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3 Constant change?

Members need to be able to participate in the superannuation system confidently if it is to be sustainable in the long run. There is widespread concern within the superannuation industry that the many changes to the rules relating to superannuation are causing people to lose confidence in the system. A number of submissions suggested that there is a widespread sense that the changes in superannuation have been too frequent.7

This was mentioned as an issue as far back as 1993 in the FitzGerald report on national saving:

It goes almost without saying that further change to superannuation is not desirable in itself — continual change in recent years has engendered complexity and uncertainty and diminished confidence. But if change is highly desirable in the long term, it is better done sooner than later. The aim is to move quickly to a superannuation system that has the ‘essentials’ right, supports national saving objectives, and can justify community trust in its long-term durability.8

There is also a range of attitudinal research, including the FSC-DST Global Solutions CEO Report and research from SPAA/Vanguard and ATO/Colmar Brunton,9 that points to concerns with confidence.

There is also a concern that the very complexity of superannuation itself reduces confidence.10

The Charter Group has formed the view that it is changes to tax concessions and entitlements (for example, to the preservation age or the ability to access super) that are most likely to affect member confidence and call for the additional processes and protections proposed by the Charter. There could be other changes that indirectly affect these things, but it will principally be changes to tax (including how much can be contributed concessionally) and access to retirement benefits that occupy the Council.

Of the changes to superannuation since 2005-06, 30 of them (detailed in Table 3.1) have had impacts of over $50 million over the budget forward estimates and a large proportion of them relate to how much can be contributed, tax or other concessions. In each case, the table shows the cost or saving over the year of introduction and the four forward years—and it is important to note also that the costs or savings in all cases continue beyond those four years specified.

Table 3.1: Estimated budget impact of changes over $50m to superannuation since 2005-06

Superannuation measures over $50m since 2005-06
Impact on Budget ($m)
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Concessional contributions in excess of the annual cap -15 -15 -25
Concessional contributions cap for those aged over 50 -195 105 230 225
Earnings on super assets supporting retirement income streams 2 152 202
Transfer of lost member accounts to the ATO 60 70
SMSF levy arrangements – recovery of ATO costs 70 164 88
Transfer of lost member accounts to the ATO 555 150 36 34
Deferral of higher concessional contributions cap 580 730 130 -10
Tax concession for contributions of very high income earners 200 355 475
Low income superannuation contribution – work test 26 27 26
Concessional contributions caps – one year pause in indexation 360 125
Reduction of co-contribution 352 342 329
Co-contribution – pause to the indexation of the income threshold 25 25 25
Contribution caps – operation of the higher cap for over 50s 65 90
Co-contribution – pause for two years 35 70 95 95
Low income superannuation contribution -830
Concessional contribution caps for over 50 -545 -785
Reduction to the superannuation co-contribution 175 175
Co-contribution – enhancing administration 34 31 31 42 42
Increasing superannuation guarantee to 12% -240
Reducing the Government co-contribution 385 395 410 205
Payment – lost accounts to unclaimed moneys 187 39 12
Reducing the concessional contributions caps 625 640 720 825
Temporary residents’ superannuations measure -64 -67 -76 -46
Temporary residents’ superannuation 220 415 290
Payment of tax free benefits to the terminally ill -15 -25 -25 -25
Simplified Superannuation -55 -1,276 -1,160 -1,413
Superannuation fund investment rules – instalment warrants -50 -90 -100 -110
Ensuring appropriate use of pre-1 July 1988 funding credits 150 150 150 150
Market linked and other life expectancy income streams -11 -19 -26
Surcharge abolition -650 -875 -990

NOTE: Costings provided are drawn from the date of publication in relevant Budget/MYEFO. The SuperStream reforms and financial assistance to fund members affected by the failure of Trio are not included, as the Government has cost recovery levies for these. See Budget Paper 2, 2011-12, p. 325; Budget Paper 2, 2012-13, p. 280. Further, implementation funding for Superannuation Choice and Simplified Superannuation are not included, as these did not involve any major change to entitlements. See Budget Paper 2, 2007-08, p. 307; and Budget Paper 2, 2005-06 p. 258. The Simplified Superannuation measure was concurrent with large changes to the Age Pension, which would take total spending on the measure to $7.2 billion

The introduction of Simpler Super in 2007-08, with a large extension of tax concessions for superannuation, was concerned mostly with adequacy. The subsequent series of smaller changes relate more to sustainability and fairness: six relate to reduced concessional contributions caps, six relate to reductions in the co-contribution and five relate to lost members and temporary residents. The Charter Group believes that the volume and frequency of the changes impact on certainty.

It is also important that superannuation policy and changes are not only consistent with the underlying policy of super, but are also seen by ordinary people to be consistent, thereby reinforcing the value of super. The concessional contribution caps and the minimum drawdown requirements in the retirement phase are both sound policies from a revenue perspective, but are counter-intuitive for many Australians. Many people remain confused by policies that appear to be aimed at discouraging contributions to super. Perhaps this is largely a communication problem and a number of submissions suggested a role for the Council in education about super. At the very least, communications will be advanced by the Council making its reports public and via its consultation process.

The system will continue to change as it matures, as innovations occur and as it becomes proportionately larger than other parts of the economy. Inevitably, it will also be necessary from time to time to reconsider the size of the tax concessions for superannuation, as the population ages and possibly also in periods of fiscal austerity. These factors constitute what is called ‘political’ or ‘legislative’ risk, and are similar to the risk faced by all taxpayers that future governments might change the tax system more generally. However, many people seem to view changes to the way human capital is taxed (that is, an income tax increase) differently from the way accumulated retirement capital is taxed. It will be the mission of the Council, in administering the Charter, to ensure that, as far as possible, any changes to super that are necessary meet the Charter principles.

