An important discussion with Steve Mickenbecker, Group Executive, Financial Services & Chief Commentator at Canstar. Super is fraught with issues, which can squash returns. What can be done to maximise them?
Note: DFA has no commercial relationship with Canstar.
[We had some issues with audio sync over Zoom, fixed in post as best we could]
Quirks in the superannuation system in Australia means that some who save more will get less. This highlights again the limitations of the current arrangements.
We look at a global study of superannuation (pensions) and see where Australia stands, and also discuss the elephant in the room – poor returns in a low rate environment.
What is also clear from the evidence laid out in the report that the not-for-profit sector, including industry super funds, generally outperforms the retail sector. Generally they offer lower fees and higher returns, although there are some industry funds that rank among the lowest-performing.
Despite recent reforms such as the 2013 launch of MySuper, the superannuation system is still beset with the same problems of rising fees and patchy performance. And there is still no substitute for just hopping on the internet and proactively checking that your super is in the best possible hands.
The situation is made complex by the highly segmented nature of Australia’s superannuation system. Besides the public sector funds, the most significant sectors are the retail sector and the not-for-profit funds, including industry funds (see figure 1.5 here). These sectors compete for as large a slice as possible of the overall pool.
Self-managed superannuation funds are also a rapidly growing sector of the market, however the regulatory framework applied to these funds has some significant differences to the rest of the market.
Tracking your super
Most employees have the right to choose their superannuation fund (although around one million don’t), and if they don’t nominate a fund, employers will pay contributions into a default fund.
As the new report points out (see figure 1.2 here), up to 40% of superannuation members hold multiple super accounts. In some cases this may be a deliberate choice – someone with a self-managed super fund may might, for example, choose to have their employer contributions paid into a conventional fund. But often multiple funds are a consequence of employees being enrolled into a new default fund instead of paying contributions into an existing fund.
A range of tools is now available to help people consolidate their super, so as not to lose any of their savings. In the 2018 federal budget the government announced that it would reduce the paperwork involved in this process by allowing the Australian Taxation Office to consolidate inactive super accounts with balances less than A$6,000.
MySuper
The primary aim of MySuper, introduced in 2013, was to provide a simple default product that meets the needs of members who are not engaged with their superannuation. They have no entry fees, offer simpler insurance and services, and lower administration fees that are charged on a cost-recovery basis.
But although the effects of MySuper are generally positive, the 2013 reforms may also have contributed to the erosion of funds identified by the new review.
This report confirms (see chapter 3, p.127 here) that super fund fees in Australia are among the highest in the OECD, and the upward pressure on fees continues. Just this month, the Commonwealth Bank announced that it would pass the costs of regulation onto some superannuation products.
One of the consequences of introducing the fee charging limitations for MySuper accounts was that the previous member protection standards that limited fees on low-balance accounts was repealed. In the 2018 federal budget the government announced that fees would be capped in respect of certain low balance accounts.
This report adds to the evidence that overall the current structure of not-for-profit funds is serving members well. Although it supports proposals to require the trustees of industry funds to increase the number of independent directors, the Productivity Commission highlights the need for a stronger focus on trustee skills and addressing conflicts of interest.
Most of these issues raised have been part of the discussion for the past decade. The fact that they are still on the table shows a level of inertia in the system, and a reluctance by the industry to address its problems.
So how can we, as individuals, protect our retirement nest egg? The key is to engage with the superannuation system, and not just as we approach retirement.
Compare your super fund’s fees and returns with those of the best performing funds, and then choose accordingly. Reduce your fees and insurance premiums by consolidating your accounts, and make sure that any insurance in the fund meets your needs.
The difference at retirement is worth it – up to A$407,000 for a 21-year-old by the time they finish their career.
Author: Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School, Curtin University
According to the Treasury, the retirement phase of the superannuation system is currently under-developed and needs to be better aligned with the overall objective of the superannuation system of providing income in retirement to substitute or supplement the Age Pension. The Government is addressing this through the development of a retirement income framework.
