Superannuation - where is the common ground?

Super Review and CommInsure hosted a breakfast to find out if both sides of government could come together to deliver a bipartisan approach to superannuation policy, and whether it would provide the right policy settings for a sustainable system which would provide an adequate retirement income for Australians now and in the future.

The announcement that the Financial Services Council (FSC) and Industry Super Network (ISN) would develop a more productive working relationship may have come as a surprise to many in the superannuation industry, as the policy objectives of industry and retail funds have often frayed at the centre. 

However, industry unification is one factor which could support a bipartisan approach to superannuation policy according to Association of Superannuation Funds of Australia (ASFA) chief executive, Pauline Vamos.

“We all know what this government and previous governments have said – this industry is easy to do business with because we can divide and conquer you,” she said.

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“We have so many of you that come down to Canberra, we open our doors, we listen to you but in the end because you can’t agree, we just do what we want.” 

If the industry wants the government to work together on policy to ensure the superannuation system delivers its desired outcomes – namely, retirement adequacy – the industry needs to take a greater role in standardising some of its own processes, according to Vamos. 

Change with certainty 

Australian Institute of Superannuation Trustees (AIST) senior policy adviser, Karen Volpato said some change is necessary, but to achieve a bipartisan approach change needed to occur within an environment of certainty. 

What the industry talked about in terms of change – caps, tax on end benefits, income replacement – did not provide a road-map for the future, Volpato said, which is needed to ensure a united approach from both sides of government to super policy. 

Volpato said that reaching a consensus on what constituted adequacy, sustainability and longevity could offer the infrastructure to provide change within certainty. 

“If we actually have an agreed national definition of what is adequate, then policy change can be tested against that benchmark,” she said. 

Any changes to the age pension, income stream incentives and caps could be tested against an adequacy benchmark, Volpato said, and also in terms of the impact of such policy changes on the system’s sustainability and longevity. 

Sustainability equals income 

Vamos said that although the system needed some benchmarks – in terms of tax – super itself was sustainable and the Australian model as per the OECD’s benchmark of replacement rates was very good.

“The glitch is always when it comes to income streams, and it’s not so much whether people will just blow their whole lump sum, it’s about whether people have the confidence to spend their lump sums. Because what happens if you don’t have the right income-stream products? People then don’t spend and then you don’t get the right outcomes,” she said.

Local Government Super chairman Peter Lambert said the industry had become obsessed with what each sector was doing, but in reality the threat to industry funds was not the self-managed sector but in members withdrawing their retirement benefit in lump sums. 

Lambert said a tax on earnings was a good idea, although it should be indexed. 

Mosaic Portfolio Advisers CIO, Matt Drennan agreed and said a sustainable system needed to stop members from double dipping.

“If we’re trying to provide something here, surely it’s a reduced dependence on the state to provide tax-funded pensions in old age, and for that to be effective we need to have the incentive there in the private sector,” he said.

Vamos pointed out that ASFA’s white paper on the future of superannuation suggested a number of policy incentives to entice members to take an income stream, including reducing health and other government subsidies. 

She said there were a number of impediments to developing income products. The SIS regulations limited innovation; APRA standards on minimum surrender values needed to be changed; the asset tests and reform and approval process for longevity products did not work; and the self-managed super funds (SMSF) sector had no access to income products. 

Accreditation to provide post-retirement advice was also an area that could increase the use of income products, Vamos said. 

Community concerns 

Although the superannuation industry has responsibility for people’s retirement savings, the system belongs to the community – which will undoubtedly respond when super policy is changed, Vamos said. 

Matt Drennan said the level of vested interest in super policy would complicate a bipartisan approach to the future of Australia’s retirement savings system. 

“Because it is such a big pie and the demographics make it a very public issue, inevitably it’s going to be subject to tinkering and change as politicians attempt to manoeuvre the system to either political benefit or to genuinely try and address issues that come up as constituents raise views as the world changes,” he said. 

The Federal Government’s tax on super earnings over $100,000 caused public outcry and [if ultimately enacted] would probably affect more and more people as balances grew, particularly with the stock market back on track, said Drennan. 

“There needs to be enough incentive there for people to believe that the system is worth investing in,” he said. 

However, LGsuper CEO Peter Lambert said that a cap on earnings was fundamentally a good idea, but questioned the level it had been capped at. 

“I don’t think, given the tax advantages that you get to put the money in that, you should necessarily have an endless stream of tax-free income for the rest of your life – and if people subscribe to that, I really think they don’t realise that that cuts to the heart of sustainability of the system,” he said. 

Vamos said the level of lobbying in the super industry had been intense.

“The more we defer some things that need to be cleaned up, it’s going to be harsher and louder,” she said.

What change?

But how much industry change do members actually see? 

“We’ve certainly had a frenzy of legislation, but what is change to us is not necessarily what change is to members,” Lambert said. 

Changes to contributions limits were visible and had reduced the public’s confidence in the system, but MySuper and the Future of Financial Advice reforms meant very little to members, according to Lambert. 

Media Super chairman Gerard Noonan said recent changes that had occurred had involved tinkering rather than substantial changes. 

“Superannuation itself, like the economy, is a political construct, so I think perhaps we do exaggerate our concern about the level of change that’s going on,” he said. 

JP Morgan head of global funds services, product,  Marian Azer, said that although members may not be on board with changes now, increased disclosure requirements would trickle down to the public. 

“We are at the beginning of a journey, a very long journey in terms of disclosure, [about] how things are going to change,” she said.

“I think it hasn’t quite reached the members yet, and I think when it does that will be the true measure of whether that information allows members to make more effective decisions about their superannuation.” 

Self-regulation 

Vamos said the industry should be working together to create industry-wide standards without government compulsion. 

“The first thing in order to get a bipartisan approach is that we need a better approach by the industry itself,” she said. 

The disclosure of insurance premiums in product disclosure statements was a case in point, she said. 

A single identifier that allowed members to be recognised across funds and different sectors of the industry could go a long way to ensuring a unified approach and a system that had some certainty. 

“That is a simple thing the industry can do, not requiring legislation, but to agree on a standard, and that will have an enormous impact on the ability to move across the industry and enormous impact in terms of how we service our customers,” she said. 

CommInsure’s head of industry funds, wholesale life Frank Crapis agreed and cited SuperStream as a game changing enabler that would be implemented across the board and give some certainty to super fund members.