Superannuation – Page 15 – Digital Finance Analytics (DFA) Blog

ACCC Concerned About Link Acquiring Pillar

The Australian Competition and Consumer Commission has issued a Statement of Issues on the possible acquisition of the Superannuation Administration Corporation (trading as Pillar) by Link Administration Holdings Limited (ASX:LNK) (Link). Pillar is being privatised by the NSW Government.

The deadline for submissions from interested parties in
response to this Statement of Issues is 28 October 2016, and the anticipated date for ACCC’s final decision is 15 December 2016.

This is important because given mandatory superannuation, demand for administration services will continue to grow, yet without an adequate competitive industry structure, fees to members will be higher, reducing returns to members. There has been increasing consolidation of Superannuation Administration Service (SAS) providers which has resulted from market exits (Citistreet and IBM for example) and Link has acquiring other SAS providers.

SAS provide a range of superannuation administration services including the management and distribution of benefit payments to members, data and document management, member communication – production and issuing of member and employer statements, management of employer contributions and processing of contributions into funds, administering member investment choice, customer contact services, insurance and claims management, online member and employer services, financial and accounting services and risk and compliance framework.

The ACCC has estimated that Link administers approximately 80 per cent of outsourced member accounts, or 10 million accounts.

Link has acquired numerous superannuation services business in recent years, including Australian Administration Services in September 2006, Primary Superannuation Services Pty Limited in 2008, Australian Superannuation Group in 2008, PSI Superannuation Management in June 2012, FuturePlus Financial Services Pty Ltd in December 2012, administration assets of Russell Investments in February 2013 and Superpartners Pty Ltd in August 2014; all of which has more than doubled Link’s member accounts. Link has its own proprietary IT platform (the aaspire platform), which it uses for the provision of administration services for most of its clients.

Pillar is a NSW state-owned corporation and administers more than 1.1 million superannuation member accounts with assets totalling more than $100 billion. It provides administration services mainly to Government superannuation funds, pension funds, and defined benefit schemes. Its clients include First State Super, State Super and Public Sector Superannuation accumulation plan (PSSap). Pillar does not have its own proprietary IT administration platform and is currently licensed to use Financial Synergy’s (Acurity) platform.

The NSW Government has announced that it intends to privatise Pillar, and has commenced a competitive sale process. Link is one party who has expressed an interest in acquiring Pillar.

“The ACCC is concerned that the possible acquisition is likely to substantially lessen competition in the supply of superannuation administration services by entrenching Link’s dominant position, resulting in lower service levels or higher prices, which will ultimately be passed on to fund members,” ACCC Chairman Rod Sims said.

Link and Pillar both supply administration services to superannuation funds in Australia. They are the only two providers that currently service larger funds.

“The ACCC is concerned that the possible acquisition will remove the only alternative superannuation administration services provider with the demonstrated capacity to supply administration services to larger funds in competition with Link. Consequently, there would be one dominant administration provider facing limited competitive constraint in the outsourced market,” Mr Sims said.

“It would also remove the potential for an alternative owner to further invest in Pillar’s offering and make it an even stronger competitor to Link in the future.”

The ACCC is seeking to better understand the barriers to entry or expansion and the likelihood of new entry or expansion in the sector. Other issues include the extent to which insourcing superannuation administration services is a credible constraint on Link and the likelihood of self-administered funds providing administration services to other funds.

“The ACCC’s preliminary view is that a fund that currently outsources superannuation administration services is unlikely to switch to insourcing as a way of bypassing Link; it would be too costly and difficult,” Mr Sims said.

“The ACCC also considers that funds are unlikely to provide superannuation administration services to each other in a way that competitively constrains Link. It is beyond the remit of most funds to sell administration services, and, furthermore, many funds are likely to be reluctant to purchase administration services from their competitors.”

The Statement of Issues seeks further information on the competition issues which have arisen from the ACCC’s market inquiries to date.

