This Charter is to be administered by the Guardians making up the Council. It is intended to inspire confidence in superannuation by laying down a clear process for changes to superannuation policy and rules with a view to protecting all superannuation members from changes that are inconsistent with the Charter principles.
The Charter provides a framework for the Council to assess proposed changes to superannuation policy and rules for compatibility with the Charter principles. The philosophy of the Charter is that no substantive change to superannuation should be urgent and that balanced changes that accord with the Charter principles are more likely to inspire confidence in the superannuation system.
The Council has jurisdiction to review any proposed change to a government or legislative policy or rule, whether directly or indirectly relating to superannuation, in respect of:
- taxation or concessions available in the superannuation system;
- the entitlement of any person to access their retirement benefits; or
- any matter or thing not covered in paragraph (a) or (b) that the Council reasonably regards as within the spirit and intent of the Charter principles and its role in administering them;
for compatibility with the Charter principles in accordance with the review procedures.
The Council must review any matter referred to it by the Minister.
The Government is the only party that has the authority to refer matters to the Council. Any person can provide information to, or raise issues with, the Council, but it is up to the Council to decide whether or not to act.
The Council can initiate its own inquiries and report on matters touching on or concerning the Charter principles as it sees fit.
The Council cannot review:
- any matter that relates only to a particular person, a particular superannuation fund or of a machinery or administrative matter only;
- any matter that relates to a disallowable instrument issued by a government agency; or
- any matter that relates to an industrial award or a family law issue.
The Council is not a tribunal, does not hear complaints or arbitrate disputes, does not exercise judicial power and has no regulatory power. Its purpose is solely to review matters within its jurisdiction, report on them to the Minister and give advice to the Government from time to time.
The long term aim of the superannuation system is to ‘deliver private income to enhance the living standards of retired Australians’.41 For many people, superannuation is one of the most significant forms of wealth outside the family home.42
Other core objectives are:
- to address the challenges posed by Australia’s ageing population and to relieve the fiscal pressure on the Government due to the Age Pension so that the increased costs of an ageing population are not ‘fully borne by the generation that will be working in several decades’ time when the dependency ratio is higher’;43 and
- to increase national savings (via compulsory and voluntary elements of superannuation) building up the capital stock per employee in the economy bringing with it important macroeconomic benefits, including that the superannuation system:
- creates a pool of patient capital to be invested as decided by fiduciary trustees;
- acts as a liquidity buffer in the case of economic shocks; and
- can fund the economy more generally.
Superannuation’s core objectives are implemented by:
- compelling people to save for the long term, by deferring access to a portion of current-day wages and income, in order to enjoy a better standard of living in retirement, with very limited access to those savings prior to retirement; and
- achieving near universal coverage and inclusion via an appropriate mixture of compulsory and incentivised contributions, financial literacy, engagement and products that work in the best interests of members.
The system seeks to encourage:
- self-agency by incentivising people, principally through various categories of taxation concessions tailored to their financial and personal circumstances, to take responsibility for their own retirement; and
- confident and informed participation in superannuation over many years, including the making of voluntary contributions where possible and to leave savings in superannuation in retirement.
- The superannuation system must operate efficiently, in the interests of members and with a focus on outcomes.
- Decisions about the investment of the retirement savings pool must be left with superannuation trustees and not the Government.
- Superannuation policy must align with Age Pension policy, particularly eligibility criteria and the superannuation preservation age and other policies that affect retirement savings, such as the concessional tax treatment of the family home.
- In retirement, superannuation should ameliorate the risk of outliving private savings above the Age Pension (that is, longevity risk).
- In retirement, superannuation should involve the transformation of accumulated retirement capital into a mixture of accessible capital and regular and dependable lifetime income in retirement.
Superannuation generally seeks to provide a certain amount of insurance in the case of death, permanent disablement and loss of employment income.
Part 3 — The Charter principles
The following are short definitions of the Charter principles. The principles are necessarily broad and flexible and the boundaries between them are not always clear. This will allow the Council the degree of flexibility needed to assess a necessarily broad range of potential changes to superannuation policies and rules against the Charter principles giving relevant weight and priority to them as the circumstances require.
