30 November 2019
Judith Sloan – Contributing Economics Editor
It was all going so well for the industry super funds. The election of a Labor government and they would be home and hosed.
There would be no talk of cancelling or deferring the legislated increase in the superannuation contribution rate from 9.5 per cent to 12 per cent. Those pesky requests to improve the governance of the funds by having more independent trustees would fade away.
Life and total and permanent disability insurance would remain an effective compulsory part of superannuation; after all, the opt-out arrangement had been introduced by Bill Shorten when he was the responsible minister. There would be some pretence about dealing with multiple accounts but no real action.
As for removing the quasi-monopoly position of industry super funds nominated as default funds in the modern awards, all discussion would abruptly end. And why would the ambition end there? Fifteen per cent sounds better than 12 per cent when it comes to a guaranteed regular flow of money to the funds.
All those dreams are now a fading memory as industry super funds confront a government that is not entirely convinced of the rationale for compulsory super and is determined to fix problems in the system that disadvantage far too many workers and retirees.
We don’t hear so much these days about our superannuation system being the envy of the world.
These claims were always made by those with deep vested interests in the system; in particular, the vast industry that hangs off the management of funds and their administration.
Some of the core problems of our superannuation system have been highlighted by various reports of the Productivity Commission. They include:
• The unclear purpose of superannuation.
• The excessive costs attached to investment and administration.
• The problem of multiple accounts leading to balance erosion.
• Unwanted (and sometimes worthless) insurance.
• Unaccountable governance with too many trustees having inadequate skills.
• The continuation of poorly performing funds.
Don’t get me wrong; superannuation has been a great product for some people, most notably those with earnings in the top quarter of the distribution. However, this observation is not sufficient to justify a system of compulsory superannuation. Moreover, it is clear any savings on the age pension have to be weighed against the cost of the variety of superannuation tax concessions that apply.
It also needs to be noted here that, on average, the investment performance of the industry super funds has been very good and superior to most retail funds, although there is the qualification of the absence of like-with-like comparison. Self-managed superannuation funds also generally have produced very good returns.
The government has been attempting to deal with some of the problems in the system after the remedial efforts that were made in its previous term were largely thwarted. Two changes have been implemented to merge inactive low-balance accounts with active ones and to make insurance an opt-in product for young workers and for those with low-balance accounts. Both changes were opposed by the industry super funds.
Neither of these changes deals comprehensively with the problems of multiple accounts or forced insurance but they are a start. More surprising have been the recent boasts of Superannuation, Financial Services and Financial Technology Assistant Minister Jane Hume about recent merger activity of industry super funds. Examples include the linking of Hostplus with Club Super and First State Super with VicSuper. Certainly the issue of failed mergers was raised in the Hayne royal commission into banking.
However, the issue of fund consolidation is actually two separate issues. One relates to funds that are clearly of sub-optimal size, leading to a failure to capture economies of scale. The second is about poorly performing funds and the need to remove them from the pool of default funds.
The work of the Productivity Commission makes it clear that a member who lands in a poorly performing fund and stays there by dint of inertia stands to lose up to several hundreds of thousands of dollars in terms of the final balance. It’s not apparent, however, whether the recent spate of fund mergers will deal with the problem of poorly performing funds.
In the meantime, the mergers of some large industry super funds could potentially lead to an anti-competitive configuration of a small number of behemoths that will be able to dictate many aspects of corporate behaviour given their large shareholdings. It’s hard to see how the government would regard this as a desirable outcome.
The hottest topic in superannuation remains the fate of the legislated increase in the superannuation contribution rate. Unless the statute is changed, this rate will be ratcheted up by 0.5 percentage points every year from July 1, 2021. A rate of 12 per cent will apply from July 1, 2025.
Every annual increase will cost the government about $2bn a year in forgone revenue given the cost of the tax concessions. This is a significant sum in the context of the likely tight position of the budget in that period.
The superannuation industry is highly committed to these legislated increases going ahead. Some absurd pieces of research have been released to suggest that higher superannuation contribution rates do not involve any reduction to wage growth, something that is contradicted by the theory and actual practice, including on the part of the Fair Work Commission.
In the context of low wage growth, it will be a big call by the government to ask workers to forgo current pay rises in exchange for higher superannuation balances in several decades.
Moreover, for many workers, these higher superannuation balances will simply have the effect of knocking off their entitlement to the full age pension. For them, compulsory superannuation is effectively just a tax — lower current consumption now and the loss of the full age pension in the future. It’s not clear what the government’s real thinking on this important matter is. The Prime Minister and Treasury are maintaining their support for the legislated contribution increase but may be happy to include the Future Fund in the mix of investment options to improve the competitiveness of the industry.
Other members of the government favour a cancellation of the increase or smaller rises across a longer timeframe. There is also some support for making the increase voluntary; workers could choose between a current pay rise or a higher super contribution rate.
The bottom line is that superannuation remains a dog’s breakfast from a policy point of view. The government has made some small strides to improve some aspects of the system, but the high fees and charges imposed by the funds remain a significant issue.
Far from being the envy of the world, it has become apparent that our system of compulsory superannuation was a serious policy error enacted for short-term reasons to fend off a wages explosion. It may be too late to turn back but thought needs to be given to significantly reforming the system in ways that reflect the preferences of workers as well as generating a better deal for taxpayers.