Hardship early release super – good policy or ticking time bomb?

In the near 30-year history of the superannuation guarantee (SG) in Australia few measures have proved as impactful as the Government’s COVID-19-generated decision to allow people hardship early access to up to $20,000 of their superannuation over the 2020/21 financial year.

The measure was one of the earliest announced by the Prime Minister, Scott Morrison and the Treasurer, Josh Frydenberg, in the face of the COVID-19 pandemic and preceded by almost a week their even more dramatic announcement of the JobKeeper and JobSeeker regimes.

At the time of writing, the latest available Australian Prudential Regulation Authority (APRA) data showed that nearly $17 billion had been withdrawn from superannuation accounts by members who were claiming to be suffering hardship as a result of job losses or reductions in hours resulting from COVID-19.

The question now on the minds of many superannuation fund trustees and executives is whether the momentum which has been evident in the rate of early release drawdowns will continue beyond 30 June, when superannuation fund members find themselves entering a new financial year and therefore able access a further maximum $10,000.

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The question is: have those members who have accessed drawdowns emptied or almost emptied their account balances, or are there more drawdowns to come?

The official announcement released by Frydenberg in mid-March stated: “The Government will allow individuals in financial stress as a result of the coronavirus to access up to $10,000 of their superannuation in 2019/20 and a further $10,000 in 2020/21”.

“Eligible individuals will be able to apply online through MyGov for access of up to $10,000 of their superannuation before 1 July, 2020. They will also be able to access up to a further $10,000 from 1 July, 2020 for another three months. They will not need to pay tax on amounts released and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments.”

It was hardly surprising then, that the general view of the scheme was that it would represent access to tax-free money and that it would become the target of a number of scammers and boosters.

What no-one is disputing is that, ultimately, those people who have taken advantage of early access to their superannuation will face an uphill battle seeking to restore their account balances in future years and that, because of this, many will be have to be more reliant on the Age Pension. The relatively young ages of those involved means that the Budget impacts will be in 40 to 45 years’ time when Frydenberg, Morrison and COVID-19 are but dim memories.

The vetting of early release applications was a task handed to the Australian Taxation Office (ATO) with statistical monitoring and oversight of the scheme handed to APRA.

And what APRA’s weekly monitoring of the scheme has revealed is that after a somewhat modest start, early release drawdowns have accelerated week on week in terms of the number of members utilising the scheme and the impact on superannuation fund funds under management (FUM).

Just how quickly the number of members seeking early access multiplied is exemplified by the fact that in its first compilation of data dealing with the drawdowns to 4 May, APRA reported that 665,310 superannuation fund members had drawn down $1.3 billion involving an average drawdown amount of $8,002.

A week later this had grown to over one million members drawing down $6.3 billion at an average of $7,629 each and by June it had reached nearly two million members drawing down $13.5 billion at an average of $7,473.

Total value of early release drawdowns ($m)

Source: Australian Custodial Services Association

Superannuation fund executives and senior industry consultants have confessed to be surprised at the manner in which the momentum of early release withdrawals had continued even the in face of some of the reopening of the economy in mid-to-late June.

What is more, there has been surprise at the number of early release applications being made by members of superannuation funds covering industries which have been regarded as largely unaffected by the COVID-19 shutdowns.

EISS Super chief executive, Alex Hutchison, whose members are predominantly employed in the NSW electricity supply and distribution sector, confirmed the fund had paid out $8.5 million in early release requests at an average of $7,500.

“There’s nothing wrong with that, but the electricity industry has not been as badly affected as others,” he said.

The APRA data reveals that 10 funds exist which account for more than half of all the drawdowns to date, and the reality for people like Hutchison is that the levels of drawdowns their funds have experienced are a small fraction of what has been encountered by the likes of AustralianSuper, HostPlus, REST, Cbus, Suncorp, HESTA, MLC, CFS and ANZ.

To a large extent, these funds are in the top 10 simply by virtue of their large numbers of members, however both HostPlus and REST faced significant exposure because of the large numbers of members working in the retail, events and hospitality.

The APRA data found that the 10 funds with the highest number of applications received from the ATO had made 1.3 million payments worth a total of $9.76 billion with the average payment from these funds being $7,441.

According to the data, the 10 funds are accounting for well over 60% of the early release payments.

Over the week to 7 June, 2020, the data pointed to superannuation funds making payments to 167,000 members, bringing the total number of payments made to approximately two million since inception.

“The total value of payments during the week was $1.3 billion, with $14.8 billion paid since inception,” it said. “The average payment made over the period since inception is $7,475.”

There is a lingering perception among superannuation industry consultants that the rushed implementation of the early release scheme has served to undermine its validity in circumstances where numerous instances of inappropriate drawdown have been identified along with suggestions that the money has been used for drinking and gambling.

Deloitte superannuation partner, Russell Mason, said he was loathe to be totally critical of the early release scheme because its objectives had been honourable, but it was clear that its rushed designed and implementation had caused some issues.

What is more, he said, was that he believed that any audit of how the scheme had been operating would reveal that while some members had inappropriately accessed their superannuation, this might have been more by mistake than by design.

“I think some people simply did not understand the difference between a 20% reduction in hours and a 20% reduction in income,” Mason said. “It is an easy enough mistake to make.”

However, he said there should be little sympathy offered to those who had deliberately sought to manipulate the system such as by taking early access and then recontributing on behalf of a spouse or a child so as to attract a co-contribution.

Importantly, Industry Super Australia (ISA) welcomed an ATO statement that it would be particularly scrutinising early release superannuation in the context of people seeking to minimise their taxation position – something which could be achieved through re-contribution strategies spruiked by some financial advisers.

Rice Warner chief executive, Andrew Boal, said there was no question that the rate of drawdown on early release superannuation and the manner in which it had accelerated had surprised many in the industry and probably in Government.

He noted that, to date, it was more than half of what had originally been anticipated.

Boal, like Mason, suggested at least part of the problem with the early release scheme had been the speed with which it had been implemented and the absence of any significant safeguards – even the threat of random audits.

He said he believed some momentum would come out of the early release drawdowns based on the economy restarting, people returning to work and the likelihood that, in many instances, account balances has simply been emptied out.

Number of members accessing early super

Source: Australian Custodial Services Association