A mature superannuation system must be oriented towards its participants being able to enjoy a level of income in retirement that, when taken with income provided by the Age Pension, meets their needs and expectations in light of the standard of living they enjoyed while working. This is the principle of adequacy.
In assessing adequacy, the Council will, among other factors, be informed by reference to replacement rates, retiree household budget standards, wellbeing measures and wider community standards and expectations. Retirement systems in other jurisdictions and the work of bodies such as the OECD can also be relevant.
Relevant considerations when assessing policy proposals against the principle of adequacy include:
(a) Ensuring adequate contribution rate
To be effective, a defined contrib
ution retirement system must ensure that a sufficient level of contributions are made by its participants or on their behalf.
(b) Impacts on the adequacy of the retirement income system
At a high level, how the proposal impacts on the adequacy of the retirement income system, both in aggregate and for particular groups, is relevant.
The fact that a proposal might negatively affect a particular group would not necessarily conflict with adequacy if the affected group is still able to achieve what is a reasonable level of retirement income by prevailing community standards.
Proposals designed to improve adequacy should also consider the effect on particular groups of the trade-off between higher income in retirement and reduced consumption while working.
(c) Impacts on the overall efficiency of the superannuation system
How the proposal impacts the overall efficiency of the superannuation system (including costs that ultimately flow through to members) is important.
(d) The impact on workforce participation
Participation is an important determinant of a person’s standard of living in retirement — it increases compulsory savings (for employees) and provides people with income to support voluntary contributions. Many employers make contributions at a rate higher than the Superannuation Guarantee rate.
(e) Impact on incentives to make voluntary contributions
The impact on incentives or the ability to make voluntary contributions to superannuation on either a pre-tax or post-tax basis is an important factor. Voluntary contributions are important for those who aspire to a retirement income above what the combination of the Superannuation Guarantee and Age Pension can provide, and for the self-employed who are currently not required to make any contributions.
(f) Impacts on the coverage of the superannuation system
How will the proposal impact the coverage of the superannuation system? For those with broken work patterns or limited ability to participate in the workforce, the Age Pension is likely to provide the major portion of their retirement income. Consequently, the adequacy of the Age Pension is likely to remain the most important determinant of retirement income adequacy for these groups.
(g) Access to advice
Access to advice about superannuation and retirement is more likely than not to facilitate adequacy. Proposals should therefore be assessed in terms of their impact on access to advice.
Adequacy is also affected by the increasing life expectancy of Australians.
(i) Retirement risks
Whether retirees’ savings are adequate is not merely a matter of building up enough capital during their working lives. The design of products offered in the retirement phase and whether they ameliorate key retirement risks: market risk, inflation risk and longevity risk, is also important.
A sustainable superannuation system is one that balances its short-term and long-term costs and benefits, having regard to other demands on the budget, the available sources of revenue and the ever-present circumstance of changing economic conditions.
Relevant factors when assessing policy against the principle of sustainability include:
- comprehensive costing of proposed measures;
- weighing up longer-term paybacks in the form of lower projected Age Pension expenditure and other benefits;
- affordability in light of demographic change;
- administrative sustainability; and
- other expenditures demanded of government.
Superannuation involves many tax concessions and special treatments for people in various age cohorts or other categories. Examples are super contribution splitting with a spouse or the transition to retirement rules. All such measures should be accompanied by estimates of their cost to the budget and benefit to the retirement income system (and potentially the economy more broadly) when introduced and there should be an ongoing assessment of their sustainability.
The Council could outsource this modelling work to Treasury with the Council determining the underlying assumptions and other relevant parameters.
(b) New econometric model
The Council will develop an econometric model, based on the cost/benefit model referred to in subparagraph (a), that will endeavour to take wider benefits of the superannuation system into account, rather than concentrating only on expenditures.
(c) Affordability in light of demographic change
Against the background of Australia’s ageing population, it is crucial that future policy changes be made with a view to their long-term net revenue impact.
