In a mixed response to last week’s federal Budget (February 6) the superannuation and associated sectors were generally supportive of the Government’s goals but almost universally concerned about how certain proposals would work and the likelihood of unintended adverse consequences.
On a macro level there was no significant political divide, with consensus being that the Government needed to spend a truckload of money, which it is doing. The precise make-up of the expenditure was questioned by some, as to be expected.
Largely depending on one’s view of when a vaccine will emerge, the extent of the spending and how long it should last was also open to personal and political views. However, the super sector, perhaps more than any other of its size and importance, was left wondering.
The elephant in the room went unaddressed. To fulfill its legislated promise the Government must resume the planned movement towards a Superannuation Guarantee level of 12 per, with the first 0.5 per cent due from next July. As was agreed in 2016, this is to be followed by another 0.5 per cent the year after and then 0.25 per cent a year after that until 12 per cent is reached. The increase was originally scheduled to start its difficult journey two years earlier, in 2014, but that was delayed by the Abbott Government.
The most recently relevant minister, Victorian Senator Edwina Jane Hume, the Assistant Minister for Superannuation, Financial Services and Financial Technology, and, various Coalition backbenchers, such as NSW Senator Andrew Bragg and Victorian Senator Tim Wilson, have repeatedly advocated another delay in the lead-up to the Budget, along with other major changes. Here is a summary of the sector’s initial responses.
The Institute chose to outline the changes rather than comment, at least initially. It said: “For over two decades superannuation changes have been announced in the Budget. This year is no different, though this year the Government has avoided reforms to super with a large fiscal impact and has instead opted for a number of significant reforms affecting the distribution of superannuation in the ‘Your Future, Your Super’ package. These reforms seek to address recommendations of the Productivity Commission and include:
- The stapling of existing superannuation accounts to a member to avoid the creation of a new account when they change employment
- Benchmarking tests by APRA on the net investment performance of MySuper products prohibiting products that have underperformed (over two consecutive annual tests) from receiving new members, and
- The development by the ATO of a YourSuper portal enabling employees to compare and select their superannuation product from a list of MySuper products. The Budget did not extend the temporary early release of super or put a freeze to the SG as many had speculated.
However, it did formalise a number of measures previously announced, including the COVID early release scheme and halving of the minimum drawdowns, as well as the deferral of the retirement income covenant to July 2022 so it can be informed by the Retirement Income Review.
Martin Fahy, chief executive of the Association of Superannuation Funds of Australia, said: “ASFA supports measures to lift standards for MySuper in order to improve retirement outcomes for superannuants, and how these changes are made needs to be carefully considered. We don’t suffer from a shortage of good funds and we need to ensure that these measures don’t reduce competitive intensity or damage the nation building role of superannuation.
“In the absence of the release of the Retirement Income Review and the lack of specificity in the Budget papers, it is unclear how the changes will work in practice or what the implications will be for competition, efficiency and incumbents in the sector. We need to avoid reducing the complexity of MySuper to a singularity without any reference to the nuance of member preferences and long-term fund performance.”
The Australian Institute of Superannuation Trustees, representing an estimated $1.4 trillion in super managed by not-for-profit funds, said a new ‘super stapling’ measure would need careful consideration to ensure all members’ interests were protected. Eva Scheerlinck, the chief executive, said there was no place for underperformance in the super system, but the industry would need to see more detail about how individuals would be stapled to a fund for life.
“We need to ensure that people are not in danger of being mis-sold or stapled to an underperforming fund outside the default system,” she said. “In particular, we are concerned that the scheme does nothing to protect people who are already in dud funds.” She was also “deeply concerned” that individuals could find themselves uninsurable because they were stapled to a fund whose insurance does not cover their occupation. For instance, someone whose first out-of-school-job is working in a call centre who then goes on to work in the mining industry may be stapled to a fund where they don’t qualify for insurance protection.
On the Government’s announcement of a consumer comparison tool for super and an annual performance test based on net returns, AIST said both measures were long overdue, but the comparison tool should extend to all super products. Scheerlinck said it was disappointing that there was nothing in the Budget to improve retirement outcomes for vulnerable Australians.
“This budget is a missed opportunity to deliver greater financial security in retirement for low income earners and women, especially those who have been forced to deplete their super savings by accessing early release due to the COVID pandemic,” she said.
Also, AIST would continue to call for the Government to abolish the $450 monthly income threshold and pay super on paid parental leave. It also called on the Government to consider a one-off contribution to super accounts of low-income earners who accessed their super early.
Super reforms are welcome but leave billions on the table, according to Industry Super Australia. The super reforms to ‘staple’ members to their existing super fund and stop underperforming funds from taking on new members are not the most effective way to remove multiple accounts.
Instead members’ money should be automatically rolled over into a new fund when they change jobs. The issues of underperformance and multiple accounts must be tackled but with far more ambitious reforms and a more rigorous performance assessment. The policy details outlined in the budget need re-calibration and strengthening to fully realise benefits for members.
The stapling mechanism announced won’t actually help consolidate the existing 10 million surplus accounts – it will only prevent new ones being created. Multiple accounts are eliminated more effectively by stapling Australians to their money – so their super automatically rolls over to a new quality checked super fund when they start a new job – unless they choose otherwise.