What do member contributions say about confidence?

While the level of member contributions might seem to be a good yardstick of confidence, it is difficult to disentangle other factors that might have reduced member contributions; for example, market conditions or the reduction in the concessional contribution caps in 2009.

The APRA data in Table 3.2 (which do not include SMSFs) show the pattern for member contributions (not including salary sacrifice contributions or outflows due to benefit payments) for each year (to the end of June) from 2006.

Table 3.2: Member contributions11

Year Total
contributions

$b

Member
contributions

$b

Member contributions
as a proportion
of all contributions
%
2005-06 83.5 33.2 39.8
2006-07 * 163.7 95.4 58.3
2007-08 115.8 46.1 39.8
2008-09 105.1 33.4 31.8
2009-10 99.5 29.8 29.9
2010-11 106.5 33.5 31.4
2011-12 117.5 34.2 29.1

* Better Super changes

This table shows a fall in contributions between 2007 and 2009. However, this is just as likely to have been caused by the global financial crisis and the reduction in the contribution caps. The Financial Services Council noted, in a media release dated 30 May 2013, that:

… voluntary contributions to superannuation funds posted their biggest increase since September 2007 [though also noting that] this increase was counterbalanced by a [relatively small] $40 million decline in employer contributions.12

Given the roughly 20 per cent rise in the ASX for the nine months to the end of the March quarter in 2013,13 there could be a causal link with a rising sharemarket, but the Charter Group would need more evidence to make a conclusion to this effect.

SMSFs

While there has been some media c
omment on recent Australian Taxation Office (ATO) statistics on the rate of formation of new SMSFs, the data suggest that if there has been a decline it is merely a return to trend after reaching high levels in the April to June quarter in 2012.14 Table 3.3 shows ATO data on annual numbers of new SMSFs formed, with peaks in the 2006-07 and 2011-12 years.

Table 3.3: ATO data on the formation of new SMSFs15

Year New SMSFs
2003-04 30,548
2004-05 23,049
2005-06 24,575
2006-07 45,666
2007-08 31,626
2008-09 32,592
2009-10 29,922
2010-11 33,187
2011-12 40,958

Data for the 2012-13 year is as yet incomplete, showing 5,840 new SMSFs established in the January to March 2013 quarter, compared to 9,863 in the same quarter in 2012. However, the longer run average for the quarter concerned is closer to 7,000, so the reduction might not be as significant as it appears.16 Table 3.4 shows member and employer contributions to SMSFs.17 It shows a similar pattern, with member contributions peaking in 2006-07 (with the introduction of Simpler Super and before the global financial crisis), falling considerably in 2009-10, and recovering to some extent in 2010-11.

Table 3.4: Member and employer contributions to SMSFs

Year Member contributions
$b
Employer contributions
$b
2004-05 8.5 5.0
2005-06 13.0 7.5
2006-07 56.3 10.9
2007-08 20.9 10.0
2008-09 17.5 10.2
2009-10 14.3 6.8
2010-11 17.2 7.2

While the Charter Group cannot point conclusively to a fall in voluntary contributions as evidence of a lack of confidence (because it cannot rule out the independent variable of the global financial crisis as the cause), it has nonetheless concluded that there are significant concerns among members, and the industry more widely, about regulatory changes. In short, the Charter Group believes that regular changes to important rules relating to taxation treatment and what members are entitled to contribute concessionally, do affect confidence in the superannuation system.

Confidence as a yardstick

While confidence is hard to define, it is essential for the future health of the superannuation system. The Council might wish to consider developing an index of confidence, in part to help it monitor its impact on the system, although some caution would be needed in interpreting the results because many people, particularly young people, are not engaged with their super.18 To overcome this, such a survey could measure:

  • confidence among various subgroups, including SMSF members, older and younger members and self-funded retirees in particular;
  • confidence in the ability of super funds to invest members’ money to meet member needs;
  • confidence in the long-term benefits of super;
  • satisfaction with the compulsory Superannuation Guarantee system;
  • willingness to direct discretionary income into super; and
  • willingness to leave money in super in retirement.

7 COTA submission p. 3, FSC submission p. 1, ISN submission p. 2 and p. 6, Confidential submission, AIR submission p. 2, AFA submission p. 1, SMSFOA 2013-14 Pre-Budget Submission p. 4, SMSFOA submission p. 5, National Seniors submission p. 1.

8 FitzGerald VW, National saving – A report to the Treasurer, Allen Consulting, 1993.

9 FSC Excessive regulation is crippling productivity, December 2012 p.13, ATO/Colmar Brunton Super reforms communications developmental research: Qualitative findings 2012 p. 9, p. 13 and p. 41.

10 FPA submission p. 2.

11 APRA, Annual superannuation bulletin, June 2012, 9 January 2013. See Table 7, p. 38. http://www.apra.gov.au/Super/Publications/Documents/June%202012%20Annual%20Superannuation%20Bulletin.pdf.

12 FSC, FSC Bond report: Discretionary flows highest since September 2007 – 30 May 2013.

13 ASX All Ordinaries Price Index was at 4,135.5 at 30 June 2012 and 4,979.9 at 31 March 2013; a 20.4 per cent rise.

14 Sally Patten, ‘More facts needed to reconcile super trend confusion’, Australian Financial Review, 3 June 2013, p.18.

15 ATO, Self-managed super fund statistical report – March 2013, SMSF population table – annual data.

16 ATO, Self-managed super fund statistical report – March 2013, Population table – quarterly data.

17 The data is compiled from ATO, Self-managed super fund statistical report – June 2012 and Self-managed super fund statistical report – March 2013.

18 There is considerable evidence that engagement with superannuation increases with age. See, for instance, the ATO’s recent research on the subject, Super reforms communications developmental research: Executive summary, p.2.