Changes create few waves in super pool

Despite some big wins in recent years, the super industry had been preparing for a showdown, writes Madeleine Heffernan.

Paul Simon sings of "a loose affiliation of millionaires and billionaires". As the finance industry this week lobbied against mooted changes to cut superannuation concessions for high earners, it's an expression that prompted a wry laugh this week from Michael Rafferty.

"If one looks at the political economy of industries over the last decade, it's without doubt that the finance industry is the most powerful lobby group in the country," Dr Rafferty, ARC Future Fellow at the University of Sydney, said.

The think tank The Australia Institute agrees, recently naming the banks and super industry as among the disproportionately influential industries in Australia, alongside gambling and mining.

Australia's 21-year-old compulsory superannuation system has irrevocably changed business and politics, shifting power away from fund managers such as Perpetual to large superannuation funds, such as industry fund UniSuper.

The super industry - worth an estimated $1.5 trillion, the world's fourth largest pool of money - has been shouting its displeasure, despite big wins over the past few years including legislation to raise the super guarantee by one-third to 12 per cent and self-managed super funds being able to borrow money to buy property. They were vexed by suggestions that the government might curb the tax effectiveness of super for high-income earners, sparked by Treasury's warnings of the ballooning cost of tax concessions, a projected deficit of $10 billion and the need to fund its national disability insurance scheme and Gonski school funding changes.

Super industry groups have attacked Treasury's estimates that tax concessions cost $32 billion a year, rising to $45 billion in 2015, suggesting they cost only half that when including savings on the age pension and the consequences of people ditching super for other tax-effective investments such as negatively geared housing.

And Financial Services Council chief executive John Brogden, representing retail super funds and fund managers, threatened a public campaign modelled on the successful one waged by the resources industry against the mining tax.

"If [the] government keeps tinkering and edging away, [delivering] death by a thousand cuts every budget with superannuation - we need to draw a line in the sand and make it very clear to government that we will defend superannuation and we will defend Australians who want their savings to be left alone," he told ABC TV this week.

In the end, the government announced on Friday it would impose a 15 per cent tax on the earnings above $100,000 from superannuation retirement accounts that have moved into their distribution phase. Treasury has forecast the changes will affect 16,000 people and save the budget $350 million over the forward estimates. The government confirmed that people earning more than $300,000 a year will have to pay a 30 per cent contributions tax instead of the 15 per cent paid by everyone else, affecting about 128,000 people.

It also increased the cap on concessional contributions to super to $35,000 from July 1 this year for people aged 60 and over, and from $25,000 to $35,000 for people 50 years and over from July 1 next year, and announced the establishment of an independent body to oversee changes to super - the Council of Superannuation Custodians.

Former prime minister and architect of the superannuation system Paul Keating backed the government's changes on Friday, saying they appeared to strike a "reasonable balance". Keating said that super was "designed as a retirement income system broadly to augment the age pension.

"It was never designed to make possible the shelter of income for those able to contribute increasing levels of precautionary savings and their associated compound earnings," he said. "The sustainability of the retirement income system demands that that balance be maintained. The government, by these changes, appears to be striking a reasonable balance."

Keating said the tenor of the changes "corrects by some measure the unsustainably generous Costello tax changes which dismantled the former Reasonable Benefit Limit's structure in favour of an open-ended tax-free regime". In 2007, then treasurer Peter Costello allowed tax-free super payouts for people aged 60 and over and removed the taxation of earnings in the pension phase.

They also have the effect of "modestly limiting (at a 15 per cent rate of tax) the otherwise open concessionality on fund earnings, while leaving accumulations untouched, moderating the concessionality without returning to the rigidity of the former RBL structure," Keating said.

"The changes seemed designed to return to the notion of reasonable benefits for superannuation without altering the tax treatment of lump sums themselves."

Brogden was a happy man on Friday, saying: "We do want to make it clear to this government and future governments, that if there are sovereign threats to the savings of Australians in the future, we will consider again running a campaign to ensure that the 10 million Australians who have superannuation will have their superannuation protected."

Deutsche Bank analyst Kieren Chidgey said the changes were a "considerably better outcome for the wealth industry than feared".

Former ACTU secretary Bill Kelty, who helped build the super system with Keating, said earlier this week that politicians needed to start planning for people living to between 80 and 100 years of age.

Kelty told Fairfax Media this week that Australia's super system was "relatively efficient" and its tax concessions were "inevitable".

"A tax concession is in essence a discount for time," he said. "You put it in at 20 and you can't get it till 60. And it's not high in comparison [with overseas]."

Treasury said that in 2009-10 the top 1 per cent of earners received an average super tax concession of $19,200 and middle-income earners received $800. The top 5 per cent of income earners get 37 per cent of the cost of super tax concessions, it said.

