Now, management of the nation’s superannuation system has passed into new hands, giving rise to the question, how will funds fare under Treasurer Joe Hockey and his Assistant Treasurer, Senator Arthur Sinodinos?
Direct responsibility for superannuation falls to Sinodinos, the canny and respected former adviser to Prime Minister John Howard and widely regarded as a key force behind Howard’s success.
The Abbott Government has been careful not to frighten the horses at the outset. Sinodinos says any changes will be implemented “in a staged, consultative way – no surprises [or] ad-hoc, fiscally driven decision making”.
Brett Himbury, CEO of IFM Investors, which provides investment services to a large number of industry funds, is one who praises that consultative stance.
But the years ahead will likely see plenty of changes to our super system. The incentives in the system remain contentious, and the Coalition would clearly like to marginalise union-influenced industry funds. Perhaps most importantly, our long-term ageing challenge looms closer.
Changes in the pipeline
Careful though it may be, the Government is already planning changes. It has talked of altering the client-focused Future of Financial Advice laws in several ways. In Opposition, the Coalition called FoFA’s reporting requirements “outrageous” and has committed to improvements in disclosure, efficiencies, reductions in red tape and the completion of the MySuper initiatives. For accountants who provide investment advice, these changes are likely to be welcome.
The Coalition has also announced that a series of planned Labor tax changes will not go ahead. One is Labor’s planned 15 per cent contributions tax on super pensions earning more than $100,000 a year. A second is Labor’s refund of contributions tax for three million people earning less than $37,000; funding for that was tied to the federal mining tax, which the Abbott Government is dismantling.
Another change will have to wait – a review of contribution cap limits, which under Labor fell progressively from $100,000 to $25,000 or $35,000, depending on age. The IPA is among the groups arguing for a higher cap. The Government says it will only look at the caps when the Budget is in good enough shape to bear the burden.
Women are also set to receive super payments while on maternity leave under the Government’s Paid Parental Leave scheme.
The Coalition is committed to moving the Superannuation Guarantee to 12 per cent but is stretching the phase-in period by two years to 2021/22. That, says Himbury, “is not a great outcome”, as it will eventually shrink retirement incomes.
Using default funds
Looking beyond those measures, the Coalition is likely to run a strong line on opening up the marketplace. Its chosen instrument of change is MySuper, the low-cost default superannuation arrangement that emerged from Labor’s reform package. Already, about 100 MySuper funds have been registered and probably 120 will be in the market within a few months. Sinodinos says he is “looking at default funds and who can provide a default fund … we want maximum competition and transparency in that process.”
Those seemingly innocuous words could see a bomb tossed into what has been a cosy sector of the market. Under Labor, the Fair Work Commission registered default funds that receive workers’ super payments under industrial awards, unless they opted out. The Sinodinos vision would allow the MySuper sector to step into that space, providing competition for the industry funds that have dominated up to now.
It’s a move that makes sense and will have a big effect, says Andrew Baker, managing partner of asset consultants Tria Investment Partners. “It would radically remake the landscape in favour of retail players,” he says, “and I see no point for MySuper unless it’s used in that way.”
[breakoutbox][breakoutbox_title]The shape of super to come[/breakoutbox_title][breakoutbox_excerpt][/breakoutbox_excerpt][breakoutbox_content]
Deloitte’s Dynamics of the Australian Superannuation System report predicts the super system will grow from its current level of 100 per cent of GDP to 180 per cent, or $7.6 trillion, by 2032.
On the way there, retail and corporate funds will overtake SMSFs. Deloitte forecasts retail and corporate funds will jump from their present 31 per cent of the market to 34 per cent by 2022 – perhaps even more if new super reforms prove popular with workers.
And SMSFs, now making up about 33 per cent of the $1.6 trillion superannuation system, will slip to a 30 per cent share by 2022, according to the Deloitte report.
But SMSFs will keep growing. They still offer attractive flexibility in both the accumulation and pension phases and allow for some pooling of family resources.
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The Son of Wallis
Any new, long-term approach to superannuation will probably emerge most clearly in the Government’s response to the Financial System Inquiry, due to report later this year. Sinodinos has said the Government will not make any significant regulatory or legislative changes that impact the financial services industry before the inquiry reports.
Professor Harper, who helped produce the landmark Wallis Report in 1997, argues that super “must figure prominently” in this so-called ‘Son of Wallis’ inquiry. He suggests the inquiry will need to ask whether superannuation can help finance small and medium businesses, how it might be used to finance government and infrastructure, and how it is overseen by regulators.
An infrastructure government?
Another area of change for the super system will be the marshalling of investment funds for infrastructure.
Tony Abbott says he wants to be “an infrastructure Prime Minister”. Arthur Sinodinos appears keen to use super for greater infrastructure provision. He says any moves in this direction will not involve “mandating” infrastructure financing, “but we’re looking at private sector financing of infrastructure – the use of infrastructure bonds, tax breaks [and] measures like that.”
Infrastructure investment will be built on a 15-year pipeline of projects, adds Sinodinos, “so the private sector, the super funds and everybody else will know what’s possibly available”.
Himbury says industry funds are already invested between 7 and 12 per cent in infrastructure while “across the whole system, it’s only 3 per cent. That needs to go up [to help] the strength and stability of super returns and for the benefit of the nation.”
The age-old question
There’s another issue that will emerge between now and 2020 that is so politically risky that, to date, it has rarely been discussed by government – matching retirement income needs with increasing longevity.
As Vamos notes, our system was designed for people living into their sixties and seventies, not into the nineties and one hundreds.
Now, the challenge is the bubble of baby boomers moving through the system. They will “retire with a lot of money”, says Vamos. The system needs to ensure they don’t blow their lump sums and leave the latter years of their retirements to be funded by the tax payer.
Sinodinos sees the importance of the issue, saying: “We are keen to make sure income streams can be maximised for as long as possible, and we’re happy to talk to people about the way in which we evolve annuities and retirement income.”
The political difficulty is devising strategies that will encourage people to move away from lump sums towards income streams without having the feel of compulsion.
Vamos says some simple reforms would help kick the process along. One is bringing in longevity insurance, which would stretch self-funding in retirement. Another is developing a range of annuity-based and deferred-annuity-based products that could be tailored with existing superannuation accounts and the social security system to ensure holders of the new products are not disadvantaged in relation to pension payments. Already the industry is moving to develop pension-style products that will attract superannuants.
As baby boomers age over the next 20 years, according to Deloitte’s Dynamics of the Australian Superannuation System report, the ranks of Australians over 75 will double.
That will change the face of Australia – and the nature of the super debate.
