3 August 2019
Judith Sloan – Contributing Economics Editor
The election result was a major disappointment to the vast majority of players in the superannuation industry. A Labor government would have ushered in a veritable purple patch, for the industry super funds in particular.
There would have been no debate about whether or not the Superannuation Guarantee Charge would be lifted from 9.5 per cent to 12 per cent. Indeed, there was a possibility that Chris Bowen, as treasurer, might have brought forward the increase in the contribution rate. According to legislation, the SGC will increase to 10 per cent from July 1, 2021, and reach 12 per cent in 2025.
All that pesky discussion of removing industry super funds from the default lists in modern awards would have faded away. And there would have been no talk of removing the monopoly position of industry super funds in key enterprise agreements.
The whole idea of the selection of 10 “best in show” default funds for new workers would have been quickly forgotten. And anyone who even mentioned the potential role for the Future Fund as a manager of superannuation funds would have been quickly dismissed.
To be sure, some lip service would have been paid to reducing the magnitude of fees and charges imposed by funds. And there might have been some feeble efforts to deal with the problem of multiple accounts and unwanted and/or unusable life insurance.
But bear in mind nothing would have been done to upset the industry super funds or the freeloading insurance companies. There would have been no discussion of moving away from opt-out insurance, for instance.
But those dreams of guaranteed riches and expansion have largely evaporated for the industry, and the players must deal with a government that is far less committed to the whole notion of compulsory super than Labor. It is now hand-to-hand combat as the industry seeks to defend its current privileges, as well as truly lock in the rise in the SGC.
The appointment of senator Jane Hume as Assistant Minister for Superannuation, Financial Services and Financial Technology has also sent shivers down the spines of the well-remunerated folk in the super industry. Not only is she whip-smart but she also has direct professional experience in the industry, including a stint at AustralianSuper, the largest industry super fund.
There are many issues to sort out above and beyond what should happen to the SGC. Some of them were canvassed in work undertaken by the Productivity Commission, as well as in other reports, including ironically the Cooper review that was commissioned by the Labor government and released in 2010.
A large slate of bills to reform various aspects of super was developed by the Coalition in its last term in office. But the combination of the composition of the Senate and the unrelenting opposition by the super funds, the trade unions and Labor meant most of these bills were never even presented to the upper house.
Mind you, future threats by superannuation lobbyists of electoral retaliation for unco-operative crossbench senators may well have lost their impact.
The issues the government must deal with during the coming term include: the governance of super funds, strengthening the regulation of super, the elimination of multiple accounts, the establishment of single default accounts that will follow members as they change jobs, the fate of poorly performing funds and fund mergers, and whether insurance should become a fully opt-in arrangement.
For all the carry-on about our system of compulsory super being the envy of the world — read: the envy of fund managers around the world — there are multiple problems with the system, including the often perverse interactions with other components of our retirement incomes system. These will be the likely focus of the upcoming Productivity Commission review into retirement incomes.
It’s not clear where the government will direct its efforts in terms of improving the efficiency of the super system and improving the accountability of the funds. Earlier this year, a small step was achieved when a law was passed that means that inactive — defined as those for which there has been no contribution for 16 months — accounts with balances of less than $6000 will be shifted to the Australian Taxation Office, oftentimes to be merged with another account held by the member.
The effect of this change is that unwanted insurance premiums will no longer be unwittingly deducted from these accounts and their value can be preserved. A further change is in the wind that will convert insurance to an opt-in arrangement for all new members younger than 25 and for members with accounts of less than $6000.
Even these small modifications have attracted the ire of some of the super lobbyists, who allege that members will unknowingly lose the value of insurance. They cite figures about the number of under 25-year-olds with dependants — it’s 10 per cent — as well as the proportion with mortgage debts. They predict that insurance premiums will rise because younger members will no longer be forced to cross-subsidise older ones.
The key problem of multiple accounts remains unresolved at this stage. The Productivity Commission says about a third of super accounts — 10 million in total — are unintended multiple accounts. This results in the loss of $2.6 billion per annum in pointless fees, charges and insurance premiums. The government needs to act on the recommendation of the Hayne banking royal commission that each person should have only one default super account and that there must be a mechanism to “staple” a person to this single default account. Again, the industry is pushing back on this proposal.
One of the more ludicrous proposals doing the rounds is that members’ super benefits should automatically transfer each time a worker changes a job unless the worker nominates otherwise. This is surely no one’s idea of a stapled product, with workers potentially changing funds every time they change jobs.
What the industry super funds really fear is that many young workers would enrol in either REST or Hostplus — the funds covering retail and hospitality workers, respectively — as their first fund and, under a stapled arrangement, they would stay in these funds for the rest of their working lives. Needless to say, this does not suit the other funds, even though both REST and Hostplus have been high-achieving funds. The point is, there is an enormous reform task to clean up the super industry and to make it work for the interests of members rather than the interests of the funds and other industry players. The costs of inaction — running to many billions of dollars per year — mean further changes are inevitable.
The government should keep an open mind about future changes to the contribution rate. A much better alternative would be for fees and charges to fall to world-best-practice levels — well below the 100 basis point mark — in which case there will be no need for the rate to rise. And the idea that super could be a voluntary arrangement, at least for low-income workers, should not be dismissed out of hand.
Compulsory super grew from a grubby deal between the then powerful trade unions and the federal government as a trade-off for a pay rise. Most of the details weren’t worked out, with the regulation of the system and taxation arrangements pasted on over time. It’s time for a major service, if not a new car, and that car may not be called compulsory super.