Politics and policy will define super debate in 2017

As superannuation fund executives wrap up 2016 they may find time to reflect upon a year in which the Federal Budget contained some of the most dramatic changes to superannuation policy seen in decades and a raft of other Government initiatives from Productivity Commission (PC) inquiries to regulatory resourcing reviews. 

While the Budget contained contentious changes to the superannuation tax settings, including a reduction in the concessional contribution caps, these represented only a few of the moving parts in what represents the Coalition’s determination to make key alterations to superannuation which align with their own political philosophies. 

Lost on no one in the superannuation industry is that the Abbott Government came to power with a policy to reduce union influence in the superannuation arena via the dismantling of the default funds under modern awards regime. 

The replacement as Prime Minister of Tony Abbott by Malcolm Turnbull has not altered that agenda as current and intended Productivity Commission inquiries make clear that the Government sees its changes to superannuation as a work in progress, particularly the changes to the default funds regime. 

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But the irony of the Government’s continuing work around superannuation policy is that it comes against the background of both the Coalition and the Australian Labor Party acknowledging the need for policy stability around superannuation. 

It also comes against the background of Abbott having promised no unnecessary adverse changes to superannuation policy. 

In truth, Abbott mostly stuck to his word with the vast majority of the Government’s changes to superannuation resulting from the efforts of Malcolm Turnbull’s Treasurer, Scott Morrison. 

However, in fairness to Morrison, it must also be noted that the Financial System Inquiry (FSI) initiated by Abbott and his Treasurer, Joe Hockey, delivered the Government a list of recommendations with respect to superannuation few of which it felt it could sensibly ignore. 

A primary outcome of the FSI recommendations was that the Government should define an “objective” for superannuation – something which it was argued would create greater policy certainty and limit the scope for Government tinkering.  

Objective of superannuation 

The Government in late October introduced the legislation defining the “objective” of superannuation. 

The Minister for Revenue and Financial Services, Kelly O’Dwyer expressed that as objective as being: “To provide income in retirement that substitutes or supplements the Age Pension”. 

But in doing so, the Government has disappointed a significant cross-section of the superannuation industry which had hoped that the Government might aspire to a more ambitious objective in terms of delivering people a comfortable and sustainable retirement. 

This was something reinforced by Association of Superannuation Funds of Australia (ASFA) interim chief executive and former TAL chief executive, Jim Minto, who told ASFA’s conference on the Gold Coast in November that the objective should have been a comfortable retirement consistent with the ASFA objective of “50 per cent by 2050”. 

However, while acknowledging the concerns raised by the likes of Minto and others, O’Dwyer emphasised the need for simplicity. 

“This is the first time we have had such a clear definition of what our superannuation system is intended to do – and what it is not intended to do,” she said. “It is about increasing the number of Australians who are self-sufficient in retirement. It is not about estate planning. It is not about tax minimisation.” 

“And I believe that this clarity will promote confidence in the system overall – providing a framework for evaluating future changes.” 

The minister noted that during the process there had been areas of agreement and disagreement, and that some stakeholders had wanted the objective to go further – to include concepts like ‘adequacy’ or ‘comfort’ in retirement. 

“This included ASFA, and I understand and I do appreciate that view. But as David Murray, who headed the FSI, recently said, to include these very subjective words would ‘open the way to constant political interference’,” she said. 

“Moreover, the Government is very aware that there is no consensus on how concepts such as ‘adequacy’, ‘comfort’ or even ‘dignified’ are understood, let alone measured. 

“That is why the Government has ultimately decided that a simple, unambiguous objective, without subjective concepts, is the best path forward whilst noting how important some of these other concepts are in the Bill’s explanatory memorandum.”

Alternative default models 

There exists a strongly held view within the Government that the default funds model represents the cornerstone of the success of industry superannuation funds. 

Thus, the Government has consistently signalled its view that the default funds regime should be opened up to competition – a view that has been supported by the Financial Services Council (FSC) which has argued that all MySuper funds should  be capable of selection by employers as default funds. 

The Government/FSC approach would see the removal of the federal industrial relations judiciary in the form of Fair Work Australia from the default selection process. 

The FSC and a number of major financial institutions have argued this case largely based on the premise that all MySuper funds have to be approved by the Australian Prudential Regulation Authority (APRA). 

Hardly surprisingly, the arguments of the Government and the FSC have been countered by the major industry funds bodies, the Australian Institute of Superannuation Trustees (AIST) and Industry Super Australia (ISA) who have argued strenuously the existing default system and the involvement of the industrial judiciary have acted to safeguard the interests of members. 

However the issue has been brought to a head via the decision of the Treasurer, Scott Morrison, to refer the key issues to the Productivity Commission, with the most pertinent inquiry being that into Alternative Default Models. 

