Tag: superannuation

The Australian

30 August 2016

Judith Sloan Contributing Economics Editor

There are two classes of citizens: public servants and pollies, and the rest of us.

It was always going to come out that the real rorts and costs in the superannuation system are the public sector defined benefit superannuation schemes.

Just ignore Scott Morrison’s assurances that “commensurate measures” will ensure the privileged ones on defined benefit schemes will be treated like everyone else; it’s complete twaddle and he knows it.

Or he should know it, unless he has been hoodwinked by his bureaucratic advisers who are, almost to a man and a woman, beneficiaries of these gold-plated schemes.

Let us first consider constitutionally protected employees. They include judges, tribunal members and senior state public servants. As their titles suggest, they won’t be affected at all by the changes to the taxation and regulation of superannuation announced in the budget.

When Peter Costello introduced his superannuation surcharge tax, a group of judges simply went to court — presided over by another group of judges — to ensure the tax didn’t apply to them. Surprise, surprise, they won.

So for the select group of constitutionally protected employees, life is unaffected and they can look forward to their lavish pensions in due course. No “commensurate measures” for this lot.

For others who are members of (untaxed) defined benefit schemes, at worse there may be an imposition of a few grand of extra taxes for those earning more than $100,000 a year in retirement. But this impost comes nowhere near making the treatment of these pampered pooches equivalent to people who have had to work hard and save to accumulate their superannuation balances.

There are a variety of defined benefit schemes for public sector workers. Many of them are closed but some continue to this day.

The generosity of these schemes varies. Defined benefit schemes used to operate in the private sector for high-paid executives , but they have been closed for more than 20 years. Note also that few of the private defined benefit schemes paid retirement pensions: beneficiaries were handed a multiple of their final salary and sent on their way.

Top of the pops of the public sector schemes is the old parliamentary scheme, with ex-pollies earning up to 75 per cent of their highest salary indexed by movements in parliamentary salaries. Before 2001, a 30-year-old retiring (or defeated) politician could qualify for a pension — think Natasha Stott Despoja and Bill O’Chee — defying the rule about accessing superannuation only on reaching preservation age.

The scheme was completely closed in 2004. And note that neither Malcolm Turnbull nor the Treasurer are members of this old scheme. But they do take advantage of an employer contribution of 15.4 per cent, whereas those in the private sector have to make do with 9.5 per cent. You know it makes sense.

There are also some generous parliamentary schemes at the state level. And the schemes covering judges and magistrates are to die for — although if you do die, your spouse or partner will get about two-thirds of your indexed pension for the rest of their lives.

Consider the old Commonwealth Superannuation Scheme for federal public servants that was closed in 1990. (Another defined benefit scheme was put in place, the Public Sector Superannuation Scheme, to replace the CSS. The PSS was closed only in 2005.)

Most of our fearless policy advisers will be members of the CSS. For long-serving employees, the CSS pays out over 50 per cent of final adjusted salary, indexed by the consumer price index. Under this scheme, members could make zero contribution, although contributions up to 5 per cent after tax were permitted to boost final retirement income.

The fact salaries of senior public servants have soared in recent years turns the CSS into a truly princely arrangement.

There is an additional wrinkle to the scheme that knocks it out of the ballpark.

When the system of compulsory superannuation was first introduced, members of the CSS were awarded an additional contribution of 3 per cent of salary to be deposited into an accumulation account. From that point, CSS members could salary sacrifice additional contributions to this accumulation account, free of any of the constraints that apply to workers in the private sector. (This wrinkle also applies to members of other public sector defined benefit schemes.)

What this has meant is that the entire concessional contributions cap has been available to these lucky ones because there is no estimate of the monetary value of the notional annual contribution made on their behalf.

So a current CSS member aged 58, say, can make a $35,000 pretax annual superannuation contribution , whereas an employee in the private sector must take into account the employer contribution when calculating the amount that can be salary-sacrificed as a concessional contribution .

It is a complete disgrace, but the practice has persisted for years and years — I guess because the public servants never bothered to advise the politicians to close the loophole .

But if you really want to smell the putrid stench of hypocrisy, consider the government’s decision to grandfather these schemes. When the CSS was closed to new members, all existing members were allowed to remain within the old scheme and to continue to enjoy all its benefits. Ditto the parliamentarian scheme.

It was not as if there wasn’t an alternative. CSS members could have been transferred to a less generous accumulation scheme, with only their CSS benefits to that point preserved. But the government of the day decided against this action. The same argument applied to the parliamentarian scheme.

So here’s the real rub: grandfathering is fine for public servants and parliamentarians, according to politicians. But when it comes to mere mortals seeking to save for their retirement, grandfathering is so yesterday.

Indeed, it is not just the case that grandfathering is out of fashion ; there is a need to look back into time to make sure that members of accumulation schemes have not contributed too much of their post-tax savings. Indeed, Revenue and Financial Services Minister Kelly O’Dwyer told me that she wanted to reach further back than July 1, 2007, but the integrity of the records couldn’t be assured. She was fearful there could be two classes of citizens without this retrospectivity.

