Rachel Alembakis finds that the formation of Australia's new government raises questions about the country's proposed pension overhaul
The new Australian government is noteworthy for several reasons – it is headed by the first elected woman prime minister, but more importantly, it is also the first government in which no one party holds a majority since 1940. The composition of government casts uncertainty over many policy goals, including superannuation. Hanging in the balance are major decisions affecting the structure and function of the superannuation industry, including a move to raise the employer contribution to superannuation funds from 9% of salary to 12% by 2020.
Earlier in 2010, two sweeping reports were made public. Off the back of a wide-ranging tax review, the government proposed raising the so-called superannuation guarantee (SG) by 3% over the next decade. Later in the year, a report into the operations, governance, efficiency and structure of the industry known as the Cooper Review proposed a wide variety of changes to how the industry operates, including the creation of a standard default fund option that must be made available to fund members.
However, as a result of August’s federal election, the Australian Labor Party and the opposition Liberal/National Coalition party each won 72 seats in the House of Representatives, four short of a majority. The ALP brokered deals with the one elected Green member of parliament and three of the four elected independent MPs, resulting in the return of the ALP and Prime Minister Julia Gillard to power. However, this slim and fractured minority means no legislation is guaranteed successful passage. Industry experts believe that some aspects of the Cooper Review, particularly those relating to creating operational efficiency, will pass without controversy. But legislation to create standard default funds – known as MySuper – and the SG increase look vulnerable.
“I think it creates uncertainty, clearly. It’s really hard for us to get a gauge through our government affairs areas of what could or couldn’t happen,” said Scott Hartley, general manager, corporate and institutional wealth at MLC, part of NAB Wealth. “There are a lot of questions about three reviews – the future of financial advice, Henry and Cooper. They’re all interesting proposals, and all have their merits. The question will be what will be put to parliament and what will be passed.”
When first mooted by government, the SG increase was proposed to begin in the 2013 financial year with a 0.25% increase. At the same time, the government proposed a tax rebate for low-income workers to ameliorate the effects of the 15% contributions tax, leaving a cap of A$50,000 annual contributions for those with retirement balances of A$500,000 or less and extending the SG to age 75. The SG increase was linked to a reduction in corporations tax to offset the cost of business. Both of those moves were dependent on the passage of a new tax on the mining industry. The mining tax was not passed before the August election, and thus has become an issue for debate in this parliamentary session. In turn, the SG is equally up in the air.
“The uncertainty of having SG does indeed hit the industry,” said chief executive of the Association of Superannuation Funds of Australia Pauline Vamos. “One of the key things about the SG increase is that because it starts in 2013, it gives employers, unions and workers time to build the increase. It’s supposed to be gradual, slow and built over ten years into the wage negotiations. The shorter the time then the more frantic those discussions will be.”
The opposition coalition has not definitively ruled out supporting the SG increase, but they have not committed to it, either.
“The coalition hasn’t ruled out supporting the SG increase to 12%, but it have stated a strong preference to examine the Henry Review, and only then will they decide,” said Towers Watson Australia managing director, Andrew Boal. “In the absence of the coalition changing that view, the ALP will be relying on the independents to get it through. Some might have varying opinions on the mining tax.”
On another front, the industry is facing uncertainty over the proposals in a review chaired by former deputy chairman of the Australian Securities and Investment Commission Jeremy Cooper. Cooper presented the Treasury Department with the final report in July, less than eight weeks before the election. In the wake of the formation of the minority government, two main aspects of the Cooper Review are on the superannuation industry’s radar – the SuperStream proposals aimed at reducing costs by an estimated $A1bn by targeting inefficient operations, and the creation of a simplified, mandatory default fund option, known as MySuper. Wide consensus across the industry is that SuperStream is likely to pass, while MySuper is more controversial.
Within SuperStream, Cooper recommends that the collection of mandatory employer contributions become wholly electronic and eliminating any cheque-based payments from employers. Supporting this move is recently passed legislation allowing small businesses to make superannuation payments via the existing Medicare system. Cooper also recommends that the industry adopt the Tax File Number (TFN), a unique number given to individual taxpayers, as a universal ID for making payments. These changes are widely supported by the industry.
“Particularly with SuperStream, it is vital that some legislation gets through to have any chance of enabling the industry to become more efficient,” said Mercer’s member services and advice leader Jo-Anne Bloch. “Other parts of SuperStream involve government expenditure. Now the ability for government to spend and save is really where a lot of negotiations will happen in Canberra. I’m talking about funding the role of the Australian Taxation Office, particularly its role in verifying TFNs and things like that. But what is key to all this is that superannuation must be convenient for both employers and employees. Unless we get this, it won’t be convenient and it’ll be hard for people to engage.”
The real controversy would surround legislation implementing the MySuper default option. Cooper proposed that all superannuation funds offer a default fund option that would capture enrolees that either automatically opt into an employer’s chosen superannuation provider or enrolees that choose a superannuation fund but not a particular investment option. MySuper is designed to reflect the reality that the average member account balance is below A$25,000, and that 80% of members hold their assets in a default strategy of a superannuation fund, according to statistics in the report. Because members are not likely to engage frequently with their fund, MySuper would focus on low cost outcomes. But industry experts say cost cannot be the only consideration, and cutting advisory costs could result in lower member voluntary contributions to funds. Hartley of MLC noted that under a MySuper regime, advisory services provided by NAB subsidiary Plum Financial Services would be cut.
“A lot of the work that Plum does around engaging members wouldn’t be allowed under the Cooper proposals if it is licensed for the MySuper members,” Hartley said. “In our estimation, it would save four to six basis points of cost that we would spend across our default pool educating members for potential reduction in contributions between 400-500 basis points per annum. I don’t understand why we would want to have the biggest single effect on retirement outcomes disabled by a minor cost saving as an industry.”
Because the coalition has not embraced the MySuper proposals, it is likely that any draft legislation will take longer to be put to Parliament.
“The coalition is less convinced by MySuper and have proposed in their pre-election commentary that they would use their first term to examine the MySuper requirements in more detail and come up with an approach by the end of the first term,” noted Boal of Towers Watson. “We will probably see in this government a range of situations – a lot of consultation around some of the less obvious proposals just to see what the industry thinks about it and not rushing in. MySuper might end up getting in, but might get delayed a year or two.”
However, delay is not necessarily a bad thing because it allows the industry to continue to produce beneficial results for members through market forces, according to Australian Institute of Superannuation Trustees CEO Fiona Reynolds. AIST represents mostly not-for-profit/industry superannuation funds.
“The trend for fund mergers and new member services has been playing out for several years now and should continue, with the government’s super reform agenda being an added impetus rather than the key driving force,” Reynolds noted. ”This is largely because of increased competition in the super industry and a growing recognition of the economic benefits of scale. It also needs to be recognised that most not-for-profit funds already offer a low-cost commission-free default fund and are therefore philosophically aligned to the central tenet of MySuper. As such, we would hope that most not-for-profit funds will not have to undergo any major operational challenges to meet the MySuper criteria as it now stands.”
But given the shifting sands of votes and political alliances, peak bodies like ASFA and AIST are preparing to produce more research and engage with MPs on all sides.
“We will have to do a lot of talking and negotiating and research around behavioural economics, because this is what it’s all about,” said Vamos of ASFA. “It’s about what drives people to act and how we can produce the framework that enables them to act in the easiest possible way?”
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