The Statement of Issues is available on the public register: Link Administration Holdings Limited – possible acquisition of Superannuation Corporation Administration (trading as Pillar)

Retirement will be harder for future Australians

New research by the Swinburne Institute for Social Research, shows the wealth effect of holding property, and the risks in retirement of those unable to get on the ladder. In fact, a comfortable retirement is unlikely for those renting, because they are excluded from capital growth, which makes up such a large element of household wealth.

They also show that households who invested in property in 2013 were far more highly leveraged than those from 2003, reflecting changes in tax concessions, and growing household debt.

Essentially, households have little choice but to join the property owning sector, once again highlighting why people are so desperate to join the band wagon; and the risks embedded should home prices revert to more normal level. As we said in a recent blog – all most everyone wins from ever high home prices, until the music stops.

The report examined the wealth of people aged 40 to 64 years and recent retirees.

It evaluated the degree to which households can accumulate wealth for retirement, focusing on housing, and the impact of relationships and divorce or separation.

Lead researcher Dr Andrea Sharam says lone person and couple-only renters over 45 years of age tend to have little wealth.

“There are currently 425,000 people in lone person or couple households over 50 renting in Australia with this number expected to rise to 600,000 by 2030 and again to 830,000 by 2050.

“This number of impoverished older people equates to a huge increase in demand for housing assistance.”

Men and women are revealed to have different pathways into rental poverty in old age. For women the cost of care and the gender wage gap negatively affects them, while for men low educational achievement, consequential limited employment prospects and disability are factors.

“Relationship breakdown typically adversely impacts wealth with one if not both former partners often falling out of home ownership and not later recovering home ownership.

“Single mothers with young children are particularly vulnerable,” Dr Sharam says.

Policy recommendations

The report recommends a number of policy changes, including substantial community investment in social housing, and new affordable housing tenures aimed at midlife households who may not be eligible for social housing but also cannot afford full market house pricing.

“Social housing eligibility should be widened to order to cater for a broader range of incomes,” Dr Sharam says.

This would help prevent the loss of wealth associated with being a private renter and minimise the danger of retirees exhausting their resources before end of life.

The report also recommends better rights for renters, including:

security of tenure in residential tenancies legislation,

institutional investment in rental housing,

age-specific rental supplements, and

a National Rental Affordability Scheme (NRAS) type program targeted to age pensioners.

To read the full report see, Security in Retirement: The impact of housing and key critical life events.

ABA Rejects View That Bank Wealth Advisors Sidestep FOFA

The Australian Bankers’ Association has today strongly rejected the claim by Industry Super Australia that banks ‘sidestep’ Future of Financial Advice protections when advising customers on superannuation.

They were reacting to strong claims made today by ISA:

The big four banks have been luring people away from industry super funds and into poorer performing super products, an industry super advocacy group claims.

Industry Super Australia says there has been a significant increase in people signing up to bank-owned super funds as the major banks ramp up their over-the-counter superannuation sales advice.

Industry Super’s chief executive David Whiteley says the banks’ super products typically delivered lower investment returns than industry super funds.

“There’s a real risk now of people walking into a bank and ending up as a member of a super fund that is worse than the fund they were already a member of,” he told AAP on Tuesday.

“The implication for the consumer is that they’ll retire with less, or they may have to work longer, or they will become more reliant on the aged pension.”

Mr Whiteley said the group’s analysis of data from Roy Morgan Research found that the big four banks had doubled their over-the-counter super sales advice between 2011 and 2015.

“The figures show direct advice is growing quickly and at the expense of traditional channels including financial advisers,” he said.

The research also found that customers were being switched from funds with higher net satisfaction and performance into funds with lower satisfaction and performance, he said.

And, unlike financial advisers, bank staff, who are often given incentives to sell the super products, don’t have to meet best interest obligations, he said.

“General advice direct from a bank does not need to meet the best interest obligations and it is likely the banks are using this and linked sales incentives to funnel customers into underperforming funds.”

Industry Super Australia wants banks to be required to perform a better-off test to demonstrate a customer would not be worse off if they switched funds.