Kelly, there are two classes of citizens, but it has nothing to do with backdating regulation. There are the privileged public servants and pollies and the rest of us.

And the cost of running these defined benefit schemes is soaring as interest rates fall — in much the same way that $1.6 million doesn’t generate the income it once did.

The total superannuation liability of the commonwealth (for its present and former employees) will rise by close to $19 billion across the budget forward estimates , culminating in a total figure of $195bn in 2019-20 .

Any budget savings made as a result of the government’s budget superannuation changes are completely swamped by the burgeoning liabilities associated with the defined benefit schemes.

It’s time to return to the drawing board.

To mere mortals seeking to save for their retirement, grandfathering is so yesterday.

AMP (AMP) today booked a net profit of $523 million for the six months through June, a 3 per cent increase year-on-year. The group said its underlying profit was down 10 per cent as higher claims in its wealth protection business and volatile investment conditions hampered earnings.

Revenue, however, slumped 29 per cent to $6.1 billion during the period.

AMP shares opened down 5 per cent at a five-week low of $5.50.

The slide in revenue came as cashflows into AMP’s Australian wealth management business dropped by 50 per cent to $582m, down from net cashflows of $1.15bn the same time last year. AMP said its weak retail and corporate super platform net cashflows were a product of investment market volatility and weaker investor confidence given uncertainty around proposed changes to superannuation.

“AMP Capital, AMP Bank and our New Zealand business have performed strongly, while Australian wealth management has demonstrated resilient performance in a difficult market environment,” chief executive Craig Meller said.

“While first half claims experience was poor, we continue to focus on improving the outcomes for customers and shareholders in our wealth protection business, with actions underway to improve capital efficiency and reduce volatility,” he said.

Mr Meller said AMP would be overhauling its insurance business to stem the tide of claims. The wealth protection arm booked operating earnings of $47m, down from $99m a year go.

“To address performance in the insurance business AMP is strengthening income protection assumptions, repricing, continuing the transformation of claims management and accelerating our capital management initiatives,” Mr Meller said.

AMP has over 5,400 employees and manages more than $220bn in assets and will pay a 14c interim dividend, in line with the prior year’s final dividend.

Liberals MPs told The Weekend Australian their constituents wanted greater concessions than the Treasurer’s mooted proposal to lift the $500,000 lifetime cap on post-tax super contributions to $750,000 in order to soften the impact on workers and retirees.

With more talks scheduled for the week ahead, Mr Morrison is being asked to lift the cap to $1 million in the hope of ending the ­dissent over the policy, so it can be fast-tracked through the Coalition partyroom and put into force.

Angry at the way the super tax hike has been handled since the May budget, government backbenchers said a substantial compromise would be needed to assure Liberal Party supporters that their complaints had been heard and acted upon.

The proposal to lift the cap to $750,000 was only one option in the talks with backbenchers over recent days, as Mr Morrison and Financial Services Minister Kelly O’Dwyer try to test the ground for a compromise before parliament meets on August 30.

Jason Wood, the Liberal MP who holds the marginal seat of La Trobe in Melbourne’s outer east, said a higher threshold was needed to meet demands from voters.

“I am keen to lift the $500,000 cap to $1 million, as I think this is fair,” he told The Weekend ­Australian.

“I am pushing for higher, as that is what my constituents want. There is a great deal of consult­ation and seeking feedback.”

Other MPs said the signals on the lifetime cap were being sent to test the backbench mood, but would not be enough to silence complaints when the Coalition partyroom holds a crucial meeting to approve the package.

Strong critics of the super tax increase, including former cabinet minister Eric Abetz, have kept up their warnings against the ­reforms, while industry groups are calling for more detail before ­deciding on their position.

A more significant compromise proposal is to scrap the planned start date for the lifetime cap, July 2007, to fend off accusations of “retrospective” taxation, but this would sacrifice most of the measure’s $550m in forecast tax revenue over the next four years.

Mr Morrison and Ms O’Dwyer made no comment yesterday on their consultations. The super package would raise $6bn but uses half of this to fund greater super benefits for parents returning to the workforce and workers on incomes of less than $37,000 a year, leaving $3bn to improve the budget bottom line over four years.

The government is insisting that any changes to the super tax revenue would have to be offset by savings elsewhere in the portfolio.

MPs warned against paying for the compromise on high-end super taxes by scaling back the benefits to ordinary workers from the Low Income Super Tax Offset. “You couldn’t possibly do that,” said one Liberal.

Super fund groups welcomed indications that the government may be considering changes to its budget measures but said they did not go far enough. While some groups want to increase the proposed $500,000 post-tax cap, there is widespread agreement that the more critical issue is to ­retain the current caps on concessional contributions, which are proposed to be cut from $30,000 a year, and $35,000 a year for people over 50, to $25,000 a year.

“We would welcome increased flexibility around the non-concessional lifetime cap, whether it be through an increase in the cap or by specific carve-outs,” Andrea Slattery, the chief executive of the Self Managed Super Association, said yesterday. “We would welcome a shift in start date of the measure but we understand any changes would have significant revenue impacts.”

