Category: Newspaper/Blog Articles/Hansard

Superannuation changes open windows to ‘your money’

The Australian

18 June 2021

Robert Gottliebsen

Most Australians who do not have a self-managed fund and who are accumulating superannuation savings don’t regard super as “their money”.

But, of course, it is very much members’ money and the wide-ranging, long-overdue superannuation changes that were passed by the parliament this week will cover 90 per cent of Australians in accumulation outside self-managed funds, so many more Australians will realise that superannuation is “their money”.

And self-managed funds are also helped.

The opposition to the changes was surprisingly ferocious from both the large retail and industry funds and their employer/union backers (plus the ALP), which indicates that there will be unpleasant surprises in some funds when some of the provisions are put into practice.

The changes would not have been possible but for the fact that Josh Frydenberg has become the first treasurer since Paul Keating to take an active interest in reforming superannuation.

And that is long overdue because superannuation savings are around $3 trillion. But the initial driver of these changes was Superannuation Minister Jane Hume.

What Frydenberg and Hume have done is to open a series of windows so ordinary Australians can see what is happening to “their money”.

And so the first big change is that the online accounts of the superannuation funds will tell members where “their money” is actually invested. They will also learn how much of “their money” is being spent on marketing.

Superannuation funds need to attract new members to maintain economies of scale because members retire, die or simply leave the fund. Accordingly some marketing is important but lavish marketing with executive side benefits will be revealed.

Members will also learn how much of “their money” is being paid to shareholders in the case of retail funds and employer and union groups in the case of industry funds.

The second window that is opened up is the ability to compare performances. At the moment superannuation is like insurance policies —the complexity makes it impossible to compare funds. What the legislation proposes is that if you have chosen, say, a conservative or high-growth fund it will be compared with funds with similar investment policies on a like-on-like basis.

For many Australians the first step in seeing superannuation as “their money” came when, in the pandemic last year, Josh Frydenberg gave them the ability to extract cash. But over the next year or so, when the data is assembled, friends will be able compare investment performance rates simply and straightforwardly over the barbecue.

These two measures will have a dramatic affect on superannuation.

But there is a darker side to superannuation in Australia that has taken too long to be fixed.

When Paul Keating set up the original superannuation structure it was based on a craft employment system and so most unions and their equivalent employer group had their own superannuation fund. So when a person started in the workforce in a coffee shop they joined Hostplus; then they went to Coles or Woolworths and joined a retail fund; if they did work on a building site it was Cbus and so on.

Millions of Australians ended up with savings in many different funds. Some of the amounts were small because the person did not work in that industry for very long. These savings get eaten up by administration, which represents a subsidy by young Australians for older Australians who tend to have a more stable fund.

In some industries such as retail and building it has been actually impossible for the employee to join any other fund. Earlier legislation blocked these cartels but there are still some legacy arrangements.

Apart from these cartel arrangements in most areas it has always been possible for people to consolidate their funds, but it tended not to happen. The new legislation provides that the first fund you join goes with you to the next job and so on. But, of course, you are able to switch should you be unhappy with your first fund, and given it will be possible to compare performances, there will be more shifting.

The government says it will save members $280 million so it would seem for some funds the removal of this subsidy will require costs to be reduced or performance after administrative costs will suffer.

That may be the reason for the ferocity with which the retail and industry funds plus employers and unions tried to stop this very logical and beneficial change to our superannuation industry.

It’s true there are areas of downside. It requires more work for small enterprises and Australian Taxation Office systems are unreliable. But the overall benefits are so huge that it is worth the extra time and ATO risk.

And finally, the area which has been given perhaps the most publicity is the ability of APRA to stop superannuation funds which are performing badly from taking new members, which basically means they go out of business and APRA has the power to enforce that exit.

But the test as to whether a fund is performing badly starts by looking at where the money is invested and so if, totally hypothetically, all the fund’s money was invested in infrastructure then that fund would be compared with the infrastructure assets of other funds.

