Treasury consults on Superannuation integrity of limited recourse borrowing arrangements

The Government has released for public consultation draft legislation and associated explanatory materials for changes to improve the integrity of the superannuation system. These changes are being progressed as part of a package of amendments to address concerns that have been raised in the implementation of the superannuation reform tax package.

The draft legislation will include the use of limited recourse borrowing arrangements (LRBA) in a member’s total superannuation balance and transfer balance cap to the transfer balance cap and total superannuation balance. The amendments will address concerns about the ability of SMSF members to use LRBAs to circumvent contribution caps and effectively transfer accumulation growth to retirement phase that is not captured by the transfer balance cap.All interested parties are invited to make a submission by Wednesday 3 May 2017. More information on the Government’s superannuation changes is available on the Treasury website.

The two worked examples make things a little clearer, but in essence it attempts to stop SMSF property investment being used to circumvent the $1.6m tax free cap.

Example 1

Bob is 65 and is the only member of his SMSF. Bob’s superannuation interests are valued at $3 million and are based on cash that the SMSF holds.

Bob’s SMSF acquires a $2 million property. This property is purchased after 1 July 2017 using $500,000 of the SMSF’s cash and an additional $1.5 million that it borrows through an LRBA.

Bob then commences an account-based superannuation income stream. The superannuation interest that supports this superannuation income stream is backed by the property, the net value of which is $500,000 (being $2 million less the $1.5 million liability under the LRBA). Bob therefore receives a transfer balance credit of $500,000 under item 2 of the table in subsection 294-25(1).

In the first year, Bob’s SMSF makes monthly repayments of $10,000. Half of each repayment is made using the rental income generated from the property. The other half of each repayment is made using cash that supports Bob’s other accumulation interests.

At the time of each repayment, Bob receives a transfer balance credit of $5,000, representing the increase in value of the superannuation interest that supports his superannuation income stream.

The repayments that are sourced from the rental income that the SMSF receives do not give rise to a transfer balance credit because they do not result in a net increase in the value of the superannuation interest that support his superannuation income stream.

Example 2

Peter and Sue are the only members of their SMSF. The value of Peter’s superannuation interests in the fund is $1 million. The value of Sue’s superannuation interests is $2 million. All of the assets of the fund that support their interests are cash.

The SMSF acquires a $3.5 million property. The SMSF purchases the property using $1.5 million of its own cash and borrows an additional $2 million using an LRBA.

The SMSF now holds assets worth $5 million (being the sum of the $1.5 million in cash and the $3.5 million property). The fund also has a liability of $2 million under the LRBA.

Of its own cash that it used, 40 per cent ($600,000) was supporting Peter’s superannuation interests and the other 60 per cent ($900,000) was supporting Sue’s interests. These percentages also reflect the extent to which the asset supports Peter and Sue’s superannuation interests.

Peter’s total superannuation balance is $1.8 million. This is comprised of the $400,000 of cash that still supports his superannuation interest, the 40 per cent share of the net value of the property (being $600,000), and the 40 per cent share of the outstanding balance of the LRBA (being $800,000).

Sue’s total superannuation balance is $3.2 million. This is comprised of the $1.1 million of cash that still supports her superannuation interest, the 60 per cent share of the net value of the property (being $900,000), and the 60 per cent share of the outstanding balance of the LRBA (being $1.2 million).

Budget may encourage downsizing with superannuation breaks

From The Real Estate Conversation.

The government is considering offering exemptions to new superannuation limits for retirees who downsize from their family home, according to reports.

The upcoming Federal Budget could contain measures that allow elderly Australians who sell the family home to be exempt from new superannuation caps, according to media reports.

A report in The Australian Financial Review is claiming that proceeds from the sale of the family home could be quarantined from both the $1.6 million cap on super retirement funds, and the non-concessional amount that can be contributed to super annually.

It’s widely expected that proceeds from the sale of the family home will not be excluded from the age pension assets test.

The anticipated policy is designed to tackle housing affordability problems by freeing up more housing stock on the market, in particular housing for families.