It also wants a ban on all sales incentives relating to superannuation.

ABA responds:

“It is ridiculous to claim that the increase in major banks’ superannuation market share points to ‘obvious market failure’,” ABA Executive Director – Retail Policy Diane Tate said.

“Banks have made significant investment to change their practices and systems to comply with the Future of Financial Advice laws, banning conflicted remuneration and introducing a best interest duty,” she said.

“We also support new legislation to raise education, ethical and professional standards for all financial advisers.”

Ms Tate said customers want a one-stop-shop for their basic banking and financial services.

“Banks are using technology to make sure their customers have the convenience of being able to access all their products and services in one place, like using their smartphone, and with the confidence their money is secure.

“Banks have raised the competency and ethical standards of financial advisers. For example, just last month the industry announced a new way of hiring financial advisers to stop advisers with poor conduct records moving around the industry.

“We have also established an independent review into how banks pay staff and reward them for selling products and services,” she said.

“Industry super funds are competitors with banks. If only this was a campaign about doing the right thing by customers; but really it is just a competitive play,” Ms Tate said.

NAB completes sale of 80% of Life Insurance business

National Australia Bank Limited today announced completion of the sale of 80% of its life insurance business to Nippon Life Insurance Company (Nippon Life) for $2.4 billion.

As previously advised, NAB will retain ownership of 20%of the new life insurance business, and retain full ownership of the existing investments business which includes superannuation, platforms, advice and asset management.

The financial details of the sale will be finalised and reported with the FY16 Full Year Results on 27 October 2016. The key details relating to the transaction are materially consistent with those outlined in the FY15 Full Year Results ASX announcement and Investor Presentation and include:
• Following completion, the transaction is expected to deliver an increase of approximately 50 basis points to NAB’s CET1 capital ratio.
• Goodwill for the Wealth business is expected to reduce by approximately $1.6-$1.7 billion.
• The transaction has resulted in a loss on sale, which is expected to be approximately $1.2-$1.3 billion.
• NAB will retain the MLC brand, although it will be licensed for use by MLC Life Insurance for 10 years and will continue to be used (as is currently the case) in NAB’s superannuation, investments and advice business.

As part of the sale, NAB is also today commencing a long term partnership with Nippon Life which includes a 20 year distribution agreement to provide life insurance products through NAB’s owned and aligned distribution networks.

NAB Group CEO Andrew Thorburn: “From today we move forward with a simpler, clearer wealth model designed to serve our customers better – with continued ability to offer leading life insurance products and services. “We have also streamlined our superannuation business, merging five super funds into one to create Australia’s largest retail super fund. This simplifies our superannuation business, which NAB will retain, and over time makes it easier for customers to access various products and features within the fund as their needs change. NAB has also committed additional investment of at least $300 million over the next four years in our superannuation, platform, advice and asset management business. The combination of these initiatives will allow us to deliver a better and more aligned customer experience”.

Alternative Default Models For Superannuation

The Productive Commission has released an issues paper as part of its inquiry into the superannuation system. This starts to unpick the complex maze of issues surrounding superannuation and is part of the mandate from February 2016 given by the Government “to conduct: a study to develop criteria to assess the efficiency and competitiveness of the superannuation system; and an inquiry to develop alternative models for a formal competitive process for allocating default fund members to products”. The inquiry is part of a three stage process running to 2020.

The concept of defaults (and their presence in workplace instruments) has been integral to the development of Australia’s superannuation system, largely stemming from the decision to make superannuation compulsory and the inherent complexity that individuals face in making decisions about retirement incomes. Having no defaults is their preferred, objective baseline for this inquiry. Alternative allocative models would be assessed against this baseline, and their relative performance against the agreed assessment criteria.

They make the point that default superannuation arrangements in Australia have primarily arisen out of the workplace relations system, though employees not employed under the national system are generally covered by state‑based systems.