And if over eight years it was too far below other funds then it would be warned to fix its situation and then a year later action would be taken. And so, a balance fund would be tested on the combination of each of the segments that the fund was invested in. If a person joins a fund that turns out to perform badly they will be alerted and then after nine years they will be told of their fund’s failure.

Two other changes are important.

* The limit on the number of members in a self-managed fund will be lifted from four to six which will make it easier for children and their spouses to join their ageing parents, who may be having fund management difficulty. It confirms the government resolve to maintain a healthy self-managed fund movement.

* Those who withdrew money out of superannuation last year will get the opportunity to increase their non-taxable contributions to cover the gap.

Super funds eye best returns in 24 years

The Australian

17 June 2021

Cliona O’Dowd

Super funds are eyeing their best returns in 24 years.
Super funds are eyeing their best returns in 24 years.

Super funds are on track to deliver the best annual returns in more than two decades, with the median growth fund clocking a 20 per cent return just nine trading days out from the end of the financial year.

The median growth fund returned 1.3 per cent in May, bringing the return for the first 11 months of the financial year to a stunning 19.8 per cent, according to research house SuperRatings.

The median balanced fund, meanwhile, is sitting on a 16 per cent return for the financial year to date.

With markets rising further in June, balanced funds are in sight of overtaking 1997’s 18 per cent return. This would make it the best financial year return since the introduction of compulsory super, according to Super­Ratings.

The gains will also see some of the fastest-paced growth in the nation’s pool of superannuation assets, which totalled $3.1 trillion at the end of the March 2021 quarter.

Since the end of May, the local sharemarket has powered further ahead, gaining 3 per cent to a record high on Wednesday.

Over the past year it is up more than 24 per cent, fuelled by ultra-low interest rates around the world.

The stellar return figures were released hours after wide-­ranging superannuation reforms passed parliament, with Australians now to be “stapled” to one super account through their working life, in a move opponents warn could see millions trapped in “dud” funds.

Before the final vote, Superannuation Minister Jane Hume said the reforms would save Australians “$17.9bn in fees and lost performance over the next 10 years”.

But Industry Super Australia chief executive Bernie Dean criticised the Your Future, Your Super reforms, saying many workers would lose out as a result of the legislation.

“The government was forced to drop a number of ideological proposals and to improve the performance tests for funds, but sadly it stopped short of protecting workers from losing their savings by being stuck in a dud super fund,” he said.

While the median growth fund is on track for a 20 per cent return for the current financial year, the market leaders have fared even better.

The nation’s largest super fund, the $2bn AustralianSuper, recorded a 23 per cent return in its growth option for the 11 months through May. Hostplus’s ‘‘Shares Plus’’ growth offering also returned 23 per cent over the same period, while UniSuper wasn’t far behind with a 21.7 per cent return for the year to date.

As he commented on the strong performance this year, SuperRatings executive director Kirby Rappell was also cautious on the market outlook.

“May is the eleventh month in a row we have seen a positive result for the median balanced fund … While strong performance this year is pleasing, market volatility prevails and we are erring on the side of caution in terms of the future outlook, with equity markets likely to provide investors with a bumpy ride,” he said.

“Further, with rates remaining at record lows, more defensive assets such as cash and bonds have delivered meagre returns, which is impacting retirees’ incomes.”

Fellow research house Chant West has the median growth fund sitting on a 17.5 per cent return for the year to date.

The figures between the two research houses vary slightly due to a difference in assessment criteria for what qualifies as a “growth” or “balanced” fund based on the percentage of ­investments in growth assets. “The past two financial years really have illustrated the strength and resilience of our leading super funds,” Chant West senior investment research ­manager Mano Mohankumar said.

“Despite the massive hit that Covid delivered to financial markets last year, the diversification built into growth funds enabled them to limit the damage, and the small loss of 0.6 per cent for fiscal 2020 was far better than expected.”

With a little over 50 per cent allocated to listed shares, super funds rode the upswing this financial year as markets staged a remarkable recovery.