The Federal Budget, which will be handed down on 9 May, is widely expected to contain several measures aimed at tackling housing affordability.

Read the The Australian Financial Review article here (subscription only).

Both sides of politics target the $24 billion super property lurk

From The New Daily.

The little-known superannuation tax lurk that has pushed $20 billion into the property market in just under five years is under attack, with Labor promising to ban private superannuation funds from borrowing and the Coalition foreshadowing new restrictions.

As The New Daily recently reported, self-managed superannuation fund borrowing arrangements have grown almost tenfold, from $2.5 billion in June 2012 to $24.3 billion last December. The lion’s share of that is going into commercial and, increasingly, residential property.

That has been a concern for regulators, with the Murray inquiry into the financial system in 2014 recommending SMSF borrowing be banned, warning “further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system”. The Reserve Bank concurred.

Opposition Leader Bill Shorten on Friday announced he would ban SMSF borrowing if Labor comes to power as part of a bid to “cool an overheated housing market partly driven by wealthy self-managed super funds. Allowing this [SMSF borrowing] to continue would increase risk in the superannuation system and crowd out more first home owners”.

Stephen Anthony, chief economist at Industry Super Australia, said a ban would be “an obvious structural reform that would have benefits through the economy and to the budget”.

The Coalition has been silent on the issue in recent times, but Financial Services Minister Kelly O’Dwyer responded on Friday to questions from The New Daily foreshadowing moves to make the process less attractive.

The Government will be progressing a package of minor and technical amendments including a proposed limited recourse borrowing arrangement (LRBA) integrity measure to address a potential concern  that has been raised during the implementation of the superannuation taxation reform package.”

While the meaning of that is not altogether clear to the uninitiated, tax expert and principal with Arnold Bloch Leibler, Mark Leibler, told The New Daily it foreshadows action to prevent SMSF owners using borrowings to circumvent a $1.6 million cap on tax-free super retirement pensions due to start on July 1.

“It sounds to me like what they’re going to do is prevent people using borrowings to get around the $1.6 million cap,” Mr Leibler said.

Using an example of an SMSF owning a $2 million property with borrowings of $400,000, Mr Leibler said that if borrowings were not factored into the cap, owners would effectively get the benefit of a $2 million investment while staying within the $1.6 million cap.

Stephen Anthony described the Coalition move as “interesting. But if their intention is to reduce the incentive to borrow in SMSFs you’d have to ask why they don’t just rule it out entirely.”

While the foreshadowed move might reduce SMSF borrowing, it still leaves plenty of space for funds under the cap limit to borrow, Mr Anthony said.

Peter Strong, CEO of the Council of Small Business Australia, said Labor’s SMSF plans could negatively affect small businesspeople trying to buy their business premises.

“It’s good business for businesses to invest in their business. For most businesspeople their business is their super plan, so there could be unintended consequences in this. They need to be looked at,” Mr Strong said.

It also appears that Treasurer Scott Morrison has lost the cabinet battle to allow first homebuyers to dip into super to fund a housing deposit.

On Friday, Finance Minister Mathias Cormann, who is part of the government’s budget “razor gang”, told Sky News: “That’s not something we think would address the problem.”

Prime Minister Malcolm Turnbull has also come down against the move, saying, “The purpose for superannuation is to provide for retirement, that’s the objective.” The Treasurer had previously supported the idea.

Social impact investment can help retirees get the housing and care they need

From The Conversation.

A recent report raised concerns about the erosion of retirement income by ongoing rental or mortgage payments.

The report by the Australian Institute of Superannuation Trustees is timely, given the Australian aged pension system is predicated on an assumption of outright home-ownership. Yet increasing numbers of people are still paying mortgages after retirement, use superannuation to pay off mortgage debt, or do not own a home and must rent.

Any significant decline in home ownership or equity in a home also has impacts on higher care needs. This is because older people will not have an asset to sell to fund the bonds required to enter aged care accommodation.