(d) Administrative sustainability
Proposed new rules should, as far as possible, be easy to understand and simple to comply with. The superannuation system is very complex. In some instances, this complexity is often the result of creating specific concessions for those who need the most assistance to build adequate savings. Proposals that impose a further significant regulatory burden and/or complexity can undermine administrative sustainability.
(e) Government expenditures and trade offs
To be sustainable, the retirement income system must be affordable in the context of all the other expenditures required to be made by government. Inevitably, there will be trade-offs that need to be made with other government spending priorities competing for finite budget resources.
Implicit in superannuation policy is the proposition that Australians have been asked to assume a greater personal responsibility for their financial wellbeing in retirement above the safety net afforded by the Age Pension. Superannuation involves a lifelong commitment, on the part of members, to build retirement income above that level. The trade-off for government is that people have to be given more certainty in relation to the policy settings affecting superannuation than in other policy areas that do not involve such a profound commitment and degree of self-agency.
(a) Super needs to evolve
Certainty does not, however, imply that there should be no changes to superannuation. The superannuation system must continue to evolve and improve. It is likely that there will always be a need for change, but uncertainty created by the pace or direction of change risks undermining confidence in the system.
(b) Changes to tax and entitlements
There are also different types of changes. Changes that involve rules relating to taxation or entitlements to access super (for example, a change to the preservation age) have much more potential to affect confidence adversely than administrative or machinery changes that principally affect industry participants, rather than members. Of course, too many administrative changes can also have the same cumulative effect.
(c) Ability to plan and adjust to change
Members should have sufficient confidence in the regulatory settings and their evolution to trust their savings to superannuation, including making voluntary contributions or leaving their savings in superannuation in retirement.
People should have sufficient time to alter their arrangements in response to proposed policy changes. This issue becomes more acute for those nearing or in retirement, who have fewer options and less time available to them (for example, to increase contributions or remain in the workforce longer).
(d) Capable of being understood
Certainty also requires that the general concepts and core workings of superannuation are sufficiently clear for an ordinary person to understand, particularly in light of the fact that superannuation is compulsory.
(e) No change should be regarded as urgent
What lead times will be appropriate before a proposed change takes effect will depend on the circumstances of each case. However, as a general principle, no change to superannuation should be so urgent that it needs to take effect immediately. A possible exception to this principle might apply in relation to taxation changes where certain conduct needs to be curtailed or where pre-announcement of the change would lead to ‘gaming’ or ‘front-running’ by certain taxpayers at the expense of the majority. For this reason, it seems likely that certain proposed changes will have to remain confidential during the Council’s assessment process, but would then be subsequently discussed in (for example) the Council’s annual report.
(f) Prospective and transparent; preserving existing rights
Making changes to superannuation rules prospective and transparent promotes certainty. Changes to the way existing rights are to be exercised or enjoyed in the future are not retrospective changes. However, such rights will usually need to be preserved, while recognising that this generally leads to additional complexity.
(g) Certainty does not imply a guaranteed outcome
Lastly, certainty does not imply a guaranteed outcome or removal of the uncertainties of financial markets, although this is a desirable objective for members and funds to pursue in retirement. Systemically, however, superannuation largely follows a defined contribution model where retirement outcomes are determined by a range of factors, including the level and period of contributions, asset allocation decisions and the performance of financial markets.
A fair superannuation system is one that treats people in the same circumstances equally and is perceived to be fair by the community. Incentives that place an undue burden or confer overly generous benefits on certain segments of the population are likely to be regarded as unfair.
Relevant considerations, when assessing policy proposals against the principle of fairness, include:
- progressive versus flat rate of taxation;
- equal treatment of individuals in like circumstances;
- inter-generational equity; and
- fairness with respect to legitimate expectations.
