure and take-up, superannuation savings, and the level of retirement incomes.

It can also be revealed that cabinet examined the effect of applying different concessional tax rates to super savings, according to separate requests sought under FOI laws, but the government decided against any move.

In the 2016 federal budget, the government capped tax-free pensions at $1.6 million, or $3.2m for couples, to limit the access wealthier Australians had to generous tax breaks in superannuation.

As previously revealed by The Australian, the unreleased MARIA modelling has found projections of the share of GDP Australia spends on the Age Pension is “consistent” with a fall of 2.7 per cent last year to 2.5 per cent in 2038 — significantly lower than previous estimates of the cost of providing the pension.

The Age Pension is the single biggest government expenditure at nearly $50bn a year. In 2002, the Age Pension cost 2.9 per cent of GDP and was forecast to rise to 4.6 per cent by 2042. But larger superannuation balances have seen that estimate lowered.

The government has been under pressure to scrap the ­planned increase in the superannuation guarantee from 9.5 to 12 per cent, which was partially frozen by the Abbott government.

The Grattan Institute has found increasing the rate would overwhelmingly benefit wealthier savers, hurt poorer workers by forcing them to put aside more of their disposable income for meagre increases in savings, and cost the federal budget an extra $2bn a year in tax concessions.

“The ‘currently legislated’ projections in the 2015 Intergenerational Report saw the Age Pension heading to more like 3.6 per cent of GDP,” said Deloitte Access Economics associate director Doug Ross. “With that in mind, the MARIA result is a bigger shift than you think.

“If true, those projections would be bad news for those still arguing for a lift in the SG rate to 12 per cent.”

Josh Frydenberg would not confirm whether the government was incorporating the new retirement modelling into the federal budget.

“The forecasts in the budget are based on the most current information and models available to the government,” the Treasurer said.

It is unlikely the federal budget will announce any major changes to superannuation or retirement incomes. The Actuaries Institute, which analyses long-term scenarios related to retirement income policy and financial services, was barred from joining the federal budget lockup this year as there were unlikely to be any announcements relevant to the group.

Sources familiar with MARIA said the results of the modelling could marginally affect the budget forecasts over the forward estimates, but would have a greater impact over the outer-year projections.

Treasury developed the model with the purpose of examining long-term effects of policy changes, which could estimate the impact of reforms out to 2050.

The effect of scrapping the increase in the super guarantee can also be modelled by MARIA, and sources said this was highly likely.

The Australian was blocked from accessing the contents of the documents as the information would “reveal a cabinet decision or deliberation”.

“One document was submitted to cabinet after having been brought into existence for the dominant purpose of submission to cabinet,” Treasury tax analysis division principal Matt Maloney said.

“Four documents, if disclosed, would reveal a cabinet deliberation or decision which has not been official disclosed.”

The Productivity Commission earlier this year recommended freezing the increase in the super guarantee rate and reviewing whether it would be equitable to force low-income workers to hive off even more of their salary into nest eggs, and whether the generous tax breaks in the super system have encouraged wealthier Australians to save any more than they would otherwise have done so.

Opposition Leader Bill Shorten and the union sector have attacked the government for delaying the increase to 12 per cent, which is scheduled to take place by 2025. The ACTU is pushing for a 15 per cent rate, in line with demands from the super fund industry.

Treasury modelling in 2013 found the government would continue to lose more revenue through concessional tax breaks in super than it saved in keeping self-funded retirees off the pension, with the loss extending out to 2070. Increasing the super guarantee rate to 12 per cent will result in the total super tax breaks adding more than 10 per cent to the nation’s debt by 2050.

The Grattan Institute found at the 9.5 per cent rate, the average retiree would receive an income of “at least” 91 per cent of their pre-retirement salary under current savings rates, well above the 70 per cent benchmark recommended by developed economies.

The independent think tank found that ending fee-gouging and driving better fund performance, or increasing the retirement age to 70, would result in far higher retirement incomes for all workers at the same time as taking pressure off the budget.

Michael Roddan – Reporter

Michael Roddan is a business reporter covering banking, insurance, superannuation, financial services and regulation.

The Australian

Michael Roddan, Reporter

28 December 2018

Confidential Treasury modelling of the nation’s reliance on the Age Pension has found
the amount of money spent on welfare for retirees will fall faster than previously
expected as bigger superannuation nest eggs push Australians into self-funded
retirement.

The unreleased projections of the share of GDP Australia spends on the Age Pension
is “consistent” with a fall of 2.7 per cent last year to 2.5 per cent in 2038. This is
significantly lower than previous estimates of the cost of providing the pension.

The government’s 2015 Intergenerational Report had the cost of the Age Pension
holding steady at about 3 per cent of GDP. In 2002, the Age Pension cost 2.9 per cent
of GDP and was forecast to rise to 4.6 per cent by 2042.

Documents obtained by The Australian under Freedom of Information laws reveal
Treasury noted projections by actuarial firm Rice Warner were consistent with its
revised, but not publicly released, modelling using the new Treasury system MARIA
(Model of Australian Retirement Incomes and Assets).

“Rice Warner projections are consistent with Treasury’s medium-term Age Pension
expenditure profile and longer-term projections from MARIA … though Treasury’s
projections have not been released yet,” notes an email from Treasury’s modelling
division in the tax analysis group.

The paper released in May by Rice Warner chief executive Michael Rice found the
share of the population eligible to receive the Age Pension would decline from about
69 per cent last year to 57 per cent in 2038.

This was because the superannuation system was delivering larger nest eggs for
savers, putting them outside the Age Pension assets test.

The revelations that Treasury is also expecting a falling Age Pension burden comes
after the government recently scrapped a planned move to lift the retirement age to 70.

The documents obtained by The Australian showed Treasury officials considered it
would be “good to flag” the comparison between the Rice Warner report and the
department’s MARIA modelling with former minister for revenue and financial
services Kelly O’Dwyer.

While the most recent Intergenerational Report forecast “relatively stable” Age
Pension reliance, at about 3 per cent of GDP, Treasury said the lower estimates gained
from its MARIA modelling were “not unexpected” as they reflected “updated data,
modelling and policy changes” since the 2015 Intergenerational Report.
However, Treasury has not released the assumptions underpinning its MARIA
modelling, which would allow third parties, such as the independent Parliamentary Budget Office, to check the government’s projections.

Because of the fall in the reliance on the Age Pension, Rice Warner suggested using
the savings to fund increased rental assistance for age pensioners.

Michael Roddan, Reporter