Author provided

These developments – and the increasing housing insecurity for older people – potentially undermine the sustainability of Australia’s retirement system and, in turn, public finances.

Addressing the problem

Social impact investment strategies could fund more affordable housing and aged care for seniors.

Social impact investments are:

… investments made into organisations, projects or funds with the intention of generating measurable social and environmental outcomes, alongside a financial return.

Impact investment in Australia may take a variety of different forms. It can be organised through direct equity investment, acquisition of units in a mutual fund, debt, venture capital, social impact bonds or other fixed income mechanisms, which might combine blended social impact and financial return.

The sources of investment are equally diverse. These may include philanthropists, funds, businesses, government, private investors, or a combination of two or more.

In Australia, social impact investing is a relatively recent phenomenon although it is developing rapidly in a variety of areas. Impact investing in Australia will be worth $A33 billion by 2022 and extends to a diverse range of investments.

In relation to housing support, examples include the Aspire Social Impact Bond, which targets people experiencing long-term homelessness, and Homeground, a not-for-profit real estate service.

In relation to housing developments, projects such as the innovative CapitalAsset partnerships instigated by ShelterSA. The project aims to collaborate with developers, landowners and investors to build affordable housing developments through a property unit trust.

Housing is likely to be a focus area of social impact investment partnerships between Social Ventures Australia and organisations such as HESTA and Macquarie.

Financing is the key to increasing stocks of affordable housing. It seems the federal government is likely to institute a bond aggregator model involving institutional investors and affordable housing providers.

Retirement housing issues have not been a focus for social impact investing in Australia or elsewhere. However, it is suggested this form of investing could tackle the problems outlined in the Australian Institute of Superannuation Trustees report in three ways.

(Almost) home owners

For those who must maintain a mortgage into retirement, or who want to avoid using most of their superannuation funds to pay off the mortgage, thought could be given to offering lower-cost loans or products akin to reverse mortgages at lower than commercial rates.

Alternatively, under a shared equity arrangement – where reduced payments are made until the sale of the property or the death of the owner/s – the property could be sold and the sale price shared by the older person to put towards care or the estate and the lender.

Social impact investment lenders could finance this in the same way as banks do but at reduced rates. There would still be a healthy return, and older people could live better in retirement with reduced payments but secure in the knowledge they do not have to leave or lose their home.

Regarding the older people who rent, again social impact investing could focus on ensuring that any housing projects developed have a certain percentage of the accommodation available for older people.

Models proposed for social impact investing in affordable housing could be applied to ensure this accommodation is suitable for older people.

Wrap-around services

In both cases, the financing models could be supported by social impact investing provided for support services.

For example, wrap-around services, such as those provided in the Newquay project in Britain, aim to keep older people in their homes and out of hospitals and aged care.

If housing costs are a problem for people in retirement, that’s also going to hamper their ability to pay for care. shutterstock

Ripe for repair

Social impact investing could mobilise private capital to work with not-for-profits to attract investment funds. Grace Mutual has mooted such a project in Australia.

Furthermore, social impact investments could work in areas, such as rural and regional Australia, that are traditionally left to government because of low population and problems with profitability and economies of scale.

Sabina Lim recently suggested the services gap in health and aged care is ripe for social impact investing in Australia.

It’s time to bridge the gaps

Governments alone cannot bridge the gaps and support affordable housing for seniors.

Although government will certainly continue to play a significant role, impact investment should be encouraged as a way to resolve financing and development issues in meeting seniors’ needs for accommodation and care.

Such involvement can be fostered through partnerships between government, NGOs and private investors, together with taxation and other financial incentives. Legal, policy and planning impediments to financing and investment in seniors housing also need to be removed.

Importantly, we need other players in the market who are prepared to invest in affordable housing and aged care for Australians in retirement.

Authors: Eileen Webb, Associate Professor, Curtin Law School, Curtin University; Gill North, Professorial Research Fellow, Deakin University; Richard Heaney, Professor of Finance, University of Western Australia.