MySuper was introduced in 2013. MySuper products were designed to be simple and cost‑effective superannuation products replacing previous default products. The intention was to ensure members do not pay for any unnecessary features they do not need or use.

For the purposes of this inquiry, the Commission will be developing models to allocate default fund members (employees who do not make an active choice about their superannuation fund) to default products. There is no intermediate decision of selecting a default fund.

The Commission proposes to assess alternative models against five criteria:

members’ best interests: meeting the best interests of members, by maximising long‑term net returns and allocating members to products that meet their needs

competition: fostering competition between funds that drives innovation and cost reductions, facilitates new entrants to the market (contestability) and leads to efficient long‑term outcomes

integrity: minimising scope for the allocation process to be manipulated (or ‘gamed’), including by using clear metrics that are difficult to dispute and by holding funds accountable for the outcomes they deliver to members

stability: supporting a stable superannuation system, including by building trust and confidence in funds regulated by APRA

system‑wide costs: minimising the total costs to members, employers and funds, including costs associated with regulatory compliance, complexity, ‘churn’ and ‘gaming’, and minimising costs to government of implementing and administering the models.

The five criteria collectively capture competition and efficiency. These criteria essentially relate to the benefits and costs of each model, and will be assessed from the perspective of the community as a whole. As noted, the Commission proposes to assess benefits and costs relative to a baseline scenario of no default system.

Some of the models being tabled are:

Administrative model

In an administrative model, a government body would use a ‘filter’ to determine which products are eligible to be used as defaults. This filter (the regulatory mechanism) would be akin to a set of minimum standards that products must meet. The filter would not rank the relative performance of products.

Market‑based models

A market‑based model would involve some form of explicit and formalised process through which products compete to be deemed eligible as defaults: in other words, some form of a tender or reverse auction process. Numerous variations in design have been proposed in the literature and exist in practice. However, at its heart, the market model involves superannuation funds bidding for the right to receive contributions from default members.

Active choice by employees

The baseline to be used in this inquiry is that there is no default system at all. After nearly 25 years’ experience, it could be even argued that this itself be a new allocation model, where employees themselves must make an active choice of superannuation product. This would remove the employer’s responsibility for choosing a default fund and place the onus on the employee, who may be better placed to make a decision in his or her own best interests. However, research on an active choice model (without defaults) is scarce. Most countries that have employer‑funded superannuation also have some variant of a default option.

An active choice model need not be completely decentralised. A filter or a market‑based mechanism could be used to narrow choices or ‘nudge’ members to high‑performing fund.

They are seeking submissions and alternative suggestions for models by 28 October 2016.

$500,000 non-concessional cap scratched

According to the Financial Standard, the Federal Government has reworked its 2016 Budget measures on superannuation to drop the $500,000 lifetime non-concessional cap and alter several other policies.

Treasurer Scott Morrison announced the changes this morning and said the government will replace the $500,000 proposal with a new measure to reduce the existing annual non-concessional contributions cap from $180,000 per year to $100,000.

The move will cost government revenue $400 million over forward estimates but Morrison said introducing eligibility for non-concessional contributions to those with less than $1.6 million in superannuation limits the cost of this change over the medium term.

He added: “In order to fully offset the cost of reverting to a reduced annual non-concessional cap, the Government will now not proceed with the harmonisation of contribution rules for those aged 65 to 74. While the Government remains supportive of the increased flexibility delivered by this measure, it can no longer be supported as part of this package, without a net cost to the Budget.”

Under the reworked package, individuals aged 65 to 74 who satisfy the work test will still be able to make additional contributions to superannuation. Morrison said this will encourage individuals to remain engaged with the workforce which is of benefit to the economy more generally.

Individuals aged under 65 will 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, Morrison said.

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

“This ensures that we focus the entitlement for after tax contributions to those Australians who have an aspiration to maximise their superannuation balances and reach the transfer balance cap in the retirement phase, where a zero tax on earnings applies.