The first stage in this framework is the introduction of a retirement income covenant in the Superannuation Industry (Supervision) Act 1993, which will require trustees to develop a retirement income strategy for their members. The covenant will codify the requirements and obligations for superannuation trustees to consider the retirement income needs of their members, expanding individuals’ choice of retirement income products and improving standards of living in retirement.
They have published a position paper which outlines the principles the Government proposes to implement in the covenant and supporting regulatory structures. Consultations close 15 June 2018.
The retirement income framework
The retirement phase of the superannuation system is currently under-developed and needs to be better aligned with the overall objective of the superannuation system of providing income in retirement to substitute or supplement the Age Pension. The Government is addressing this through the development of a retirement income framework. The framework is intended to:
enable individuals to increase their standard of living in retirement through increased availability and take-up of products that more efficiently manage longevity risk, and in doing so increase the efficiency of the superannuation system and better align the system with its objective; and
enable trustees to provide individuals with an easier transition into retirement by offering retirement income products that balance competing objectives of high income, flexibility and risk management.
In December 2016, a discussion paper on Comprehensive Income Products for Retirement (CIPRs) was released for consultation[1]. Submissions closed on 7 July 2017. The Department of the Treasury (Treasury) received 57 written submissions on the discussion paper, and met with more than 100 organisations.
That consultation revealed that there is broad agreement on the importance of what the CIPRs policy is seeking to achieve, but divergent views on the best way to achieve the objectives.
In addition, some stakeholders stressed the importance of finalising the social security treatment of pooled lifetime income products first. The Government announced the treatment of the social security means test rules for new and existing pooled lifetime income products in the 2018‑19 Budget.
Having taken steps to remove barriers to the introduction of pooled lifetime income products, the Government plans to prioritise progress on the development of a retirement income covenant.
The Government has also announced it will progress the development of simplified, standardised metrics in product disclosure to help consumers make decisions about the most appropriate retirement income product for them. Other elements of the framework will be developed progressively:
reframing superannuation balances in terms of the retirement income stream they can provide, by facilitating trustees to provide retirement income projections during the accumulation phase; and
a regulatory framework to support the other elements of the retirement income framework including definitions, any necessary safe harbours, requirements for managing legacy products and other details.
Retirement income covenant
On 19 February 2018 the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, announced the establishment of a consumer and industry advisory group to assist in the development of a framework for CIPRs.
The central task of the advisory group was to provide advice to Treasury on possible options and scope of a retirement income covenant in the Superannuation Industry (Supervision) Act 1993 (SIS Act). The group strongly supported the idea of a retirement income covenant and provided advice on the proposed framework. This feedback has helped shape the proposed approach set out in this paper.
As part of the Government’s More Choices for a Longer Life Package in the 2018-19 Budget, the Government has committed to introducing a retirement income covenant as a critical first stage to the Government’s proposed retirement income framework. This will codify the requirements and obligations for superannuation trustees to improve retirement outcomes for individuals.
Existing covenants in the SIS Act include obligations to formulate, review regularly and give effect to investment, risk management and insurance strategies; but not a retirement income strategy.
Introducing a retirement income covenant will require trustees to consider the retirement income needs and preferences of their members. It will ensure that Australian retirees have greater choice in how they take their superannuation benefits in retirement. This should allow retirees to more effectively choose a retirement product that aligns with their preferences, improving outcomes in retirement. The proposed obligations for inclusion in the covenant are outlined in the section ‘Covenant principles’.
The covenant will be supported by regulations to provide additional guidance and outline in more detail how trustees will be required to fulfil their obligations. Appropriate enforcement will also be part of the framework. The ‘Supporting principles’ section outlines the principles and guidelines that would be included in regulations (and possibly prudential standards). Implementation of these regulations may require adjustments to existing regulations and instruments.