The cumulative return since the Covid low point in March 2020 was about 25 per cent and funds were now 10 per cent above their pre-Covid crisis highs, Mr Mohankumar said.

Australian and US markets reached record highs in May, with Australian shares jumping 2.3 per cent and international shares rising 1 per cent in hedged terms and 1.2 per cent unhedged.

A strong quarterly earnings season in the US boosted the May performance, while in Britain, confidence was boosted as lockdown measures eased.

In the eurozone, the vaccine rollout gained momentum during the month while restrictions were also eased.

The S&P/ASX 200 on Thursday pulled back from this week’s record high and finished the session down 0.4 per cent following weak overseas leads after Wall Street fell overnight on higher inflation expectations from the US Federal Reserve amid the prospect of sooner-than-expected rate rises.

New, lower-cost superannuation fund era ahead

The Australian Business Review

19 may 2021

Robert Gottliebsen

With one exception, Senator Jane Hume’s superannuation changes make sense and prepare the total superannuation movement for a new era of importance.

That is why initially I was surprised at the ferocity of the opposition. Then the penny dropped.

These changes are going to attract new powerful entrants into superannuation (I detail two starters below) and will hasten its move away from superannuation being a craft-based movement.

This frightens the industry funds because they are based on the craft model, but their excellent overall performance in recent years makes them well prepared.

The one change that Hume proposes that I think is a poor idea is giving government or government bodies the power to stop a superannuation fund investing in a particular security.

Once there is proper disclosure then members are perfectly free to vote with their feet.

Government intervention is likely to create a dangerous precedent. But most of the other changes are long overdue.

For example, we currently have a situation where many people have a multitude of funds because they took on different jobs. Their scattered savings are absorbed in fees, which is a terrible waste.

The new system will see an employee in their first job booking into a fund and staying with that fund in different jobs. Each employer can make a quick check with the Australian Taxation Office to find out the relevant fund or the employee can choose. This is a defined task that the ATO should be able to do well. But I am wary. It will need to be a fast, efficient service.

The employee, of course, can change funds at any time. The alternative of an employee changing funds each time a new job is taken would be horrendously costly to the employee.

At the moment superannuation is not seen as relevant to many young people. But thanks in part to state government actions rents are going to rise sharply and young people will need to find a way to buy their own home. Increasingly in coming years superannuation will be used to help in this first step so it will have a new meaning to the up-and-coming generation.

And of course, although superannuation is important in retirement, a house is even more important.

The second change requires much greater fund disclosure including contributions to owners plus employer and union organisations. Marketing and a vast array of other costs will also be disclosed, along with the portfolio of every publicly available superannuation fund.

Members of superannuation funds will get the same sort of information that is available to self-managed funds. Again, this is a long overdue change because members are entitled to know where their money is invested and how much goes to the owners of a fund, employer groups and unions — it’s their money that is being managed.

And the third major change is more controversial. Funds that don’t match an industry-based criteria may have to merge. The measurement is over seven or eight years and can be tailored to the portfolio structure of the fund. And so, totally theoretically, if a fund had 50 per cent of its money in one class, say infrastructure, the measure will be weighted accordingly. It is possible this will push funds towards indexation, but the simple situation is that funds managers that can’t perform over a long period need to be replaced.

What will become apparent to members of funds is the total cost of running their fund. Most large funds will come in with a cost basis of 0.8 to one per cent, but some will have much higher costs. These prospective extra disclosures are suddenly attracting new entrants into the superannuation race.

The big funds would justifiably believe they can compete, but we are looking at a new era.

The first and biggest new entrant is Vanguard. The giant index-based investing institution has developed a successful business in Australia by attracting small and large investors to low management-cost index-based returns over a wide area of investment alternatives.

It is now planning to enter the superannuation market. Employees can write down Vanguard as their preferred superannuation investment and Vanguard will be shouting from the roof tops that its costs of operations are in the vicinity of 0.2 to 0.3 per cent – well below other funds. It clearly believes there is a lot of business to be picked up.