(a) Progressive versus flat tax rate structure
Typically, Australia has relied on the progressive rate structure of the personal income tax system combined with means testing of income support payments to deliver distributional fairness, rather than setting a progressive tax rate structure for superannuation. This has changed in recent times with certain measures aimed at making tax outcomes in superannuation more progressive. Also, the use of the superannuation tax concessions for wealth creation (beyond the creation of what might be regarded as reasonable retirement income) and estate planning will often involve a question of fairness.
(b) Equal treatment of individuals in like circumstances
A policy that, without good reason, favours one group of people over another where the two groups face similar circumstances (that is, is not horizontally equitable) is likely to be regarded as unfair.
People who are unable to access the superannuation concessions, for example, due to particular individual circumstances that have prevented them from contributing to superannuation, such as those who take time out from the workforce to care for family, might view policy proposals that extend the superannuation concessions as unfair.
Similarly, a policy that enables certain groups to structure their affairs to access the concessions in ways not open to all is also likely to be perceived as unfair.
(c) Inter-generational equity
Inter-generational equity requires that present generations should ‘pay their way’ and, as far as possible, not impose undue tax burdens on future generations.
(d) Fairness with respect to legitimate expectations
Policy changes that result in unexpected losses relative to previous expectations can be perceived as ‘unfair’. For example, a tax change that materially reduces the level of income that a person was expecting to enjoy in retirement might be perceived as unfair. In practice, virtually every policy change can potentially have this kind of effect. Such impacts are therefore difficult to avoid altogether and need to be balanced against other potential benefits of the proposed policy change. This aspect of fairness is closely related to the principle of certainty.
- The superannuation system must continue to innovate and policies must be directed towards the evolution of the system to meet the changing needs of the Australian population.
- Superannuation is a large and complex system with an increasingly important social and macroeconomic dimension. It must be regulated and administered coherently and policy and rule changes should be made sparingly and in a way that engenders member confidence.
- The system must have sufficient flexibility to accommodate its inherent growth path and should strive for continual improvement, rather than abrupt changes. Government decisions about superannuation should be taken with a long‐term perspective.
- The core objectives and principles of the Australian superannuation system must remain clear and transparent.
Changes to superannuation policy and rules must:
- consistent and compatible: be consistent with the core objectives and must be compatible with the Charter principles;
- demographic and other trends: have regard to demographic, economic and social trends, particularly increasing life expectancies;
- made sparingly: be made sparingly and in a way that engenders member confidence, while recognising:
- that the system must have sufficient flexibility to accommodate its inherent growth path and should strive for continual improvement; and
- the need for the system to improve and innovate in a coordinated and coherent way;
- adequate time for Council review: be made in circumstances where there is adequate time to assess the proposed policy changes against the Charter principles;
- prospective in effect: be prospective in effect and only adversely affect the rights and entitlements of existing participants in the superannuation system where absolutely necessary;
- sufficient lead time: be introduced so as to give participants sufficient time to adjust to the changes before they take effect;
- bi-partisan approach: where possible, be supported politically on a bi-partisan basis;
- long-term perspective: take the longer-term perspective into account;
- wider perspective: take into account the wider macroeconomic and social impact of the changes, but always keeping the core objectives in mind;
- no direction on investing: not seek to direct participants in the superannuation system to invest in particular assets or asset classes, nor to prevent investments in certain types of assets or asset classes unless there are prudential or regulatory reasons for doing so;
- simplicity of administration: where possible, be simple to administer and easy to understand for ordinary Australians; and
- harmony with other policies: where possible, be harmonious with other areas of government policy, including social security, health and aged care.
- The Council must address itself to superannuation as a system, not to matters of detail or regulatory issues. Certain proposals for
change will also be immaterial to the system as a whole. It follows that not all proposals for a change to a superannuation policy or a rule should be reviewed by the Council. However, it should be up to the Council to determine its jurisdiction in any particular case.
- The most recent IGR and Tax Expenditure Statements should guide the Council in its assessment of proposals, along with any other information it considers relevant.