Finally, additional principles have been identified that may be appropriate for inclusion in the retirement income framework, but which are not being fully developed at this time. These principles will form part of the regulatory framework to be progressed at a later date.
The covenant and supporting principles would apply to trustees of all types of funds except Australian eligible rollover funds (ERFs) and defined benefit (DB) schemes that offer a DB lifetime pension. The Government considers that it would not be appropriate to require trustees of these fund types to develop a retirement income strategy because ERFs do not have any members in retirement and a DB lifetime pension already reflects an implicit retirement income strategy.
While all members of the advisory group provided valuable input and insights which have helped inform this position paper, the positions expressed in this paper are those of the Government.
The retirement income framework, including the covenant, will be implemented with an appropriate transition period to allow sufficient time for industry to adjust. The Government proposes to legislate the covenant by 1 July 2019 but to delay commencement until 1 July 2020. This timing would allow the market for pooled lifetime income products to develop in response to the changes to the Age Pension means test arrangements announced as part of the 2018-19 Budget and for other elements of the framework to be settled.
[1] Treasury, Development of the framework for Comprehensive Income Products for Retirement, Canberra, 2016.
Despite not being able to estimate the true amount of superannuation guarantee non-compliance, the Government is proposing a number of reforms to protect employees and strength compliance. They say it is mostly small businesses who are non-compliant, and this is often caused by cash-flow issues. We have summarised their recommendations.
On 31 March 2017, the Superannuation Guarantee Cross-Agency Working Group provided its report on Superannuation Guarantee Non-Compliance to the Minister for Revenue and Financial Services. This Working Group, established in December 2016– comprised officials from the Australian Taxation Office (Chair), the Treasury, the Department of Employment, the Australian Securities & Investments Commission and the Australian Prudential Regulation Authority.
There are currently no robust estimates of superannuation guarantee non-compliance.
In December 2016, Industry Super Australia (ISA) estimated non-compliance in 2013-14 to be $2.8 billion (affecting an estimated 2.15 million employees). In March 2017 this estimate increased to $5.6 billion (affecting an estimated 3 million employees).
The Working Group believes this estimate should be considered in the context of the $89.6 billion in total employer contributions made in 2015-16. From the analysis of ISA’s methodology, the Working Group considers that the $5.6 billion estimate is likely to substantially overstate the actual size of the superannuation guarantee gap. The data is inconsistent with experiences and observations from the ATO’s
compliance program.
A review of ATO case data indicates that small businesses account for around 70 per cent of reported superannuation guarantee non-compliance. Cash flow problems are often the major reason small business employers provide as to why they did not pay their employees’ superannuation guarantee contributions.
The Working Group recognises that while there is, overall, a high level of voluntary compliance by the majority of employers there is scope to improve compliance to better safeguard employee entitlements.
The Working Group has identified two key barriers to maintaining or improving superannuation guarantee compliance.
The first barrier is that the ATO does not currently have any visibility over an employer’s superannuation guarantee obligations to their employees. The second barrier is that the ATO only receives information on superannuation guarantee payments received by superannuation funds on an annual basis so there can be a lag of up to 14 months in the reporting of contributions that employers have paid. This delay further reduces the effectiveness of the ATO’s compliance work.
The Working Group proposed changes that would improve substantially the ATO’s capacity to monitor superannuation guarantee compliance:
All employers should report superannuation guarantee obligation information to the ATO in a more timely manner. One way this will be achieved is to leverage the Government’s introduction of Single Touch Payroll legislation. Single Touch Payroll will commence for businesses with 20 or more employees from 1 July 2018. The Working Group considers that Single Touch Payroll should be extended to businesses with 19 or fewer employees as soon as practicable. Subject to more detailed design and consultation, it is believed that this change may be able to be implemented from 1 July 2018.