Here’s how superannuation is already financing homes

From The Conversation.

The federal government is split on whether first home buyers in Australia should be allowed to use part of their superannuation for home deposits. But what the more strident critics miss is that Australia’s superannuation system already channels a significant proportion of retirement savings into housing.

It does this not via the traditional route of people buying a house outright, but rather through an indirect channel, by transforming the household’s compulsorily acquired superannuation equity into mortgages from commercial banks and other financial intermediaries.

Statistics from the ABS (December 2016) show that for every A$1 of assets managed by the superannuation sector, approximately 27 cents is directly financing Australia’s banking sector. This is via superannuation holdings of bank deposits (14c in the dollar), bank equity (7c in the dollar), and other bank liabilities (6c in the dollar).

What do banks do with this 27c? The ABS reports that 38% of bank financial assets are long-term loans to households. We have cross-inspected this data with figures from the Australian Prudential and Regulation Authority (APRA) and found that nearly all of these loans are mortgages.

This suggests that at least 10c of every A$1 of superannuation assets is indirectly financing house purchases via commercial bank debt.

But this also excludes other indirect financing of banks by superannuation. For example, the portfolios of non-money market mutual funds and other private non-financial corporations are also heavily weighted towards funding banks (24% and 36% of their assets, respectively), and superannuation funds allocate 6% and 24% of their funds to these agents respectively. This potentially adds a further 4c in every A$1 of superannuation assets that ultimately results in debt financing of housing.

Why using super for housing might be good idea

One of the merits of allowing households to use their superannuation to supplement their housing deposits would be to reduce unnecessary and expensive financial middlemen. Under the present system, the money from superannuation that finds its way into housing finance does so by passing through chains of two or more intermediaries. This means that it incurs management expenses at each step.

The first link in the chain is the superannuation sector (with an average expense ratio of 0.7%). Next is one or more financial intermediaries, like banks. A plausible estimate of the banking sector’s expense ratio, by our calculations, is 1% to 2.3% of bank assets.

Total expenses through the intermediation chain could therefore be as high as 1.7% to 3%. These expenses might be lower under a housing equity super access scheme.

Another potential benefit relates to the accumulation of debt and its consequences for financial stability.

Most of the money people put away into superannuation, because its compulsory, would have otherwise been used for other types of saving. If you look at the assets in a household’s balance sheet, it is clear that housing equity (representing 65% of non-superannuation assets) is the household’s preferred savings vehicle.

It is possible that growth in compulsory superannuation has contributed to growth in household debt in two ways. First, by frustrating people’s ability to finance home ownership through their deposit. Second, by increasing the supply of mortgage finance, as superannuation savings are recycled through the financial system, and converted to mortgages by the banks.

The risks with the plan

One concern about letting people divert money into buying a house is that their income in retirement could suffer as a result. To mitigate the risk of this happening, any policy on this would need to record and track the values of super funds’ home equity stakes (just as super funds presently track values for the traditional assets they hold).

But retirement income is determined by total net assets, not superannuation assets alone. In this context, home ownership provides retirees an important stream of stable tax-free, inflation-protected, income. This is recognised by the Association of Superannuation Funds of Australia benchmarks for “modest” and “comfortable” retirement income.

These assume that retirees own their home outright. So the decline in home ownership is a significant threat to the adequacy of Australia’s retirement income system.

A second risk is that the policy could further raise house prices, reducing affordability and exposing retirement savings to a house price collapse. In the present house price environment, this is a real risk, which would need to be monitored. But the policy’s two main merits (reducing intermediation costs and improving financial stability by reducing gross debt) are long-run benefits that will continue to hold beyond our current point in the house price cycle.

APRA also already monitors risks associated with housing credit growth, and has the tools, and the willingness to use them, should the policy promote undesired house price growth.

There are reasons to expect that a policy allowing first home buyers access to super will not lead to net growth in housing finance. Superannuation funds are already required by APRA to understand their underlying asset exposure risks. So super funds might try to maintain their total exposure to property risk under this policy, for example by reducing their exposure to the banks.

