Has the excess contributions regime become excessive?

• Roundtable part 1: Fallout from the Productivity Commission's super findings
• Roundtable part 2: The trouble with default superannuation funds
• Roundtable part 3: Is enough superannuation reform never enough?
• Roundtable part 4: Has the excess contributions regime become excessive?
• Roundtable part 5: Superannuation lump sums – like it or lump it?

In this session from the 2012 Super Review ASFA roundtable, participants examine the efficiency of superannuation, in particular, whether the excess contributions regime is too draconian.

Mike Taylor, managing editor, Super Review: One of the things that has been raised by the panel and by [Anne Myers, CIO, ING Direct] in passing is the efficiency of the system, and sometimes what might be perceived as a deliberate inefficiency in terms of rolling from one fund to another.

But one of the issues raised at a function we had the other night was the question of excess contributions, and the manner in which you can be severely punished if you’ve reached the excess contributions caps.

It seems to me that there’s a lot of debate still in the industry about whether the system dealing with excess contributions is actually far too draconian and doesn’t take account of the fact that most people err simply by mistake, rather than by intention.

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I just wonder, Pauline, whether you think the Government ought go back and review what is a bit of a problem in the industry at the moment – which is, people can get caught by slow employers and slow funds. 

Pauline Vamos, CEO, Association of Superannuation Funds of Australia (ASFA): There is an assessment at the moment of the processes used by the ATO, because as we know, the ATO has some discretion on whether to actually apply the higher tax rate.

That review was started in terms of consistency and whether or not the approach by the ATO has been reasonable. 

It’s a very difficult issue, because you’ve got inadvertent [excess contributions], particularly with some members of SMSF vehicles; but you’ve also got inadvertent [excess contributions] where you should’ve known [this] with some people as well. 

My understanding is that by far the greatest breach of this area is with self-managed fund members.

Now, these are engaged people, who pay good money to advisers for individual attention, so I would want to make sure, as part of the consumer protection of the people in self-managed funds, that their advisers are being held to account, because I think that is often something that is missed in this debate.

Mike Taylor, Super Review: Russel?

Russell Mason, partner, Deloitte: Yeah, I think Pauline’s quite correct. It’s a confusing and complex area, at the best of times and we experts in the industry find it complex, so the average consumer must find it a nightmare.

Yes, advisers have a duty to their members to make sure they fully understand and to avoid those sort of problems.

To be fair, most of the large funds that would be in Pauline’s constituency, the big corporate, public sector industry retail funds, do put a lot of effort in this area to make sure members are fully informed.

Letters go out and I’ve noticed that now the ATO will send letters out when you’ve reached your concessional contribution limit or what they assume is your concessional contribution limit.

But it is a complex area and I’m sure many people inadvertently over-contribute.

Mike Taylor, Super Review: Anne?

Anne Myers, ING Direct: Look, I don’t think I can add much commentary to that one. I think it is certainly a problem. Is it the biggest problem we face?

I don’t think so. I’d be much more concerned about the employers not making contributions, than perhaps the occasional people paying a little bit more tax, because they over-contribute. 

Mike Taylor, Super Review: Peter, have you got any perspective on that?

Peter Beck, CEO, Pillar: From an administration point of view, it’s a lot easier just to refund when people overpay, and we don’t do self-managed super funds, so I can’t really speak about them.

But I would say the majority of people have just made a mistake and they effectively want to correct it. 

It is difficult for us, because they blame us when they pay extra contributions, despite the fact that they may have been told half a dozen times.

It is complex from an administration point of view, trying to explain to people and particularly [answering questions like], “Why can’t you just pay it back? Why can’t you just refund, it’s pretty simple? If you put money in an account and you didn’t mean to put it in, or there were reasons not to put it in, just refund it”.

We have to explain that it’s not as easy as that.

I think that’s the complexity of our industry that I’d prefer to get rid of and just pay the money back.

I don’t have a view in terms of whether people are manipulating the situation or not. I just have a view that says, “The bulk of people just make mistakes. Let’s pay them their money back and be done with it”. 

You can do that pretty quickly and efficiently – and there’s not a massive gain in financial terms for people who’ve done that [manipulating]. 

Mike Taylor, Super Review: Which brings me to the question of concessional contribution caps, which are down to $25,000 now, which most people would say is not an exceptionally high amount.

Given that we’ve had a series of intergenerational reports, not to mention other government enquiries that suggest that we remain, by and large, insufficiently superannuated, is this a wise policy to have?

That is, to sequentially lower the concessional caps?

Pauline Vamos, ASFA: It might be wise policy long-term, because the system will be mature.

The most significant issue is the timing of it, because you’ve got so many people now nearing the time [of retirement] who are baby boomers, who really are not able to contribute what they want. 

I think the other big issue is the fact that the caps had been changed so many times, that that has done a lot for people, in terms of looking at other ways that they can save.

