Deferral of the next SG rise warranted by economic reality

A focus group of senior superannuation industry executives has agreed that a deferral of the next rise in the superannuation guarantee might be warranted in the economic circumstances but that it should be subject to independent review.

ATTENDING:

Mike Taylor (MT) –

Managing editor, Money Management and Super Review

Paul Cahill (PC) –

Chief executive, NESS Super

Russell Mason (RM) –

Superannuation partner, Deloitte

Andrew Howard (AH) – C MT: Can we sensibly expect them to proceed with the rise which comes into effect next year when we already know the likelihood that we’re Chief commercial officer, TAL going to have a lot of unemployment and a recession?

PC: Look, I think you use the appropriate word there, Mike. It’s a loaded question. You should sensibly, so that automatically makes it a loaded question. But you know we’ve been stuck at 9.5% for god knows how long. I appreciate we’re in times that no one has ever experienced before in their life and probably hopefully never will but the whole increase in the superannuation guarantee (SG) has been kicked around like a political football.

My view is the Government will use the opportunity not to increase it or they’ll move it up to 10% and park it there for five years. Put it to sleep. But I can’t see the legislative timetable going through simply because any opportunity to cut something out to help the economy will absolutely be utilised.

So, the best case for us is that we get it to 10% and it stays there for a few years while the economy regains its feet. But it wouldn’t surprise me if we were left at 9.5% for a not insignificant amount of time.

RM: I think Paul is right, which is a real shame and the question becomes, if the economy is going into recession how quickly will it recover because it would be a shame to delay increases when the economy actually recovers quicker than expected. And there’s already

been talk of a quicker turnaround than initially expected and I expect that once a vaccine is released things will change very quickly.

Also it’s a shame because most people have acknowledged that 9.5% isn’t adequate and that we need to get it to a higher level and, in my view, 12% is the minimum.

Technically we should have got there at 1 July last year if we had stuck with the original Labor timetable and now it’s been pushed back. I still believe we need to get to 12% and if the Government does defer next year’s increase I’m hoping that deferral is only for 12 months and not for an extended period of time. MT: Well, you don’t think as someone might have suggested in an editorial recently that the deferral should be subject to review depending on how quickly the economy recovers? RM: If there is a deferral, I think that makes a lot of sense because the bottom line is that we’re in unknown territory and we really don’t know what things will look like in 12 months and, as I say, you know it may recover a lot quicker than expected so that if there is a deferral it would be good to have an independent review of that this time next year to see how appropriate that deferral is. AH: I don’t have much more to add to what Russell and Paul have said except that I think it’s important, and it’s certainly important to the fund partners that we work with, that it’s not lost in the debate that the superannuation system has achieved an enormous amount for Australia. It’s a leading system for saving and you only have to consider where we were before it was put in place.

From the point of view of life insurance, it’s a fact that the system itself creates access for more people than otherwise would be the case and it also provides better value for money on life insurance. Those are important points that I think need to be preserved as the debate on the matter is considered.

The poor design that is making early release a problem

The Government’s rushed design of its hardship early release regime has caused a cascade or problems for funds and their members. MT: So let’s assume there will be no rise in the SG and we move onto the early drawdown of superannuation which for some people is obviously a necessity and for others possibly not so much the case and there is an argument that says that in the absence of increases in the SG people are going to find it very, very hard to restore their balances.

I guess, from your point of view Andrew, it also raises the question of whether they can restore their balances such that they can continue to have insurance inside superannuation. So Russell, let’s start with you on that issue. RM: Yes, Mike, I think irrespective of whether the increase is delayed or not, it’s going to be difficult for many people to get back to pre-COVID-19 levels and the majority of people will not make additional voluntary contributions so I’m concerned about those that have been disadvantaged in the long-term by drawing down money.

I don’t want to criticise them for doing that when they are in dire financial straits. For those people who are in that situation it’s what all of us would do in those circumstances. But

RUSSELL MASON

it’s hard to see those people clawing back that money, especially with the compounding effect over the ensuing years.

Increases in the SG will at least help towards part of that clawback, but I think what we need to do when we come out of this is to embark on a strong education program to encourage people to make additional voluntary contributions, make people aware of the impact the drawdowns had, and perhaps there can be some concessions short or medium term for those people who have drawn down and who may want to try to pay the money back into super through additional tax concessions. MT: Andrew, give us your view. I know that TAL and other insurers have actually been quite generous in some instances in trying to help people maintain their insurance cover. How does the early drawdown look from an insurance company perspective? AH: Well a lot of funds that we work with have been active in discussing with us their concerns about individuals potentially losing insurance cover as a result of the early drawdown of super. So far it’s been reasonably modest, but that’s high on the funds’ minds.