“These measures mean that with their annual concessional contributions, Australians will be able to contribute $125,000 each year and, if taking advantage of the non-concessional “bring forward”, up to $325,000 in any one year until such time as they reach $1.6 million.

“While noting that less than 1% of superannuants now reach the proposed transfer balance cap of $1.6 million, these improvements will mean Australians will be given a clear and better opportunity to realise their aspiration to build their balance to the limit of the transfer balance cap.

“In addition, the commencement date of the proposed catch-up concessional superannuation contributions will be deferred by 12 months to 1 July 2018 to ensure the full cost of changes to non-concessional contribution arrangements are met over both the forward estimates and the medium term.”

Morrison added these measures will ensure that 96% of Australians remain better off or unaffected by the Government’s superannuation reforms “that will introduce greater flexibility and sustainability to our retirement income system.”

The Association of Superannuation Funds of Australia (ASFA) said it supports the government’s revised superannuation package announced this morning and urges the Parliament to pass the changes as soon as practical, in order to provide certainty for people saving for their retirement.

ASFA interim CEO Jim Minto said: “ASFA has long advocated for both a lifetime cap on non-concessional contributions and a limit on the total amount tax free in retirement. The revised superannuation proposals address both issues.

“The key message for savers is that they should have confidence in their super.”

Industry Super Australia chief executive David Whiteley said the policy shift was a “workable compromise.”

Managed Accounts Market Growing Fast

Further evidence of complexities in the investment sector in Australia are demonstrated by the latest estimates from The Institute of Managed Account Professionals (IMAP) which uses data from their 2016 survey. This shows that based on responses from 29 out of 37 organisations surveyed, total funds under management/administration (FUM) held in managed accounts now exceeds $30.874 billion.

The results show that managed accounts are a very significant part of the retail financial services market – already equivalent to approximately 5% of all the investment assets held on platforms.

In February 2015, IMAP had surveyed the main providers and estimated that the market size exceeded $13 billion in total FUM. Morgan Stanley recently predicted that Managed Accounts would exceed $60 billion by 2020. So there has been significant growth.

Here is the list of entities who responded. There is an interesting mix of integrated financial services players, and several stand alone organisations and start-ups. Many have fingers in multiple pies!

The results show that managed accounts are a very significant part of the retail financial services market – already equivalent to approximately 5% of all the investment assets held on platforms.

IMAP says the inflow to managed accounts services has been strong through 2015-16 and is likely to continue to grow strongly. The growth since the 2015 survey has been largely in platform based services rather than in “client own name” services, showing the extent to which financial planners and advisers have now adopted managed accounts as a way of delivering their overall advice service.

Over 85% of the FUM measured in this survey would also be counted in a survey of the retail IDPS and Superannuation platforms. Also, this 2016 result is not directly comparable to the total FUM amount measured in the 2015 survey because the survey process this year continues to add new participants. The results also show significant growth for those who have participated in both surveys. Managed Accounts are provided in a variety in legal structures and several organisations can be involved in a single service. This means that there is a risk of overlap between the returns from several organisations, so the numbers are at best indicative.

ASIC says MDA services involve a range of financial products and financial services, such as offering and trading in financial products, operating a custodial and depository service, and giving personal advice. Because of the individualised nature of the range of financial services involved, they will regulate persons contracting with retail clients to provide MDA services as providers of financial services rather than issuers of a financial product. Managed accounts are increasingly considered a mainstream investment management solution and many managed account solutions are made available using a MDA approach.

However, advisers operating a managed discretionary account (MDA) service are expecting new tighter regulations soon.

A large number of industry participants provide MDA services to retail clients using a no action letter issued back in 2004. The no action letter came about because the industry argued that unlike “full service” MDAs, many advisers primarily used discretion to rebalance managed fund portfolios via a regulated platform which took care of administration, custody and reporting. It successfully argued that it wasn’t clear whether they needed to be licensed or not. If the no action letter is removed, Limited MDA arrangements, particularly those with portfolios across a range of instruments, will probably need to gain specific MDA authorisation on their licence to continue their current approach.