Another new entrant is known as Flare, which is backed by global investors including KKR, Point72 and Westpac Reinventure. Flare is one of the largest providers of software to manage superannuation and human resource bookkeeping. Its network has exploded in the last 18 months and one out of five Australians who start a new job are enrolled via enterprises using Flare technology.

Flare gives its software free to enterprises but plans to use that software network to market financial services products.

Its first foray into this arena is set to be a managed global superannuation fund for Australians. It expects its costs to be in the 0.5 to 0.6 per cent range – higher than Vanguard – but the Flare fund will contain a managed selection of global investments.

Australian investments will be a comparatively small part. Neither new entrant would have made a move but for the Hume legislation. The fact that two have emerged so quickly indicates that there is more to come.

Superannuation funds eye best annual return since 2013

The Australian Business Review

18 May 2021

Cliona O’Dowd

Super funds are on track for their best annual return in close to a decade as markets straddle record highs, with the March 2020 meltdown now a distant memory.

The median growth fund grew 2.2 per cent over April, bringing the return for the first 10 months of the financial year to 14.7 per cent, according to research house Chant West.

If super funds can hold on to that return for the next six weeks, it will be the highest annual return since financial year 2013, when growth funds surged 15.6 per cent over the year.

“They’ve shown their resilience – as we saw last financial year when they limited the COVID-induced damage to post a small loss of 0.6 per cent – and now they’ve shown their powers of recovery,” Chant West’s senior investment research manager, Mano Mohankumar, said.

“The cumulative return since the end of March last year is about 22 per cent, which is astonishing given the health concerns, disruptions and economic damage caused by COVID-19.”

The median growth fund is also now more than 7 per cent above its pre-COVID crisis high set in January 2020.

Since the introduction of compulsory super in 1992, the median growth fund has returned 8.1 per cent per annum, well above the annual CPI increase over the same period of 2.4 per cent. This means funds have delivered a real return of 5.7 per cent, well above the typical 3.5 per cent target.

“Even looking at the past 20 years, which now includes three major sharemarket downturns – the ‘tech wreck’ in 2001–2003, the GFC in 2007–2009 and now COVID-19 – the median growth fund has returned 6.8 per cent per annum, which is still well ahead of the typical return objective,” Mr Mohankumar said.

Source: ChantWest
Source: ChantWest

Share markets were the main drivers of the fund performance over April, according to Mr Mohankumar.

Australian shares were up 3.7 per cent for the month, while international shares gained 4.1 per cent in hedged terms. The appreciation of the Australian dollar over the period pared the gain back to 3.2 per cent in unhedged terms.

The vaccine rollout in the US, where 70 per cent of the population has now had at least one dose, has been a market confidence booster of late.

“Markets were also boosted by some improving economic data and by President Biden following up his $1.9 trillion fiscal stimulus package with a proposed $2 trillion in infrastructure and manufacturing subsidies. In addition, US companies had a strong quarterly earnings season,” Mr Mohankumar said.

Source: ChantWest
Source: ChantWest

But as funds march toward the end of the financial year, increased volatility and the threat of a correction are never far away.

Last week, a surprise spike in US inflation sent jitters through markets as investors mulled sooner-than-expected interest rate rises in the world’s biggest economy.

Consumer prices rose 4.2 per cent over the 12 months through to April, up from 2.6 per cent in March and well above the 3.6 per cent the market had been expecting. The shock print helped push Wall Street to its steepest three-day decline in seven months.

US stocks started this week on a sour note, ending Monday’s session in the red on continued inflation concerns, but the local market has taken it in its stride, rising in both Monday and Tuesday’s trade as it pushes to get back to its recent record high.

While inflationary pressures build in the US, the Reserve Bank sees only muted inflation risks for Australia in the coming years, allowing it to hold its line on not raising interest rates until 2024 “at the earliest”.

In minutes of its May 4 policy meeting published on Tuesday, the central bank said there was little risk of a wages breakout on the horizon, with plenty of spare capacity in the labour market and firms focused on cost control.