The regime should be more flexible so that penalties can be tailored to reflect different levels of employer behaviour and culpability. The current penalty regime within which the ATO operates is not consistent with the settings of other areas of taxation administration. The superannuation guarantee charge regime operates largely on a one-size-fits-all basis and does not distinguish between deliberate or repeated non-compliance and inadvertent mistakes.
Employers display to avoid superannuation guarantee obligations are closely related to characteristics that are seen in phoenix activity – the Phoenix Taskforce, which may recommend widening the manner in which the ATO is able to use Security Bonds and more readily securing outstanding superannuation guarantee charge debts through Director Penalty Notices.
The Government should clarify the law on how salary sacrifice agreements affect an employer’s superannuation guarantee obligations. In particular to, firstly, ensure that employers cannot use an amount an employee salary sacrifices to superannuation to satisfy the employer’s superannuation guarantee obligation; and secondly, to ensure that the ordinary time earnings base used to calculate an employer’s superannuation guarantee obligation includes those salary or wages sacrificed to superannuation. This will ensure that employees receive the full benefit of voluntary contributions.
At present, superannuation guarantee is required to be paid by employers within 28 days of the end of each quarter. The Working Group considers that improvements to data visibility are the main priority after which payment frequency could be reviewed.
There is merit in departments working more closely to promote conformance with, and performance of, the superannuation guarantee system drawing from the respective roles and expertise of each agency. So some information sharing arrangements will be changed.
Research commissioned by Industry Super Australia (ISA) suggests that the big four banks took a third of the estimated $30 billion in fees generated out of the nation’s $2 trillion superannuation sector in the 2014-15 financial year.
According to Fairfax Media, the report, by consultants at Rainmaker said not-for-profit funds generated 25 per cent of the fees but held 41 per cent of funds under management, while retail funds claimed 50 per cent of fees despite holding only 30 per cent of all funds under management.
ISA chief executive David Whiteley said that the fees directed to the larger entities lacked transparency, arguing the current regulatory focus on industry funds was misplaced.
“You’ve got a $2 trillion super industry generating $30 billion in fees and $10 billion of that goes to four banks, and these are the banks campaigning to dismantle the superior not-for-profit model,” he said, according to Fairfax.
Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Like the nine-headed Hydra, which replaced each severed head with two more, each time the idea is cut down it seems to return even stronger.
Both sides of federal politics took proposals to the 1993 election to let Australians draw down their super. After re-election, then Prime Minister Paul Keating scrapped it amid widespread criticism. Former Treasurer Joe Hockey raised the idea again in March and was roundly criticised by academics and the media. This month the Committee for Economic Development of Australia (CEDA) has again resurrected the idea.
House prices have skyrocketed again over the past two years, particularly in Sydney. So politicians are attracted to any policy that appears to help first homebuyers to build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But the change would worsen housing affordability, leave many people with less to retire on, and cost taxpayers in the long run.
It is a bad idea for five reasons.
First, measures to boost demand for housing, without addressing the well-documented restrictions on supply, do not make housing more affordable. Giving prospective first homebuyers access to their superannuation will help them build a house deposit, but it would worsen affordability for buyers overall. Unless supply increases, more people with deposits would simply bid up the price of existing homes, and the biggest winners would be the people who own them already.
Second, the proposal fails the test of superannuation being used solely to fund an adequate living standard in retirement. The government puts tax concessions on super to help workers provide their own retirement incomes. In return, workers can’t access their superannuation until they reach a certain age without incurring tax penalties.
While paying down a home is an investment, owner-occupiers also benefit from having somewhere to live without paying rent. These benefits that a house provides to the owner-occupier – which economists call housing services – are big, accounting for a sixth of total household consumption in Australia. Using super to buy a home they live in would allow people to consume a significant portion of the value of their superannuation savings as housing services well before they reach retirement.