- The Council should have regard to wider retirement-related financial issues, including:
- the taxation treatment of the principal place of residence;
- the impact of housing tenure on retirement income and adequacy;
- the availability of fair and transparent products for drawing down on home equity in the retirement phase;
- aged care and health care issues and policies;
- other means of building and accessing retirement wealth outside superannuation;
- data relating to pre-retirement and post-retirement household indebtedness; and
- workforce participation by older Australians.
- The review the Council conducts of the proposed change to a superannuation policy or rule will be a ‘de novo’ review for compatibility with the Charter principles and is not limited by administrative law concepts such as an error of law or procedure. The Council can inform itself in any way it chooses.
The review procedure to be followed by the Council in any particular review is a matter to be determined by the Council having regard to the nature of the proposed change, its potential impact, scale and complexity and the number of issues involved. The following is a non-exclusive list of procedures that could be applied by the Council in dealing with a proposed change to a superannuation policy or rule:
(a) Notice of proposal to Council
The Government must give written notice to the Council of a proposed change to a superannuation policy or rule. Depending on the scale and materiality of the proposed change and its state of development (that is, anywhere from concept stage to draft Bill) the Council would negotiate a review procedure with the Government that would deal with as many of the following steps as the circumstances required.
(b) Discussion paper released by government for public consultation
In all but the most exceptional circumstances, any proposed change to a superannuation policy or rule will be the subject of a discussion paper released by the Government with sufficient time for stakeholders to consider and respond to it having regard to the scale and complexity of the change. What is reasonable in the circumstances will vary between 7 to 14 days in the case of very minor changes to 30 to 45 days in the case of a more complex change or changes with more significant potential consequences.
(c) Council holds open meeting
The Council may hold one or more open meetings where its proceedings would be held in full public view, including by webcast.
(d) Council notifies and consults with stakeholders
The Council may also notify key stakeholders and engage in wide-ranging or selective consultations with them, having regard to the level of consultation that has already taken place and the nature of the proposed change.
(e) Council reports to Minister
The Council would report its conclusions, including recommending other options, to the Minister. The Council must have a reasonable time in which to prepare its report. In most cases, the Council would need not less than 60 days from first being advised of a proposed change to prepare its report. There will be occasions where less time is necessary, but there might also be cases where longer, up to 180 days, will be appropriate. The Council must be flexible and reasonable in relation to time periods, but it also has to be mindful of its obligation to uphold the Charter principles.
(f) Report must contain certification
Any report issued by the Council must contain a clear certification as to whether or not, in the opinion of the Council, the proposed change to a superannuation policy or rule is compatible with the Charter principles.
(g) Report then tabled in Parliament
The report to the Minister would then be tabled in Parliament within 15 days. If Parliament is not sitting, the report would be posted on the Council’s website.
(h) Lead time for change to take effect
The Council will specify in its report to the Minister whether it considers that there should be a delay before the legislation takes effect and, if it decides that there should be a delay, the length of such delay.
From time to time, the Council should consider issues such as:
- the appropriate methodology for calculating the notional tax expenditure of the Commonwealth on superannuation, including an appropriate econometric model for analysing the benefits of superannuation;
- issues in respect of life expectancy and longevity;
- demographic trends such as predicted movements in the dependency ratio;
- research on retiree expenditure patterns;
- system design issues;
- sustainability issues;
- innovations evident in overseas systems that are not present in Australia; and
- other matters the Council considers are consistent with the core objectives and the Charter principles.
The Council is required to table an annual report in Parliament each year on its activities. The annual report may also contain, among other things, the Council’s views on:
- sustainability according to the Council’s model;
- the superannuation system confidence index;
- a summary of research and publications issued during the year;
- areas for improvement; and
- the Australian system versus comparable overseas pension systems.
41 Super System Review, Super System Review Final Report, 2010, Part One, p. 15.
42 Australian Government, Stronger Super, 2010, p. 3.
43 R Hanegbi, ‘Australia’s superannuation system: A critical analysis’ Australian Tax Forum 25 p. 303, 312. See also The Treasury, Australia’s Future Tax System: The Retirement Income System—Report on Strategic Issues, 2009, p. 30. In the former article, Hanegbi challenges the assumptions on which this position is based.