ASIC has also flagged plans to increase the capital requirements for MDA
operators so that net tangible assets (NTA) of 0.5 per cent of funds under administration (FUA) up to $5 million will need to be maintained (assuming custody is outsourced).

MySuper becoming a ‘conscious choice’ – BT

From InvestorDaily.

Increased product availability within the MySuper regime is starting to attract ‘choice’ members as well as SMSF trustees, says BT Financial Group.

Speaking at a Trans-Tasman Business Circle luncheon in Sydney yesterday, BT Financial Group chief executive Brad Cooper said the super system will see staggering growth over the next two decades.

“Australians have invested more than $2 trillion in superannuation assets, and at its current trajectory, the system is projected to double to $4 trillion in the next nine years and reach $9.5 trillion by 2035,” he said.

Mr Cooper divided the system into three main categories: advised, self-managed and MySuper or ‘default’ funds.

“We call [MySuper] default because you default there when you have provided no other option,” he said.

“But I think people will stay in the MySuper environment because they will be consciously staying in there, leaving decisions to trustees who they believe would make more informed decisions than they otherwise would.”

Industry segmentation within the MySuper sector – into industry, retail, and public – will start to “fall away” as the focus shifts to outcomes for people covered by MySuper products, according to Mr Cooper.

Some members with “specific requirements” will start to move out of the ‘choice’ environment and into MySuper products.

“SMSFs are interesting too – as you get more product availability within the MySuper regime, people will start to look at why they’re in an [SMSF] and maybe choose to go back [to MySuper],” he said.

However, the SMSF sector will also continue to grow over the next two decades.

“That sounds contradictory, but when you see the super system going from $2 trillion to $9.5 trillion there’s a lot of growth in each of those sectors,” Mr Cooper said.

“More people staying in MySuper because they’ll start to trust that a lot more – many people will make a conscious decision.

“I think they will move between MySuper operators based on whether or not that MySuper fund’s working for them, based on cost/performance or other attributes.”

New Grattan research shows what is at stake in the superannuation debate

From The Conversation.

The Federal Government’s plan to wind back superannuation tax breaks would create a fairer superannuation system more aligned to its purpose of providing income to supplement the Age Pension, according to new Grattan Institute analysis. It would also contribute to budget repair.

The analysis shows how either of the reform packages proposed by both major parties would be a big step in the right direction. It explores how the current system provides much larger benefits to those with such ample resources that they will never qualify for an Age Pension. And it shows how the proposed changes would affect them – and pretty much nobody else.

As they debate the Coalition government’s proposals to wind back tax breaks on superannuation, politicians on all sides can do three big things: create a better and fairer superannuation scheme; take an important step towards repairing the Commonwealth budget; and show that our political system still works.

Both main parties have laid out their preferred reforms to super tax concessions. While they agree on all but the details, they are yet to strike a deal. Our new research shows what is at stake.

A better, fairer, super system

First and foremost, the proposed reforms to superannuation announced in the 2016 budget are about making super better, and fairer.

Tax breaks should only be available when they serve a policy aim. The purpose of super identified in the budget and due to be defined in legislation is to provide income in retirement to substitute or supplement the Age Pension. Super tax breaks don’t fulfil this purpose when they benefit those who were never going to qualify for an Age Pension in the first place.

The plans of both the government and the ALP would be big steps towards aligning super tax breaks more closely with their purpose. They would trim the generous super tax breaks enjoyed by the top 20% of income earners – people wealthy enough to be comfortable in retirement and unlikely to qualify for the Age Pension.

Retirees with large superannuation balances will start paying some tax on their superannuation savings, but still pay much less tax than wage earners on lower incomes. For a small proportion of women with higher incomes later in life, the changes will reduce their catch-up contributions. Yet the changes will reduce the tax breaks far more for wealthier old men.