Third, most first homebuyers who cash out their super would end up with lower overall retirement savings, even after accounting for any extra housing assets. Owner-occupiers give up the rent on their investment. With average gross rental yields sitting between 3% and 5% across major Australian cities, the impact on end retirement savings can be very large. Consequently, owner-occupiers will tend to have lower overall lifetime retirement savings than if the funds were left to compound in a superannuation fund
Frugal homebuyers might maintain the value of their retirement savings if they save all the income they no longer have to pay as rent. In reality, few will have such self-discipline. Compulsory savings through superannuation have led many people to save more than they would otherwise. A recent Reserve Bank study found that each dollar of compulsory super savings added between 70 and 90 cents to total household wealth. If first homebuyers can cash out their super savings early to buy a home that they would have saved for anyway, then many will save less overall.
Fourth, the proposal would hurt government budgets in the long run. Superannuation fund balances are included in the Age Pension assets test. The family home is not. If people funnel some of their super savings into the family home, gaining more home equity but reducing their super fund balance, the government will pay more in pensions in the long-term.
Government would be spared this cost if any home purchased using super were included in the Age Pension assets test, but that would be very hard to implement. For example, do you only include the proportion of the home financed by superannuation? Or would the whole home, including principal repayments made from post-tax income, be included in the assets test? The problems go away if all housing were included in the pension assets test, but this would be a very difficult political reform.
Fifth, early access to super for first homebuyers could make the superannuation system even more unequal than it is today. Many first homebuyers are high-income earners. Allowing them to fund home purchases from concessionally-taxed super would simply add to the many tax mitigation strategies that already abound.
Consider the case of a prospective homebuyer earning A$200,000. Their concessional super contributions are taxed at 15%, rather than at their marginal tax rate of 47%. Once they buy a home, any capital gains that accrue as it appreciates are tax-free, as are the stream of housing services that it provides. Such attractive tax treatment of an investment – more generous than the already highly concessional tax treatment of either superannuation or owner occupied housing – would be prone to massive rorting by high-income earners keen to lower their income tax bills.
What, then, should the federal government do to make housing more affordable?
Prime Minister Malcolm Turnbull has tasked Jamie Briggs with rethinking policy for Australia’s cities.Mick Tsikas/AAP
Helping fix our cities
Above all, new federal Minister for Cities Jamie Briggs should support policies to boost housing supply, especially in the inner and middle ring suburbs of major cities where most people want to live, and which have much better access to the centre of cities where most of the new jobs are being created. The federal government has little control over planning rules, which are administered by state and local governments. But it can use transparent performance reporting, rewards and incentives to stimulate state government action, using the same model as the National Competition Policy reforms of the 1990s.
Other reforms, such as reducing the 50% discount on capital gains tax and tightening negative gearing, would also reduce pressure on house prices and could be implemented straight away. Such favourable tax treatment drives up house prices because it increases the after-tax returns to housing investors. The number of negatively geared individuals doubled in the 10 years after the capital gains tax discount was introduced in 1999. More than 1.2 million Australian taxpayers own a negatively geared property, and they claimed A$14 billion in net rental losses in 2011-12.
There are no quick fixes to housing affordability in Australia. Yet any government that can solve the problem by boosting housing supply in inner and middle suburbs, while refraining from further measures to boost demand, will almost certainly find itself rewarded, by voters and by history.
Authors: Brendan Coates, Senior Associate, Grattan Institute; John Dale, John Daley is a Friend of The Conversation, Chief Executive Officer , Grattan Institute.
They have published a position paper which outlines the principles the Government proposes to implement in the covenant and supporting regulatory structures. Consultations close 15 June 2018.
On 31 March 2017, the Superannuation Guarantee Cross-Agency Working Group provided its report on Superannuation Guarantee Non-Compliance to the Minister for Revenue and Financial Services. This Working Group, established in December 2016– comprised officials from the Australian Taxation Office (Chair), the Treasury, the Department of Employment, the Australian Securities & Investments Commission and the Australian Prudential Regulation Authority.