She also warned that there would need to be an analysis of any proposed “carve-outs” for lifetime events such as divorce.

The Weekend Australian understands there will be no special treatment for funds received from inheritances. Simon Swanson, the chief executive of ASX-listed wealth management company Clearview, said an increase in the post-tax contribution cap would allow ­people who had interrupted work patterns to “catch up” in saving for their retirement.

“An increase of the contrib­ution cap to $750,000 would give those people who leave the workforce for an extended period a chance to catch up, thereby ensuring they don’t need any support from the pension,” he said.

Australian Financial Review

17 August 2016

by Sam Henderson

Many believe a $25,000 pre-tax contribution cap is too restrictive and does not adequately encourage Australians to save more in retirement

A reader in his 50s with $700,000 in super has a good chance of hitting $1.6 billion by retirement age, writes Sam Henderson who answers your questions on super.

Q: I am in my mid-fifties with a super balance of $700,000, largely achieved by making use of the pre-budget annual non-concessional cap over the last few years since the mortgage and private school fees have finally been put behind us. I had a perfectly sound plan in place to achieve a healthy super balance in line with Rice Warner’s lucky 40-year-olds over the next 10 years, using a combination of concessional and non-concessional contributions. But with the new flat $25,000 annual cap on concessional contributions, and having already used up the proposed retrospective $500,000 non-concessional cap, how can I possibly now achieve my pre-budget plan or even anything close to it? Some 40-year-olds may indeed be crying wolf, but I feel that we 50-somethings are being thrown to them! David

A: David, you are correct but only assuming you receive no return on your money, which is unlikely. I thought I’d run a quick rudimentary spreadsheet on the numbers and you would need to attain a return of 6.5 per cent compounded per annum to attain a little over $1.6 million in 10 years. According to SuperRatings, the average return over the past five years has been around 5.5 per cent for a super fund so assuming you received this return, it may be estimated that you could end of achieving a retirement lump sum of a little south of $1.5 million. Depending on your risk profile, experience, knowledge and preparedness to borrow money, gearing might magnify the returns (and potentially losses) to attain a figure well in excess of $1.6 million.

Incidentally, despite requiring a little faith in the future and an assumption that no further detrimental changes to super will affect you (lets hope not!), I don’t think you will be too far from the mark.

For the record, I do agree with you that the $25,000 is too restrictive and does not adequately encourage Australians to save more in retirement. It is proposed that superannuants will be able to use non-utilised years of the $25,000 (essentially saving it up and making a lump sum of up to $125,000 and still be able to claim a tax deduction). It’s further proposed that they will be able to contribute to super over the age of 65 without having to meet the work test until 75. This will help those people needing to pump up their super using lump sum contributions from the sale of assets or an inheritance.

All of this is increasingly important in a lower interest rate environment when $1.6 million may not create the income stream it did when interest rates were at 7 per cent. I should also note how highly problematic it is attempting to navigate the advice process in this environment after the government has made such impactful announcements without any of them having seen the light of parliament yet.

Q: I am another who will be caught out by the proposed changes to the transition to retirement pension rules. I do not classify myself as wealthy and I did not use the pensions to avoid tax. I believe that I have used them as intended and am now almost completely retired. I would like the option of doing interesting work if it came my way but it looks like that will be denied. I am also annoyed that the government has misrepresented the Productivity Commission which actually suggested that more information is needed to see who used TTR pensions and for what purpose before changes were made. The government is applying collective punishment to all who used the TTR pensions. I am now 68 and hence am well above my preservation age. I have a term allocated pension and an allocated pension in a self-managed super fund. Is it true that if I fully retire before the end of this financial year, the earnings for these pensions will continue to be tax-free? If so, I feel that it is ironic that the government will force a highly educated and experienced person (Ph.D.) from the work force but will draw no additional tax revenue. Michael

A: Thanks for your question, Michael. Your answer is far simpler than you may imagine. Attaining age 65 (three years ago) is a full condition of release so you should be receiving a full account-based pension not a transition to retirement (TTR) pension. TTRs are only for people from preservation age (age 56 at the moment) to age 64. This should have been changed by your administrator or accountant when you turned 65. You really have very little to worry about given the changes.

Essentially, you may continue to work or you may retire but either way, your pension will remain tax-free and you may also retain an accumulation account for as long as you like although it may be prudent to have as much as possible in a pension phase.

The only caveat is if you have greater than $1.6 million in your individual account, although I doubt you’d have a TAP if you are in this situation and the proposals are yet to pass parliament.

These questions are answered without the full financial and lifestyle details of readers and must therefore be taken as general advice. We recommend you speak to a qualified financial adviser for complete and comprehensive advice.

Financial planner Sam Henderson is CEO of accounting, advice and funds management firm Henderson Maxwell (www.hendersonmaxwell.com.au). To submit a question, please email: superquestions@fairfaxmedia.com.au. Published questions will win a free copy of Sam’s book The One Page Financial Plan (Wrightbooks, RRP $29.95) – remember to include your mailing address in your email.
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