Authors: James Giesecke, Professor, Centre of Policy Studies and the Impact Project, Victoria University;
Jason Nassios, Research Fellow, Centre of Policy Studies, Victoria University

A less than super response to housing

From The New Daily.

Prime Minister Malcolm Turnbull has reportedly intervened to scotch reports the May budget will include a measure to allow first home buyers to access funds from their superannuation.

He may believe that’s the end of the story, but in reality it’s the continuation of a too familiar narrative. This is a government of fragile convictions, bereft of ideas and lacking a cohesive policy framework.

This is not the first time the Turnbull government has floated a ‘big thinking’ idea – such as the short-lived income tax sharing arrangement with the states – only to hastily retreat at the first sign of opposition.

The irony will not be lost on anyone that a government which has boasted that it alone has a plan for Australia is manifestly rudderless on a range of policy fronts. On tax reform, energy, health and education the government has proven more adept at setting expectations than delivering on them.

Treasurer Scott Morrison’s second budget will seek to restore confidence in the government’s agenda, such as it is, but the early signs are less than promising. The flailing Mr Morrison, whose budget will also be aimed at securing his hold on the Treasurer’s job, has set very high expectations in an area he can realistically do very little about: housing affordability.

The grand plan floated for putting housing within the reach of first-time home buyers was a proposal to allow young Australians early access to their superannuation to raise funds for a house deposit. The same proposal that was deemed “thoroughly bad” by Mr Turnbull when it was raised two years ago. The fact that the idea resurfaced raises questions not just about the government’s policy acumen but its political smarts as well.

Under the model that reportedly had the favour of the Treasurer, potential home buyers would be able to put their compulsory superannuation contributions into a special-purpose fund for up to three years.

Despite public support by some members of the government’s restive backbench, including resident thorn-in-the-side Tony Abbott, the proposal has been widely condemned by economists and the superannuation industry. Mr Morrison would have been familiar with criticisms that the early release of super would lead to higher home prices.

And that’s in addition to the criticism that allowing young Australians to access their super early would be to the detriment of providing an adequate retirement income. As it is, with a current superannuation guarantee rate of just 9.5 per cent, retirees will be struggling to fund their retirement.

negative gearing morrisonTreasurer Scott Morrison has come under fire for the plan.

It would have been negligence of the highest order were Mr Morrison to enact bad policy for the sake of being seen to be doing something about housing affordability.

It is one thing for backbenchers to float populist measures in the lead-up to the budget, but Mr Morrison’s conduct on this issue has been reckless. Whether for supporting the flawed proposal or permitting speculation to gain such currency, he stands condemned.

In making housing affordability a cornerstone of his budget, Mr Morrison has again set expectations that the Turnbull government will not be able to meet. While there are assistance measures around the edges that can provide home buyers with some relief, housing affordability is a function of the market. Nationals leader Barnaby Joyce is wrong to assert that there is no housing affordability crisis, but Mr Morrison is no less wrong for pretending that a resolution to housing affordability is in his gift.

As economist Chris Richardson of Deloitte Access Economics told the National Press Club, governments cannot solve housing affordability.

“We now have state and federal politicians talking about housing affordability and their policies, and if we leave families with the impression that governments can solve this, then they’re going to be pretty disappointed,” he said.

“The levers that state and federal governments pull on housing affordability are pretty small levers on a massive thing.”

Mr Morrison would do the nation a favour if he employed similar candour to set the context in which his budget will seek to provide some relief for young home buyers. He would especially do the nation a great service if instead of undermining Australia’s superannuation system he preserved, defended and enhanced its one and only role of providing Australians with a retirement income.

The Facts About Using Super For Housing

Given the reported idea of using super to assist home buyers is back, again, data from our core market model offers some important insights into the potential number of households who may benefit. So here is our analysis.

First we look at the average super balances households have by age groups. No surprise, younger households have lower balances because they have not been saving so long, and not benefitted from compounding. In addition, we see that households who “want to buy” a property tend to have a lower value in super than those in the general population.