Such is life under flat tax rates, says Alex Dunnin, director of research and editorial at superannuation research firm Rainmaker.

"Someone earning $300,000 gets a better tax break in dollar terms than someone earning $50,000, that's just how it works out. The question is, when someone becomes wealthy, to what extent do they keep needing tax concessions?"

Dunnin said super's size made it an easy target. "Of course you're going to attack the big items first because the biggest items have the biggest savings."

But inter-generational equity and the sustainability of super are other ingredients.

Ian Silk, the chief executive of $60 billion industry fund AustralianSuper, has warned that Australia "won't be able to maintain the current tax settings on super" and the current settings "post a huge problem for any government."

Pauline Vamos, the chief executive of the peak super body The Association of Superannuation Funds of Australia, said the changes "quelled" some of the concerns raised about sustainability and inter-generational equity. "We could always improve the system and that should the aim," she said.

And are concerns about inter-generational equity misguided or irrelevant in a system that is just 21 years' old and is not set to mature until after 2040?

Jeremy Cooper, the author of a 2010 review of superannuation and now chairman of retirement income at financial services company Challenger, was this week loath to join the shouting from the sidelines.

But he said the underlying thesis of Challenger research showing that the median Australian balance would reach $200,000 by 2017 was that "the system is working" despite its immaturity.

And he played down concerns that baby boomers will drain the system, leaving generations X and Y to carry the can. "I think we continue to improve the system. We know much more about superannuation, the system's going to be so much more efficient and mechanised.

"I have a more positive view than the baby boomers are going to run off with all the money."

Garry Weaven, another pivotal player in the development of super, says the Treasury figures are based on the idea that if you took away superannuation these dollars will magically find their way to a fully taxed vehicle.

Weaven, who chairs Industry Funds Management, praised the government's announcement in the face of a hostile media and said the pressure is now on the Coalition's superannuation policy. The Coalition has been able to keep a wide compass on super and tax - avoiding a firm commitment to reverse the proposed changes and maintaining its policy of scrapping the super tax offset for low-income earners, which pays about $500 each to the more than 3 million people earning up to $37,000.

He said that it was not baby boomers who were making hay with super - having been without super for much of their working lives - but in fact people coming into the workforce now who would most benefit.

"The system really does work," he said. "As long as future governments maintain their belief, which they should clearly should, the beneficiary will be the young person of today and that's because of the power of compound interest."

Weaven said super was allowing Australia to become the world's leading financial services hub, attracting offshore capital and large funds under management.

"The country is an enormous beneficiary and it's going to get bigger and bigger down the track."

It's a point picked up by Deepti Paton, tax counsel at the accounting body the Tax Institute, who says that in the longer term the government could not afford to not nurture the industry.

"It's not just the fact that people are saving for retirement, it's also the amount of money that has been pumped into the economy as additional capital that then goes on to fund other projects and so forth," Paton said.

"There are obviously a lot of levers to push and pull when it comes to the budget but I would say the superannuation system is well worth investing in."

Paton said settings for super should mirror the long-term goals of its members. "People save for their retirement over 20, 30 years and we've obviously had a very odd economy since about 2008.

"If sustainability is the goal then we'd like to see where the government expects the system to be in five, 10, 20 years' time."

Michael Davison, senior policy adviser for superannuation at CPA Australia, said the changes would make a "dent" in Treasury's concerns about the sustainability of tax concessions on the budget.

He called for a Productivity Commission inquiry into the effectiveness of the investment industry underneath the super system.

"The issue is there is a huge investment industry built around the compulsory superannuation guarantee," he said.

"And there are some pretty high fees, not necessarily based on performance. A much closer look needs to be had about who has their snouts in the trough ... the long chain of service providers, with fees coming out every which way."

Davison says the Howard government's decision to scrap tax on super withdrawals was the right one at the time, because people retiring in the past five years have not enjoyed a full working life with the super guarantee. But he said as the system matured in 30 or 40 years it would be equitable to tax payouts rather than contributions.

"The most efficient way is tax free on the way in and while in there, but taxed on the way out," he said.

As super's estimated 34 industry bodies fought to maintain the status quo, Rainmaker's Dunnin noted that if industry members "put that same energy they put into defending tax breaks instead into making smarter investment decisions then their members could be tens of thousands of dollars better off". Rainmaker's annual fee study, of 500 funds and covering entry fees, ongoing fees, investment fees and member fees, show that Australians pay $20 billion in super fees a year, or $17 billion excluding insurance premiums.

"With average fees across the whole superannuation system being 1.28 per cent it means people are paying an average $2000 per year in fees," Dunnin said. It's one hell of an industry, and "it keeps raising the bar on how much people need to retire comfortably".