Claims that the budget changes will affect many low and middle-income earners are wrong. Our research shows the changes will affect about 4% of superannuants, nearly all of them high-income earners who are unlikely to access the Age Pension. Nor are the proposed changes retrospective. Many reforms affect investments made in the past, and no-one suggests they are retrospective. Rather, the changes will affect taxes paid on future super earnings, and entitlements to make future contributions to super.

Any plausible combination of the packages on offer would make the super system fairer. At present, someone in the top 1% of income earners can expect to receive nearly three times as much in welfare and tax breaks from super in their lifetime as an average income earner. The government’s changes would trim some of these excesses: the top 1% would instead receive just twice as much as low or average income earners. And by targeting tax breaks that go to the top 20% of income earners, neither side’s plan would see much of an offsetting increase in Age Pension spending.

An unsustainable tax system for seniors

Decisions by the former Coalition Government to abolish taxes on superannuation withdrawals in 2007 and radically increase the amount senior Australians could earn before paying income tax have dramatically reduced the tax bills of older Australians.

These changes are one of the main reasons why households over the age of 65 (unlike households aged between 25 and 64) now pay less income tax in real terms today than they did 20 years ago. At the same time, the workforce participation rates and incomes of seniors have jumped. Generous super tax breaks have been funded by deficits. The accumulating debt burden will disproportionately fall on younger households.

Tax breaks to older Australians are also a major cause of the increase in the “taxed nots” identified by Treasurer Scott Morrison. The number of older Australians not paying any income tax has increased from three in four in 2000 to five in six today. The rise of these “taxed nots” coincides with the introduction of the Senior Australian Tax Offset in 2000, and tax-free super withdrawals in 2007.

Repairing the budget

The increased cost of services and reduced taxes per older household explain in large part why the Commonwealth budget is in trouble. For eight years, budget deficits have persisted at about 2 to 3% of GDP, and the future looks little better. The returned Turnbull government is putting a priority on budget repair, now described as a “massive moral challenge” by the Prime Minister. Winding back some of the tax breaks given to older Australians during the happier times of the mining boom is an obvious step.

The government’s super package would save the budget at least A$800 million a year. Alternative proposals by the ALP, which broadly supports the Coalition’s reforms, and then goes further, would save more than A$2 billion a year. Should Treasurer Morrison seek a deal with the ALP or the Greens, any “concessions” will mostly improve the budget position.

Nor is the Turnbull government likely to find more attractive opportunities for budget savings. Unlike most of the government’s savings measures, changes to super tax breaks are broadly popular. Electorates more likely to be adversely affected by the super changes – that is, those with more old and wealthy voters – tended to swing less to the ALP at the last election than other electorates. And a survey before the election showed that the proposals had more support amongst those most likely to be adversely affected.

A test for our political system

Even after the reforms, super tax breaks will still mostly flow to high-income earners who do not need them, and the budgetary costs of super tax breaks will remain unsustainable in the long term. Further changes to super tax breaks will be needed in future. But agreeing to the super package now before the Parliament would be progress in the right direction. And there is a broader issue at stake.

Super is only the first of a number of difficult choices that will come before the Parliament as government seeks to promote economic growth in a sluggish global economy, and bring the budget back under control. There is no easy road to these ends that will keep everyone happy all the time. Pragmatic compromise will be critical.

The proposed changes to super tax breaks are built on principle, supported by the electorate and largely supported by the three largest political parties. If we cannot get reform in this situation, then our political system is in deep trouble. In coming weeks, our MPs have the chance to show how government in Australia can still change the nation for the better.

Authors: John Daley, Chief Executive Officer, Grattan Institute; Brendan Coates, Fellow, Grattan Institute; William Young, Associate, Grattan Institute

A super test for Australia’s political system

From The Conversation.

In the past week, both major parties have made welcome, albeit tentative, commitments to tackle much-needed budget repair. The Turnbull government has moved quickly to lock in budget savings that Labor supported in the federal election campaign. Now Labor has signalled its support for the bulk of the government’s proposed changes to superannuation tax breaks, while proposing some extra budgetary savings of its own.