Next we look at the number of households in each age band, who are “want to buys”, and the number who have a minimum balance of $25k and $50k in super – this is important because most prospective purchasers will need a deposit of at least $50k.

From this we estimate that from the pool of want to buys aged 20-35 of 315,000 about 77,000 would be potentially able to benefit from accessing super for property purchase, or about 24%. So it may make a small dent in the number trying to get into the market, but overall it is a small proportion of the 616,000  “want to buys” we identify across the market.

In addition of course there is the argument that this will simply lift prices in this sector of the market, as a zero sum game, as well as the point that risks in housing are higher (especially at current high prices) and reduced super contributions especially in the early years means compounding is reduced so in later life balances will be lower.


Outrage at ‘really dumb’ resurrection of super-for-housing idea

From The NewDaily.

Reports that the government is again considering hacking into superannuation to solve the housing crisis have angered experts and regular Australians alike.

Anonymous sources within the Coalition have leaked to the ABC, The Australian and others that the plan is still in play, despite Treasurer Scott Morrison previously saying the government had no such proposal.

ABC political reporter Andrew Probyn reported Monday night that the proposal was being actively investigated for inclusion in the May budget.

Liberal backbench MP John Alexander, a vocal member of the advisory panel formulating the government’s housing affordability package for the May 9 budget, is known to be fighting for the idea. He is supported by fellow backbenchers Tony Abbott and Craig Kelly.

Assistant Treasurer Michael Sukkar wouldn’t rule it out in an interview with Sky News on Tuesday. He said the government is “pretty keen to examine measures that can bridge [the deposit] gap and allow first home buyers to get into the market as soon as possible otherwise the goal posts keep shifting”.

The super-for-housing idea, as commonly understood, would allow prospective first-time buyers to put their super savings toward a deposit. This would be in keeping with Mr Sukkar’s “keen” focus on removing the first hurdle to home ownership.

Treasurer Morrison told a conference on Monday it now takes eight years to save for a home deposit in Sydney and six years in Melbourne.

However, experts are horrified, as are many Australians, that super savings could be tapped in an attempt to solve this problem.

Economists, academics and even former PM Paul Keating, the godfather of compulsory superannuation, have all warned it would push up prices, expose the savings of Australians to a undiversified asset, erode their income stream in later life, and push up the cost to taxpayers of age pensions.

In fact, Malcolm Turnbull once dismissed it as a “thoroughly bad idea” and Finance Minister Matthias Cormann warned it “will not improve housing affordability” when it was floated during the Abbott years.

On Tuesday, Opposition Leader Bill Shorten described it as a “raid” on super. “Most young Australian’s don’t have much super at all,” he told a press conference.”

This is borne out by a recent report that estimated the average Australian aged 25-29 had only $16,000 in super in 2014.

Mr Shorten also noted, as many experts have done, that the “secret” of superannuation is compound interest. Theoretically, thousands of dollars could be lost in retirement if a worker’s capital is eroded early in their working life.

“If you raid that superannuation when it is in very small amounts at the start of people’s careers, you just won’t have enough super to retiree on,” he said.

“If the government wants to do something about housing affordability, rather than raid superannuation and starve people of income in retirement, you need to reform negative gearing in capital gains tax deduction.”

Early super release ‘wrong solution’ for housing

From InvestorDaily.

Giving young Australians early access to their super to finance a house purchase would do nothing to address the underlying problem, says the Committee for Sustainable Retirement Incomes.

Home ownership is a “fundamental determinant of living standards in retirement”, said Committee for Sustainable Retirement Incomes (CSRI) managing director Patricia Pascuzzo, and declining rates of home ownership should be a significant concern for policy makers.

Allowing young Australians access to their super prior to retirement to finance the purchase of a house would go towards fixing this problem, and could potentially improve young people’s engagement with the super system, Ms Pascuzzo said, however the proposal carried “one major flaw”.

