Heffron's Blog is a collection of comments related to the latest superannuation comings and goings.
How could the Government change super?
Speculation is running wild that the superannuation system will be changed again in the May 2012 Federal Budget – so much so that key lobby groups and professional bodies have felt the need to go on the public record say that it would be a bad thing.
I agree with them on the whole – to my mind the constant fiddling with the system plays to an existing fear amongst taxpayers that superannuation is inherently risky and uncertain from both a legislative and investment perspective. Given the policy direction Australia has taken on investment risk (ie, creating a system where individuals bear that themselves with only a safety net protection via the age pension) we have more interest than most countries in ensuring that the legislative framework is stable.
I wonder if the problem is that we have several competing philosophies at play in superannuation policy.
Who is representing whom?
An amusing little back story has broken out in relation to the FoFA reforms.
It was recently reported that a deal had been struck between the FPA and ISN (Industry Super Network) to the effect that the FPA would stop fighting the “opt in” rules if the ISN would support the FPA’s push to have the term “financial planner” officially defined in legislation. The whole thing has been denied and so is quite possibly completely true, only a little bit true or a total fabrication by someone trying to bring back the biff. Given the last minute amendments to the FoFA legislation that passed last night, there would appear to be at least some fire behind this smoke.
Regardless – it started a train of thought about member based organisations and how they represent their membership.
Muted response to administrative change on ECT
Has anyone else been surprised at the generally calm and quiet response to the ATO’s recent indication that they will use their administrative powers to do something sensible on excess contributions tax?
Living longer – dealing with the risks
I attended a fascinating presentation at the SPAA conference earlier this month that looked at longevity risk (the risk of living too long and running out of money). It was delivered by Jeremy Cooper (not surprising given Challenger’s presence in the annuity market) and Catherine Nance (an actuary with PwC who has been an active participant in the debate on retirement incomes policy for many years).
Catherine took me back to my actuarial roots and reminded both me and the rest of the audience that there are really two types of longevity risk.
Firstly, what she called “idiosyncratic” longevity risk. This is the risk that a particular individual will happen to have mortality experience that is not precisely average. It’s the risk that you will die young (or in this case, live longer) than most of your peers.
Then there is a completely different risk which we could call “systemic” longevity risk. This is the risk that improvements in medicine, living standards etc will cause everyone to live longer than the previous generation. (This effectively moves the average life expectancy up.)
She made the very good point that one of the conventional wisdoms supporting the provision of annuities by life insurance companies is that it allows pooling of risk. If a superannuation fund (or any other entity for that matter) tries to provide an annuity for 1 person, it’s impossible to know how much will be needed because that person may die tomorrow or could just be the 1 in 100 who lives for another 40 years. If, however, a life insurance company is providing annuities for 10,000 or even 1,000 people, chances are that the experience of the pool will, overall, be “average”. In other words, we can’t predict the experience of a single individual but we can probably make some sensible guesses about the group as a whole.
However, pooling only ever evens out “idiosyncratic” risk – it is designed to ensure that we have enough people to give us a spreadh of people who die young and also those who will live for a very long time. (It’s also why if you ever buy an annuity, you would ideally like everyone else in your pool to have had an exhausting physical job that causes them to die young – perhaps hang around outside building sites and promote your provider’s products?)
So how do we deal with systemic longevity risk (the fact that everyone is living older and the average is moving up)?
Superstream for SMSFs – do we need it and do we want it?
A personal view? You bet.
The Government released Superannuation Legislation Amendment (Stronger Super and Other Measures) Bill (No 2) 2012 last week as a draft for comment. It is the first step in the process to implementing the Cooper Review’s Superstream recommendations. These are designed to streamline the way in which information and money is passed around the superannuation system. (Imagine, for example, a world with no cheques just electronic transfers, no paper rollover forms, contribution schedules from employers that were in an identical format regardless of the employer from whom they came or the fund to which they were being paid. This gives you some feel for what Superstream is aiming for.)
At this stage, it remains to be seen how much this will impact on SMSFs. The Cooper recommendation was to largely leave SMSFs untouched but we will obviously need to deal with the changes at some level (certainly on those occasions when SMSFs interact with large funds and employers). However, we won’t know the detail until we see the Regulations and Legislative Instruments that will be used to spell it out. The changes proposed in the current Bill simply set a framework – ie, they define “superannuation data and payment matters”, give the Commissioner (and where relevant APRA) the power to set standards in relation to those matters and then finally provide for penalties where the standards aren’t met.
