Superannuation reforms must deliver better value for money
The current recession has depleted the retirement savings of millions of Australians. More than 2 million people have taken advantage of the COVID-19 stimulus of early access to super and withdrawn about $35 billion from their nest eggs.
Record low interest rates and poor investment returns have also raised doubts about whether the $3 trillion in retirement savings (that is still in super) will yield enough retirement income.
That situation makes it all the more important to look for policies that will help people rebuild the balances of their superannuation accounts and get better returns.
The federal budget announced a series of useful reforms which should help them make up some of the lost ground by reducing waste on administration fees of running multiple funds and by weeding out underperforming funds.
The budget estimates the reforms will reduce fees and boost earnings by a total of about $17.9 billion over the next decade compared to the $30 billion paid each year in fees.
Currently savers are allocated a new super fund each time they start a job unless they choose one of their own and each fund has its own flat fee. But under new “stapling” rules, savers will keep the same fund when they change jobs.
The Australian Prudential Regulation Authority will also compile a list of funds that perform badly and they will have to tell their members they are on the list. They will also be banned from signing up new members. In most cases it is expected the bad funds will have to merge with better managed funds to stay afloat.
APRA will have to take care to compare funds fairly on an apples-for-apples basis. Some super funds which invest in things such as toll roads and gas pipelines that yield good returns over time have expressed concern that if the league tables measure performance over too short a time it will reduce the supply of patient capital.
The budget also imposes a broad duty on super funds to act in the best financial interests of members. If this makes super trusts think carefully about expenditure it could help reduce fees.
Industry Super Australia, a lobby group representing the bigger industry funds that mostly charge lower fees, complains that the changes do not go far enough. While the early release scheme has put the spotlight on super, most people still pay so little attention to their balance that they would probably do nothing even if they receive an official letter telling them their fund is on a list of duds. ISA says the government should force consolidation of existing accounts and impose even tighter checks on underperformers.
Another big question facing the federal government is whether to proceed with the legislated increase of the compulsory superannuation guarantee levy from 9.5 per cent to 12 per cent of wages. The Herald has argued that raising the rate, starting from July 1 next year, would impede economic recovery by slowing wage growth. It argues the rise should wait until a broad review of the role of super tax breaks in retirement savings.
For instance, the federal budget has introduced an anomaly for low income earners paid between $37,000 and $45,000. The tax free threshold has been raised to $45,000 but tax of 15 per cent will still be paid on compulsory deposits into super for people earning more than $37,000. It is unjust to penalise people, especially fairly low income earners, who are forced to put money into super.
A future review should make sure that super is efficient and the benefits flow primarily to those who would otherwise be at risk of poverty in retirement.
Note from the Editor
The Herald editor Lisa Davies writes a weekly newsletter exclusively for subscribers. To have it delivered to your inbox, please sign up here.
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Source: Thanks smh.com