Super needs to be depoliticised

Graeme Colley

The ultimate goal of all participants in the superannuation system should be to depoliticise it. Super is too important to be a political football, tossed about whenever political expediency demands it.

Despite the uncertainty and media speculation of recent months, the federal government has a reasonable track record in this respect. In 2009, it established the Stronger Super review and since Jeremy Cooper’s committee delivered its final report in 2010, the government has been working through its recommendations in a measured way.

The government’s decision to set up a Council of Superannuation Custodians, which is intended to provide certainty and a bipartisan political approach to super, is another positive move in this direction and it has the SMSF Professionals’ Association of Australia’s (SPAA) full blessing.

However, the lesson from recent events is that policy based on tax concessions alone, and designed to meet short-term budgetary goals, runs the potential risk of creating difficulties and undermining confidence in the system. As two recent SPAA reports have highlighted, SMSF trustees are more concerned about Canberra moving the super goalposts than market volatility.

But while the recent changes announced by Financial Services and Superannuation Minister Bill Shorten and Treasurer Wayne Swan have been generally welcomed by the industry, there are still problems – assuming the changes survive the September 14 election.

For example, from 1 July 2014, earnings on assets supporting income streams are proposed to be tax-free up to $100,000 a year for each member. Earnings above $100,000 will be taxed at the same concessional rate of 15 per cent that applies to earnings in the accumulation phase.

But the capping of tax exemptions on earnings from superannuation funds at $100,000 appears to be administratively difficult for any funds where there is no direct link between each member and the fund and each individual asset of the fund.

Unitised funds or funds with blended investment options will have great difficulty with this change as the ‘income’ incorporated may include unrealised capital gains and income accurals.

People with large superannuation account balances will also be able to circumvent this rule by spreading their super assets across multiple funds. Such an outcome would work against a lot of government policy directed at making the system more efficient by encouraging people to consolidate their accounts.

The government – and the opposition if it wins the next election – needs to maintain its more measured response to superannuation policy because there is a lot more to work through.

Last year’s Melbourne Mercer Global Pension Index gave the Australian super system a rating of B+, which means it is “a system that has a sound structure with many good features but has some areas for improvement”. Among the 18 countries surveyed, only Denmark received an A rating and the Netherlands was the only other country to receive a B+ rating.

The report says the Australian system could be improved by introducing a requirement that part of the retirement benefit must be taken as an income stream. It recommends increasing the labour force participation rate among older people.

And it would like to see the introduction of mechanisms to increase the pension age as life expectancy continues to increase, and also a rise in the minimum access age for receiving benefits from private pension plans so that retirement benefits are not available more than five years before the pension eligibility age.

These are all issues the industry would like the government to address. One positive step in the latest round of announcements is the decision to provide deferred lifetime annuities with the same concessional tax treatment that super assets supporting income streams receive. This means income from deferred annuities will be taxed within a life company’s overall tax return at zero, rather than the present rate of 15 per cent. The superannuation industry has advocated a change of this type for some time and it may assist in enabling a range of new products to address longevity risk – the biggest issue facing the system.

Compulsion may not be necessary to encourage more retirees to put their super benefits into pensions, but the government can help, as it has done in its latest announcement, by facilitating the development of a wider variety of retirement income options.

Perhaps a market for deferred annuities, to complement the established markets for account-based pensions and term annuities, would give retirees an income stream if they live beyond life expectancy. It must be remembered this comes with a price tag to take into account the person’s longevity.

Another benefit of greater cooperation and coordination between government and stakeholders would be less confusion and misunderstanding when policy changes are announced.

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