The ALP has endorsed the main elements of the government’s package of reforms to super tax breaks. It has accepted the government’s moves to tighten the annual cap on pre-tax super contributions to A$25,000 a year, and to put a A$1.6-million cap on tax-free super earnings in retirement.

These changes will better align superannuation tax breaks with their policy purpose, as a substitute for the Age Pension, by reducing breaks for those who don’t need them.

Going further

The ALP proposes to tighten superannuation more than the government, contributing more overall to budget repair, without substantially reducing income in retirement that would substitute or supplement the Age Pension. Over four years, the ALP’s proposals would raise up to A$1.7 billion more than the government’s plan.

The ALP proposes to tax super contributions at 30% instead of 15%, if a taxpayer’s income is more than A$200,000. In the federal budget, the Coalition set this threshold for the higher tax rate at A$250,000.

Labor’s proposed change is worthwhile. The threshold is calculated by adding taxable income and pre-tax super contributions. So it would be close to the threshold for paying the top marginal rate of personal income tax – A$180,000 – added to compulsory super contributions of A$17,100.

The ALP also sensibly rejects parts of the Coalition’s super package that would increase the generosity of super tax breaks to high-income earners.

For instance, allowing people to contribute more to their super when they have not reached their pre-tax contributions cap in previous years, as the government proposes, will do little to help women and carers to catch up. The evidence shows that few middle-income earners, and even fewer women, make large catch-up contributions to their super funds. Most people who contribute more than A$25,000 to super from pre-tax income have high incomes, and probably have continuous work history.

Similarly, the ALP is right to oppose government moves to abolish the work test that prevents older Australians from contributing to super unless they are working. This change would risk making the system even more generous to high-income earners by enabling them to funnel existing savings into super, while doing little to boost genuine retirement savings.

Lifetime cap on post-tax contributions

While it supports much of the package, the ALP’s rejection of the proposed A$500,000 lifetime cap on pre-tax contributions is disappointing.

This cap is not retrospective, as it does not affect post-tax contributions made before budget night, even where they exceed A$500,000. From a legal perspective, a measure is only “retrospective” if it means that actions in the past make a person liable for criminal penalties, additional tax, or the like. That is not the case here.

Those who have already put in more than A$500,000 before the cap was introduced would simply be prevented from putting in any more. Given the size of the superannuation savings these people have already accumulated, they are unlikely to qualify for an Age Pension even if they make no further contributions.

The ALP’s counter-proposal to only count post-tax contributions made from budget night towards the A$500,000 cap may only cost A$500 million in foregone revenue over the next four years. But younger generations, on the wrong side of the drawbridge after the policies change, will lose again when they pay for benefits for older generations that they will not receive themselves.

A worthwhile increase to super tax breaks

The government plans to make it easier for people to make voluntary pre-tax contributions directly to their superannuation fund. The ALP is wrong to oppose this.

The government wants to enable all taxpayers to contribute directly to their super funds and claim a tax deduction on their personal income tax return. At present, only people who earn most of their income from non-employment activities, or those who are self-employed, can contribute directly. Employees can only make pre-tax voluntary contributions if their employer provides a facility for salary sacrifice payments. If pre-tax voluntary contributions are allowed at all, there is no rational basis for limiting this to employees with more sophisticated employers

A test of political maturity

Reforms to super tax breaks represent a rare opportunity to make much-needed progress on budget repair, while better aligning super tax breaks with their policy purpose. They would trim the generous super tax breaks received by the top 20% of income earners – people wealthy enough to be saving for retirement anyway and unlikely to be eligible for the Age Pension. Both major parties have made substantial proposals in this direction. They agree on many measures.

The parties disagree over some of the details. The danger is that these disagreements derail reform. But good politics is always the art of compromise. If a sensible deal cannot be done when the parties are so close together, then our political system really is in trouble.

Author: John Daley, Chief Executive Officer, Grattan Institute; Brendan Coates, Fellow, Grattan Institute