According to the ISA submission to the PC inquiry, “Australia’s default superannuation system is important to the wellbeing of a large part of our population, our financial markets, and the economy”. 

“Millions of Australians rely on default superannuation settings. Hundreds of billions of superannuation assets are managed pursuant to these settings. Fortunately, the default super system in Australia has generated very good results, materially outperforming all other segments for as long as the data have been recorded. By contrast, the parts of the superannuation industry sold by banks, financial planners, and other for-profit providers, have substantially underperformed, resulting in the beneficiaries of that sector being poorer – and harming the Commonwealth fiscal position and economy as a whole.” 

Elsewhere in its submission, ISA pointed that not all MySuper funds had delivered the type of performance which made them appropriate to be default funds. 

The ISA’s arguments around the appropriateness of all MySuper funds as defaults gained some credence from the Australian Prudential Regulation Authority’s (APRA’s) submission which acknowledged that not all MySuper funds had been created equal. 

The APRA submission said the regulator’s data had indicated that, since 1 July 2013, “there has been considerable variation in net returns and fees for different MySuper products, leading to a wide range of outcomes for members across these different products”. 

“While there has been some evidence of reductions in fees and costs since MySuper products were introduced, particularly for products with previously very high fee levels, there is clearly room for further improvement. Further, while many MySuper products have achieved their net return targets over the past few years, some have fallen well short,” it said. 

The APRA submission went on to say there would be merit in legislating both stronger authorisation requirements and a broader member outcomes assessment in lieu of the current scale test, with a view to lifting the bar that MySuper products need to meet on an ongoing basis. 

While sticking to its guns on all MySuper funds being eligible to be selected as default funds, the FSC clearly noted APRA’s concerns about the highly variable performance of MySuper products and backed the imposition of more rigorous testing. 

The FSC submission said the FSC proposed “that the safety net for consumers could be strengthened through an enhanced MySuper approval process should the Commission have concerns in relation to the strength of the MySuper safety net and consumers’ behavioural biases”. 

“An enhanced MySuper approval process, as detailed in this submission, would focus on member outcomes and be an ongoing assessment, rather than the narrow, point in time assessment APRA conducts when it is granting a MySuper authorisation,” it said. 

The PC is expected to hand down its initial findings on superannuation competitiveness and efficiency and possibly alternative default models before Christmas. 

O’Dwyer has signalled that in 2017 the Productivity Commission will be asked to continue its processes by bringing the two issues together. 

It is then expected that the Government will develop a legislative approach.  

2016 Budget changes 

Federal Treasurer, Scott Morrison’s 2016 Budget proposed more changes to the superannuation settings than had been seen in the prior two Parliaments, but the Government’s decision to call a double-dissolution election intervened. 

Then, with the Government only narrowly returned with a waifer-thin majority in the House of Representatives and a minority in the Senate, it was forced to agree changes to the Budget package – something which outlined by Morrison in mid-September. 

He announced that the $500,000 lifetime non-concessional cap would be replaced by a new measure to reduce the existing annual non-concessional contributions cap from $180,000 per year to $100,000 per year.  

He said individuals aged under 65 would continue to be able to ‘bring forward’ three years’ worth of non-concessional contributions in recognition of the fact that such contributions are often made in lump sums. 

“The overwhelming bulk of such larger contributions are typically less than $200,000. 

Individuals with a superannuation balance of more than $1.6 million will no longer be eligible to make non-concessional (after tax) contributions from 1 July, 2017,” Morrison said. 

“This limit will be tied and indexed to the transfer balance cap.” 

By early November the Government was still finding it challenging to pursue its superannuation changes, with O’Dwyer bemoaning the Federal Opposition’s seeming intransigence in the face of the Government’s efforts to move its legislation through the Parliament. 

By contrast Labor’s changes will prevent people in these cohorts from having the opportunity to build up their super balances. 

The legislative tranche introduced to the Parliament in early November involved: 

• Permitting the rollover of unused concessional caps so that Australians with superannuation balances of less than $500,000 who have interrupted work arrangements can make ‘catch up’ superannuation contributions; 
• Allowing more Australians to claim a tax deduction for personal superannuation contributions assisting around 800,000 people; 
• Encourage partners to make contributions to their low income spouses’ super where their spouse has an income under $40,000 per annum; and 
• Allowing all people aged under 65, and those aged 65 to 74 who meet the work test, to be able to claim a tax deduction for any personal superannuation contributions to an eligible fund up to the concessional contributions cap. 

With the Productivity Commission still reviewing other elements of the superannuation regime, particularly those impacting the industry funds, the legislative horse-trading around superannuation remains a work in progress and one that seems likely to continue well into 2017.