But the inflation jitters that have hit stocks of late pose a risk to the funds invested heavily in the so-called Covid winners.

“The COVID winners and the stocks that have been the best performing in the prior 12 months…there has been a fairly meaningful selloff in them,” Forager Funds’ chief investment officer and founder, Steve Johnson, said.

Afterpay and Xero are among Australia’s large COVID winners that have come unstuck this year amid inflation concerns and the outlook for interest rates and central bank liquidity from bond buying that boosted the valuations of growth stocks in the past year.

Afterpay has nearly halved from its February peak of $158 and is currently trading at around $86.50. That’s still a big jump on the $8.90 it hit in the March market meltdown last year.

Xero, meanwhile, has slumped by 25 per cent from its all-time highs and is currently trading at $118.

In the US, Bell Asset Management’s chief investment officer Ned Bell sees big risks for the “hot” concept stocks that rocketed in the post-Covid environment.

“The big stocks like Tesla, Nvidia, Netflix, Salesforce, these types of names, they’re so overowned, and they trade on these nosebleed earnings multiples. And frankly, I don’t see who the marginal buyer is,” Mr Bell said.

“So those are the names, those extremely expensive names, are the ones that typically derate the most in a rising interest rate environment. And that’s what we’re expecting to see.”

Additional reporting: David Rogers

Superannuation heads for double-digit returns for the year as sharemarket gains

The Australian

21 April 2021

Cliona O’Dowd

Super funds are racing toward double-digit returns for the financial year, after riding investment markets over the past three months to lock in a 3.1 per cent gain.

The median growth fund returned 12.2 per cent for the first nine months of the year and is up more than 2.2 per cent already this month, according to research house Chant West.

With just 10 weeks left until the end of the financial year, a double-digit return is now in sight, Chant West senior investment research manager Mano Mohankumar said.

The figures come as ultra-low interest rates is pushing more funds into equity markets, seeing Australian shares hover just short of record levels, while Wall Street continues to push fresh highs.

“Despite the brief volatility in late February on fears that a stronger than expected economic recovery may result in increased inflation, the March quarter was characterised by optimism around the global rollout of vaccines and a return to some economic normality,” he said.

As the median growth fund return climbs past 14 per cent, the market leaders are powering ahead at an even faster pace. The $80bn Sunsuper and $48bn Hostplus are among those with growth funds sitting on 20 per cent-plus returns for the financial year to date, while the nation’s largest super fund, the $200bn AustralianSuper, isn’t far off with a 19 per cent return.

“Zero interest rates and zero inflation means there’s nowhere else to put your money other than dividend-paying sharemarkets around the world,” Hostplus chief investment officer Sam Sicilia said.

“Institutions can put their money in anything, but the vast majority of people can’t do that, and that’s the wind in the sails of equity markets,” he told The Australian.

Hostplus’ growth fund returned 20.4 per cent to mid-April, while its balanced option is sitting at 16.3 per cent. Sunsuper’s growth option, meanwhile, racked up a 26 per cent return by the end of March, and its balanced option 21 per cent.

Equity markets have powered much of the gains over the past year following the March 2020 market meltdown. Australian shares rose 4.2 per cent in the last the quarter, and have since climbed past 7000 points, while international shares gained more than 6 per cent over the three months through March.

“This game of volatilie equity markets fluctuating will persist until there are alternative places for people to put their money. And I can’t see that (happening) any time soon,” Mr Sicilia said.

Alongside equity markets, unlisted investments including private equity have been the outperformers for Hostplus. The fund has shunned fixed income, favouring to diversify through other, better-returning asset classes.

Bond yields rose over the quarter amid persistent fears of rising inflation. This was reflected in negative bond market returns, Mr Mohankumar said, with Australian and international bonds down 3.2 per cent and 2.5 per cent.

After the “very strong performance” in equity markets in recent months, Tribeca Investment Partners’ portfolio manager Jun Bei Liu is anticipating a more volatile period ahead.

