Super funds need reminding it’s not their money

Industry Super fund eggs are quietly being eaten up by hidden intrafund advice admin fees, that most fund members never receive and cannot opt out of.

By Judith Sloan 16 June 2020 The Australian

Noticed the number of television ads promoting industry super funds? With expensive production values, they seek to bolster the case for compulsory superannuation as well as demonstrate the quality of the performance of particular funds.

It is hard to square this use of members’ funds with the sole purpose that governs super funds: to maximise retirement incomes.

But the Australian Prudential Regulation Authority resorts to all the force of a powder puff to applying the sole purpose test. It has been a difficult time for the industry. The pandemic and lockdowns adversely affected its financial performance, and the government decided to allow members early access to their accounts.

Amounts up to $10,000 are permitted for this financial year and the same applies for the next. It is estimated about $15bn has been withdrawn, the typical amount being just above $7000.

It is a relatively small amount. It is estimated that super funds held about $2.7 trillion in January. Of course, some have been required to fund relatively more withdrawals than others

The super industry didn’t take too kindly to the government’s decision. The point was made that applicants were not required to give detailed reasons for seeking their money. Moreover, misleading figures were produced to exaggerate the effect on final retirement balances.

Industry Super Australia, the funds’ lobby group, was required to restate the financial impact. For a 30-year-old withdrawing $20,000, the revision it made was close to 20 per cent lower. This followed criticism from Treasury and the Australian Securities & Investments Commission

Sensing perhaps that a second withdrawal option might be reconsidered by the government, data has been presented indicating super withdrawals have been spent on gambling, alcohol and takeaway food. Actually, the largest single use has been to pay down personal debts.

But according to Andrew Charlton of economic advisory firm AlphaBeta — prime minister Kevin Rudd’s economic adviser — “superannuation is there for retirement, not for crises. If someone used super money to buy a $20 pizza, that pizza might end up costing them $150 at the time of their retirement. It will be the most expensive pizza they’ve ever bought.”

What this demonstrates is the confusion about the ownership of the funds and the purpose of compulsory superannuation. There is a view the money belongs to the funds rather than the members, so any action that jeopardises the ability of the funds to hold on to the money should be queried.

The alternative view — that the money belongs to the members — is shared by the government. Given today’s circumstances, it has been entirely appropriate members have had access to their money based on their own judgment of need.

Adding to this confusion is that the purpose of superannuation has never been legislated. The government has proposed the following: “To provide income in retirement to substitute or supplement the Age Pension.”

The key objection raised by the industry was the absence of any reference to a comfortable or adequate retirement. But the real weakness is its vagueness. A dollar more in retirement would meet the goal but would require years of forgone consumption.

Unless substantial proportions of the population are able to move off the Age Pension, it’s hard to see the point. And we know from the modelling that the proportion of entirely self-funded retirees is not likely to rise above about one-fifth for the next 30 years or so. After the financial impact of COVID-19 is taken into account, this may be even lower.

The key weakness of the system is that low-income earners must sacrifice today’s spending, which they can ill-afford, only to rely on the full Age Pension when they retire, plus a small balance.

Also, middle-income earners are particularly dudded as they enter the asset trap (presently above $400,000 a couple) and have full entitlement to the Age Pension reduced by an extremely high taper rate (read tax rate). They are taxed during their working years by virtue of the superannuation guarantee charge, then taxed in retirement. It’s hardly surprising there is a scramble among retirees to get below the asset cap.

The scheme makes sense only for the relatively well-to-do who can achieve a super balance north of $1m. Not only are they better placed to spend a little less while working, they are able to take full advantage of tax concessions associated with super contributions and earnings. And many in this group would have saved for self-funded retirement in any case.

Given these fundamental flaws, it’s extraordinary that ISA chief executive Bernie Dean declares our compulsory super a “national treasure”. (Note to Bernie: Clive Palmer was declared a national treasure.) Equally laughable was his notion that super policy is essentially settled. It’s about as settled as a tropical storm given the multiple changes made to the system, including in relation to contribution rate, contribution caps, taxation and other features.

His primary concern is that the government may backtrack on its commitment to lift the SGC from 9.5 per cent to 10 per cent in July next year, and 12 per cent in 2025. But the case for permanently freezing the rate at 9.5 per cent looks overwhelming. We are waiting for next month’s final report of the Retirement Income Review. Commissioned by the Treasurer, it was decided the review should continue in these difficult months.

Without doubt, some of the contradictory arrangements affecting retirees will be highlighted, including the asset trap. Hopefully, attention also will be drawn to the industry funds’ high fees and charges that significantly erode final balances. It will be fascinating to see if the panel can navigate a rational way out of this bizarre maze of rules and regulations. They create a climate of confusion and perverse incentives for retirees and workers, even if they provide a very comfortable living for those working in superannuation.

Original article here