However, should SMSF trustees and practitioners see this as something that will help or hinder business as usual?
The ATO’s SMSF statistical overview
Last Monday, the Australian Taxation Office (ATO) released a publication called “Self-managed superannuation funds – a statistical overview 2008-09”. It’s a fascinating document (and not just for people who are interested in numbers). It provides a snapshot of what the SMSF sector looked like in 2009, based on the returns lodged with the ATO for 2008/09.
(Why are the stats so old, you ask? Because SMSF returns are routinely lodged so late that these are the most up to date figures! An interesting piece of trivia – only around 70% of SMSFs lodge on time. Around 10% are more than 6 months late. Given that most well behaved SMSFs don’t have to lodge their returns until nearly 12 months after the year end, it’s hard to see how anyone could compile more current statistics.)
There are many interesting numbers in the report. I’ve written an article for the AFR’s DIY Super site (www.afr.com/diysuper) which should be up there in the next few days that talks about the compliance statistics.
But there are other interesting segments of the report.
Mid year economic forecast
There wasn’t much ‘new & exciting’ news in this for SMSF members and trustees:
- The information on the Low Income Superannuation Contribution (a special extra Government contribution a bit like the co-contribution for certain people who are working but earning less than $37,000) essentially replicated the draft legislation we already have
- the removal of any upper age limit for Superannuation Guarantee contributions had already been flagged in a press release last month and is actually already well on its way to becoming law. (This was discussed in a previous post where I highlighted that legislation had been put to the House of Reps to increase the upper age limit from 70 to 75. That legislation was amended in the House to remove the age limit entirely and the new version is now in the Senate.)
What was new (but perhaps not exciting) is that the Government Co-contribution is to be halved (effectively the Government’s matching of the individual’s own contributions won’t be as generous).
Equally dispiriting – indexation on the $25,000 concessional contributions cap is to be deferred for a year. Normally this would have increased to $30,000 in 2013/14 as the rules for this limit are that it is indexed to Average Weekly Ordinary Time Earnings but only in $5,000 jumps. We were finally due for a jump. This cap flows on to all sorts of other limits – for example:
- the limit on non-concessional contributions is 6x the concessional contributions cap (so it will also stay at $150,000); and
- the proposed new limit for those over 50 who have less than $500,000 in super is the concessional contributions cap + a fixed $25,000
Perhaps the only thing to get remotely pleased about is the fact that the Government has decided to extend the temporary reduction in minimum pension payments for yet another year. For the three years up to 2010/11, members drawing account-based and market linked pensions were only required to take 50% of the “normal” minimum pension. This year (2011/12), they are only required to take 75% of this “normal” amount. That was due to stop next year and we were to see a return to 100% levels at 1 July 2012. Instead, the 25% reduction (meaning members are only required to take 75% of the “normal” rate) will continue for one last year (2012/13) and we will return to the normal rules from 1 July 2013 (maybe – who knows – this concession has now dragged on for five years, perhaps we’ll never go back to “normal”).
So nothing terribly exciting or imaginative. But hey – I’d still rather be saving for my retirement in Australia than Europe.
Australians ill equipped to handle investment risk
Counter intuitive Super Guarantee changes
The Government has long said it will increase compulsory super via raising the Superannuation Guarantee rate from 9% to 12% over time and it introduced the relevant legislation to the House of Representatives last Wednesday (2 November 2011). The first increase (from 9% to 9.25%) will happen in 2013/14.
The same legislation will extend the age at which Superannuation Guarantee cuts out from 70 to 75. In fact, in a press release issued on the same day, the Minister announced that the Government would actually even scrap this upper age limit from 1 July 2013. (Does this sound like Ground Hog Day? If so, that might be because you recall a Private Member’s Bill put forward by Bronwyn Bishop earlier this year which proposed exactly the same change.)
Why do people question the payment of lump sums from funds with individual trustees?
This old chestnut popped up in a newspaper article this week, prompting several anxious emails from clients asking whether their fund could pay lump sums. While I actually think this is an esoteric and largely irrelevant issue (as in “of course all funds can pay lump sums unless their trust deed prohibits it”), I wondered if there might be some interest in why that question even arises. In fact, more broadly, why do we have this somewhat funny requirement that super funds must either have a trustee that is a company OR the primary purpose of providing pensions? Surely those two things don’t have anything in common?