“Quite possibly over the next couple of months we might see a bit of profit-taking behavior. But that’s purely tactical, and whether it’s the tax year-end or anything else, fundamentally, the market looks pretty strong,” she said.

On the prospect of investors choosing to “sell in May and go away” Ms Liu said that would likely be short-lived.

“It could take place but, ultimately, it comes down to whether the economy‘s holding strong or not. So far, every indication is showing it’s doing quite well. So even if we see a weak patch in May or June, we may well see it come back quite quickly in July and August.”

Research house SuperRatings also cautioned Australians to prepare for more volatility in markets even amid the recovery as the jobs market improves and economic activity picks up.

“The March returns data reinforced the success that super has seen in rebuilding from the depths of the pandemic last year,” SuperRatings executive director Kirby Rappell said.

“The real bright spot has been the bounce back in the labour market, which has restored confidence to households and helped reboot consumer spending. The reopening of the economy and the low or zero rates of community transmission we’ve experienced in Australia in recent months have galvanised the recovery.”

The continued strength in share markets has seen the median growth fund put on a further 2.2 per cent in April, in addition to the 12.2 per cent to the end of March, bringing the cumulative return since the end of March last year to about 22 per cent.

“(This) is remarkable given the health concerns, disruptions and economic damage caused by COVID-19,” Mr Mohankumar said.

The median growth fund is now more than 7 per cent above the pre-COVID crisis high reached at the end of January 2020.

While the median growth fund has returned just over 12 per cent in the financial year to date, all-growth fund returns reached 18.7 per cent and high growth returns are at 15.7 per cent. The median balanced fund has returned 8.7 per cent so far this year.

As super funds push toward a strong end to fiscal 2021, the economy has already recovered all of its COVID losses, according to the latest Reserve Bank of Australia meeting minutes.

“Overall, preliminary data suggested that GDP in the March quarter was likely to have recovered further to around its pre-pandemic level, earlier than previously expected,” the minutes from the April 6 meeting said.

Despite the swift recovery, the central bank is unwavering in its bid to keep rates at a record-low 0.1 per cent until at least 2024.

Implications of the Retirement Income Review: Public advocacy of private profligacy?

17 March 2021

Terrence O’Brien

Download the Analysis Paper (AP19) as a PDF

The recent Retirement Income Review (RIR) implies policies that would reduce after-tax returns to super saving, encourage faster spending of life savings and of equity in the family home, and minimise bequests.  Its approach would incline each generation towards consuming more fully its own lifetime savings.

This paper demonstrates the RIR relies on contested Treasury ‘tax expenditure’ estimates that use a hypothetical benchmark that is biased against all saving, but particularly against long-term saving.

The AP reports that the effective tax rate on superannuation earnings is already much higher than the statutory rate. It also presents credible alternative Treasury measures that use a neutral benchmark. These estimate ‘tax expenditures’ that are only one-fifth the size the RIR claims, essentially flat over time rather than rising strongly, and thus do not unduly favour self-funded retirees compared to Age Pensioners.

The RIR implies policies should encourage faster and more complete consumption of superannuation capital and housing equity in retirement to prevent some retirees’ wealth rising and ending in bequests.  But with savers’ equity in their houses typically about double their savings in superannuation, no prudent acceleration of super spending is likely to overtake inflation of housing prices in an era of fiscal and monetary stimulus and asset price inflation.

The RIR proposes that a retirement income of 65-75% of the average of after-tax incomes in the last 10 years of work would be “adequate” for all, and estimates most (except some retiring as renters) are already saving more than enough for such a retirement.  But it would be unwise and unnecessary for government to set its policies to constrain citizens’ choice of the self-funded living standards they want to work and save towards.  Policies to crimp voluntary saving and accelerate retirement spending would create more uncertain retirements and a more fragile economy, more dependent on international lending and investment.

This paper was first published on 17 March 2021 by The Centre for Independent Studies (Analysis Paper 19)

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.

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