Trustees and management teams, from an accumulation point of view and from an insurance point of view, want to know what the funds can do for those members who are going through hardship so one of the things that we’ve been talking to the funds about is implementing access to career services and mental health services because all of this really does wrap into what is a health crisis which is turning into an economic crisis. If you follow the bouncing ball, it could end up giving rise to a social set of problems for us to deal with.

The funds feel they have a role to play in that if they can take care of some of the things that relay to how much contributions individuals have but as members, or even non-members, what they can do for them. PC: We’ve had to go to enormous effort to make sure that members who have literally taken their account to zero – and we’ve had plenty of those – don’t lose their insurance. Because of the way the whole early release scheme was designed we’ve had many a member pull out an account balance that was sub-$10,000 and they’ve hit the zero figure and a week later we’ve had a contribution for them, so we had to make sure that the mechanisms are in place so that a member didn’t lose all their insurance.

So, it’s little things like that that people don’t consider. You know, this is probably one of the worstdesigned pieces of legislation I’ve seen for the law of unintended consequences. So you know, many of the funds had a member go from an account balance of whatever you like to zeroed-out and closed out.

Insurances have gone and if the fund wasn’t really dialled in a lot of insurances which the fund has a fiduciary duty to protect, can be lost, so there’s all sorts of consequences. And what is most perturbing to us is the fact that if, one day, someone does the analysis they’ll find that a lot of these claims aren’t real or fair dinkum.

A lot of people are getting money out because the opportunity simply presents itself – and coming back to Russell’s point – when you’re 55 years old taking out $10,000, it isn’t really going to affect your end balance too much in the larger scheme of things. But a 25-year-old taking out $10,000 and doubling down on $20,000 – that’s going to drive a trucksized hole in their retirement income.

When you’re 24 years old you think it will be alright and that something will sort itself out later on, but the reality is that the compounding effect of $40,000 over 40 years of work is not insignificant and you know what, it’s not going to be today’s Government’s problem. Continued on page 10

Is superannuation too big to let politicians play with it?

Superannuation should be placed under an independent A As the Australian superannuation industry it is treated in an incorrect manner,” he said. Prudential Regulation Authority (APRA), authority such as the Reserve Bank rather have it subjected to political game-playing, according to a roundtable of senior industry executives. moves to assets of over $3 trillion it is time to “It [superannuation] needs to be treated the Australian Securities and Investments extract politics from the equation and place the like interest rates or currency and needs to Commission (ASIC) and the Australian sector in the hands of an independent entity handled by an independent authority such as Taxation Office (ATO) together we need to such as the Reserve Bank of Australia (RBA). the Reserve Bank. The Government may put make sure this money is well-regulated.” That was one of the issues canvassed in people on the board of the RBA but it is highly He said that Deloitte had estimated that by a superannuation focus group conducted independent. the end of the 2030s, superannuation funds by Super Review with NESS Super chief “Due to the critical place that would own over 60% of the assets listed on executive, Paul Cahill, actively arguing for the superannuation intersects with the economy the Australian Securities Exchange (ASX) fate of superannuation to be removed from now, I think it’s time it gets moved off to which represented a huge amount of money the hands of politicians and into those of a something like the RBA for carriage of the with the capacity to change the shape of less volatile authority. various legislative requirements,” Cahill said. corporate Australia. “I think it is time that the whole Deloitte superannuation partner, “All that means superannuation will need superannuation debate is moved to a different Russell Mason, said the concept being to be well managed and well-regulated and, level and what I’d love to see is the Reserve canvassed by Cahill was not one he had as Paul Cahill said, from an independent point

Bank get carriage of superannuation,” he said. previously contemplated but that he agreed of view,” Mason said.

“Because of its political nature now, and that “as we approach $3 trillion in assets, TAL chief commercial officer, Andrew the size of it – $3 trillion going to $8 trillion superannuation is something that is just too Crawford said he believed it was about – it’s too dangerous to leave it to fly by night large and too important to get wrong”. confidence and the need for fund members to politicians with an agenda and I include Labor “So whether it’s the RBA or consolidated hear different voices talking about confidence and Liberal in that description,” Cahill said. with a specialist superannuation regulator in the superannuation system and confidence

“You can see the damage that it can do when which brings the best of the Australian in the role insurance plays in superannuation.