“It was the wrong solution for the problem at hand, namely housing affordability. Moreover, in the absence of other measures, it had the potential to exacerbate the problem of housing affordability,” Ms Pascuzzo said.

A number of other solutions, such as the reassessment of tax breaks proposed by Financial System Inquiry head David Murray, would be far better suited to addressing housing affordability issues, Ms Pascuzzo said.

“A number of other policy measures could be actively considered as part of an integrated retirement incomes policy agenda that would also indirectly improve the environment for first home buyers,” she said.

“These include reconsidering the extent of the tax-preferred status of the home and/or including housing in the age pension means test, so long as the exemption limit is set sufficiently high to ensure no pensioner suffers a loss of cash income.”

Slick marketing won’t make super savers richer

From The NewDaily.

To understand what’s driving the Productivity Commission’s latest suggestions for reforming ‘default’ super funds in Australia, context is everything.

Australia’s super system is the envy of most of the world – only two nations outrank Australia in the internationally respected Mercer Global Pension Index.

The Index ranks nations on three broad categories: ‘Adequacy’, or whether enough is being saved and how those savings interact with the tax system; ‘Sustainability’, or whether the system can cope with a changing economy and demographic profile; and ‘Integrity’, or how efficiently the system is regulated and governed.

You might think that to improve the system you’d want to look at the two nations that outrank Australia – Denmark and the Netherlands.

In fact, the terms of reference set for the Commission called for comparisons with Sweden and Chile, both of which are well behind Australia in terms of adequacy (see chart below), and New Zealand which is not yet part of the Mercer report.

Neither Sweden nor Chile can match Australia on the measure of ‘Integrity’, which is strange because the way default funds are allocated certainly comes under Mercer’s integrity sub-categories of ‘governance’ and ‘regulation’.

Top returns

The Commission’s review came out of the 2015 Financial System Inquiry which noted that: “Fees have not fallen by as much as would be expected given the substantial increase in the scale of the superannuation system, a major reason for this being the absence of consumer driven competition, particularly in the default fund market.”

The default funds are dominated by industry super funds, because historically they were written into enterprise bargaining agreements. As their members are also their shareholders, they can also afford to charge lower fees.

Increasing ‘competition’ in that space might seem like a good idea until you look at the performance of the group of funds keen to take more of the default market: the bank-owned retail funds.

Data from the Australian Prudential Regulatory Authority shows 10-year annualised returns for the super funds managed in-house by corporations, or by the industry super funds, of 5.1 and 5.4 per cent respectively.

Public servants have also done well, with their government-managed funds returning 5.4 per cent.

But way below all of them are the bank-owned retail funds, which have returned just 3.6 per cent in the past 10 years.

These are important figures, because of those four groups only the retail funds stand to benefit significantly from what the commission calls “consumer-driven competition”.

Competition or confusion?

Competition in highly regulated markets can produce perverse results, such as have been seen in the privatised electricity market where clever marketing by energy retailers has extracted profit margins roughly double what the regulator thinks reasonable.

The same fears exist in the super sector, where consumers often don’t understand what they’re being offered.

So before looking at the Productivity Commission’s four plans to boost competition, you really have to ask why the third-best retirement income system in the world needs to learn from those who don’t do it as well.

And why does a new marketing opportunity need to be opened up for Australia’s already-huge banks, when the net result if they are successful will be smaller returns for the nation’s super savings?

David Whiteley, CEO of Industry Super Australia, argues that giving banks the chance to cross-sell other products, such as credit cards or personal loans, could convince future super savers to switch between complex super products – only to find they retire with less money.

He told me on Wednesday: “Superannuation is an economic policy, not just a personal finance industry.”

Well that’s true, because super savers who retire with less money have to draw more income as a pension via the government’s balance sheet.

That’s why weighing up which of the PC’s four plans is best is a bit of a smoke screen.

The bigger political question is whether the super system should be changed to increase returns to bank shareholders, or maintained in something like its present form to take as much burden off taxpayers as possible – through the simple, historically proven higher returns that the non-retail funds have generated.