Our concern is always, if they’re not putting money into super, then are they putting it into other tax-incentivised vehicles including property – and what is the impact of that: on their risk profile, on their investment profile and their eventual retirement.

We worry about the gap, particularly for women. The female gap is huge in this area. Maybe we do need to have some sort of discrimination, I guess, in favour of females, so they can double their caps. 

Mike Taylor, Super Review: Well Russell, you have a view on positively discriminating in favour of females?

Russell Mason, Deloitte: I have a view of positively discriminating in favour of anyone who hasn’t been able to accumulate enough for retirement – and Pauline is quite correct, it’s often women.

It is often working couples who’ve been paying off mortgages, who have been putting their kids through school, a whole range of day-to-day expenses that we all face.

They get to catch-up phase and they haven’t caught up.

I can understand the Government’s view, when it makes comments such as, “Well, no-one needs five or 10 or 15 million dollars in retirement”, and some people, especially in the self-managed space, have massive amounts in superfunds in retirement.

But surely people should be allowed to catch up, and maybe we need to go back and look at putting a cap on the total amount, so that ordinary working people have got a chance to catch up. 

As you said, $25,000 really isn’t a lot. You get people in their mid-50s who are willing to sacrifice all of their salary into super, to do their catch-up.

My view is that’s good. At the end of the day, it puts money into the system. It allows them to avoid calling on social security and we should do all we can to encourage that. 

Anne Myers, ING Direct: I’m a bit with Pauline. I think the consistency is the major issue: that by having a $100,000, $50,000, $25,000 cap ; if it’s a predictable amount, then at least people know what they’re dealing with.

They can plan for it in the future and then therefore deal with it.

I think people do tend to forget that it is quite possible to make post-tax contributions as well. It seems to be in a lot of the financial press and so on, that you can’t make contributions above $25,000.

Well, you can, and in fact if you can afford to make contributions above, then you may well be able to afford to pay the tax to do it as well.

It’s always that dilemma of the budget deficit versus the concession available.

One of the features I find quite interesting, which isn’t talked about too much, is the taking of a lump sum, post-retirement, and building up, using that concessional contribution to then take out a large lump sum and go off and have your holiday and then come back and go on the pension.

I think there’s also a counteracting piece of post-retirement: should we be putting a few more boundaries around what people can actually draw down, when they draw it down, and using super for what it was intended for? 

Pauline Vamos, ASFA: That, of course, is a very live issue at the moment and it’s a discussion that will come up through the conference.

We’re putting a paper on various options to our CEO think tank.

The design of the system and that balance between paternalism and giving people choice, in terms of what they should do, is a difficult one and there’s not enough information. 

Yes, there might be some people with lower lump sums who go and just spend, and then go on the pension, but they’re going to be on the pension anyway.

For most people with a sizeable lump sum, the biggest issue is that they don’t bore down enough and they’re so scared about running out of money.

So there’s the whole issue of products in that space, and there’s different views between APRA and the ATO as to what is a legitimate post-retirement product.

That is a significant concern that we have to fix quickly.

Peter Smith, head of distribution, Metlife: With so much other change that people are having to concentrate on, how are they going to spend the time on post-retirement innovation and products, when they’re trying to model some of the other legislation changes?

It’s very difficult for the organisations to spend time on innovation and look at these products.

Peter Beck, Pillar: I’ll make two comments.

One is, I agree with what Anne said, I don’t think you can solve this problem without solving the pension problem, if you like.

We need to figure out on the pension system – how the drawdown phase works, and we haven’t really spent enough time looking at that.

The second point, which is the same point I make over and over, is this is a flip-flop.

Every change in government, it’s a new set of rules and we, as administrators, have to implement those changes and that’s costly and it doesn’t really progress us very far.

I’d rather spend all that money we’re spending on making changes, on innovation and member services, than actually wasting the time changing or complying with the latest set of rules, because there’s been a change of government.

Super is a political football and so, we need to find the middle road here that both sides of politics, or three sides, can live with, because otherwise, we’re just going to have this continuing flip-flop, flip-flop, depending on who’s in government.

I often get asked the question, “Do we spend enough money in the superannuation industry on systems and administration?”

And the answer is, “Yes, we spend a fortune,” but most of it is directed at compliance, complying with the rules. Whereas with the banks, I don’t think there’s been a change on a bank deposit for many, many years, or not a significant one. 

So the banks can put money into stuff like innovation and member services, whereas we run out of money – once we’ve actually complied – to actually spend money on services.

I think at macro-level we should try and find a place to land on this which both sides of politics can support.

It will generate confidence in the industry if we stick with a set of rules that people can understand, and that stay in place for longer than five minutes.

Anne Myers, ING Direct: I think the issue – and it’s definitely an issue – is that it’s actually undermining confidence in the system, so people don’t necessarily want to contribute more, because they’re worried about what it might look like, by the time they retire.