Bernie Dean, ISA chief executive, said: “The low-cost workplace default system has protected workers from being ripped off by unscrupulous players, these reforms must build on and improve those foundations – not undermine them.”
The Australian Investment Council, representing the private equity sector, said the “major extension” to the investment allowance to encourage more businesses to invest in new assets and equipment was an important policy initiative that would help to create new activity across every sector of the economy.
Yasser El-Ansary, AIC chief executive, said the initiative was precisely what the economy needed right now. He said: “The new cash incentive for businesses to hire unemployed workers aged between 16 and 35 will play an important role in helping to address the potential risks of structural unemployment for younger workers…
“From the first impacts of the global pandemic earlier this year, the [AIC] has led the call for changes to introduce a cap on refundable R&D credits to be abandoned, and it’s pleasing to see that the Government has accepted that advice and decided not to proceed with the previously announced reforms…”
On new investment into Australia’s manufacturing capability, he said: “The Council also supports government’s focus on advanced manufacturing in industries where we already are, or could be, world leaders and going narrow and deep in developing them further.”
Often a thorn in the side of the super sector, the think tank was onside this time around. Danielle Wood, Grattan Institute director, and president of the Economics Society, delivered her response as the keynote presentation at this year’s Morningstar Investment Conference (see other reports this edition).
At the macro level, she said the tax cuts were not as well designed as a stimulus as they could have been. She said that it was only changes in the tax scale that were brought forward; not the tax offset, which take effect when people put in their tax returns. “And that’s where the action is,” she said. “My concern is that we’re not getting that kicker now when it’s needed.”
The Budget also focused on sectors which did not need it most. “It doesn’t make a lot of sense to me in terms of a stimulus to concentrate on construction and transport. A recent poll by the Economics Society showed that social housing should be the number one priority “by a big big margin” for both stimulus and long-term social benefit.
Missing was anything on child care and aged care, where permanent boosts were needed. “The cost of child care is a big problem for a recovering economy and is an important long-term reform,” she said. Also, there was no clarity on the fate of JobSeeker, which was due to end in December.
In the super and retirement section of a detailed response, Mercer said about ‘Your Future, Your Super’ that the announcement was light on detail and the implementation timeframe seemed ambitious. The change does not directly address the issue of existing members with multiple accounts. The Government was relying on the existing transfer of assets below $6,000 for inactive accounts to the ATO to reduce multiple accounts.
“We are concerned that the changes will undermine employer-provided group super arrangements which are some of the most competitive in the industry. We are also concerned about the group insurance implications,” the firm said. “Stapling of members to a specific default for the duration of their career, particularly where that fund is the default fund for the individual’s first employment, has the potential to exacerbate the underinsurance of the working Australian population.”
On the Your Super performance comparison tool, which expands on APRA’s roundly criticised ‘Heatmap’, Mercer said this would require careful education of members to ensure it was used appropriately. For example, it is unclear how the fee ranking would take account of individual member characteristics, such as account balance. “It also seems that the tool will encourage members to choose a fund purely based on past investment performance,” Mercer said. The measure of performance was a “blunt tool”.
Graham Hand, the editor of the influential FirstLinks industry newsletter (now a Morningstar company) takes the prize for the best post-budget headline: “YourSuper will save $17.9 billion! Surely you’re joshing”.
In his analysis, Hand says many factors influence performance, including positions on growth versus defensive assets, which may be due to a member’s age and health, and investment styles such as growth versus value. Many experts are tipping a return to popularity for the underperforming value style because of the dominance of big tech stocks in the 10-year outperformance of growth.
“We could go on,” Hand says. “A fund manager may take a strong sustainability position against fossil fuels just as oil prices rise rapidly. Should they be punished for saving the world? Another fund may hold government bonds in its defensive allocation as interest rates rise rapidly, losing their defensive characteristics in the comparison period. Of course, the bond will repay at par on maturity but by that time, the damage is done.
“At industry funds, insurance arrangements for members are often unique to the relevant industry, and cheaper than comparable insurance in the public market. For example, many Mine Super members are miners who need protection in a risky industry, and the fund has negotiated attractive group prices. What happens with insurance when an apprentice coal miner starts work if Mine Super is unable to accept new members?”
Also, he says: “The fear is that superannuation fund trustees become so worried about the fund closing to new members and the shame of public underperformance that they stop the investment team backing its views. The CIO who decides the market outlook is poor and wants to take a more defensive position to protect member capital may be prevented from doing so or be forced to reverse a position if timing is wrong in the first year…
“It is common for a fund manager to lead the league tables over one period and be bottom of the pile over another, and few stay in the top tier over all periods. Some hog the index because business survival is often more important than market performance.”
When did a proposed change to government policy – any change to any policy – become a ‘reform’? The term, which one would think is a value judgement, has been universally adopted as a fact by both sides of governments and also by commentators and lobbysts. They are changes, not reforms.
The Macquarie Dictionary, Australian journalists’ bible, says of ‘reform’: “The improvement or amendment of what is wrong, corrupt, etc.; the amendment of conduct etc.; restore a former and better state, improve by alteration, substitution, abolition etc.”
Australian journalists, by the way, are not immune, either, from the misuse of this word.