Is the golden era for super over?

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For superannuation fund investors, the Abbott government at least stuck to its promises of no new adverse changes in its current term. But the super industry now needs to stay alert and prepare for almost certain variations, especially as several major government inquiries loom.

Coalition antagonistic

And investors need to be realistic in their expectations: the Coalition has in the past shown it is antagonistic to super in general and to the industry funds in particular.

Already, much to the delight of many employers, the timetable for taking the contribution rate to 12 % of salary has been extended by a three-year pause: the 9.5% in the coming financial year doesn’t rise to 10% until 2018-19. (The Coalition has form in this area; Peter Costello famously reneged on a promise about contributions before the 1996 election.)

But by 2016, it can be assumed that any guarantees for superannuation are off. By then, the government will have received the White Paper on taxation and will also have the report from the inquiry into the financial system chaired by David Murray. Superannuation can hardly escape major scrutiny and change – concessions for super are a major topic in the current tax reform debate and superannuation now dominates the financial industry.

If any government is serious about ensuring people have enough savings for their retirement, rising super fund balances are one obvious, long-term, aim. This should be an argument not to delay increasing compulsory contributions to 12%.

But critics argue that more than two decades of super haven’t reduced the claims on the age pension and the long-term outlook is only marginally better, with the percentage of pensioners on a part-pension declining slightly into the future. With more than $1.7 trillion now in super, however, this is more a case of a lack of direction – lax means testing for the age pension and a failure to make people rely more on their super savings rather than the age pension.

Product development

After two decades, little has been done to engineer proper retirement income products to distribute pensions from the growing super accounts. Instead, Peter Costello’s over-generous tax-free status for payouts creates a major problem in the more stringent budgetary conditions.

In the meantime, most self-funded retirees’ income comes from portfolios, which depend on a volatile stock market (and, potentially we are told, a crisis-prone world economy). Bonds as an alternative? There has been interminable talk – but little progress – about developing a public market in bonds.

Annuities? Canberra has shown little enthusiasm for reforms, which could make it feasible to develop a major market in annuities. Even now, as annuities are starting to make a little headway here, the UK government – which led the way in prescribing these products for retirees – is deserting annuities. And, even if interest rates do eventually recover, now is the worst time to be relying on fixed interest securities to back an annuity income.

Then there is the rising pressure for tax reform. The Budget backlash focussed on so-called middle class welfare; the tax concessions for super, which favour the well-off, clearly will be a focus in the tax white paper. In addition, other strategies, like negative gearing and discounted capital gains will be under scrutiny. And, from a prudential regulatory viewpoint, will the Murray report be relaxed about allowing SMSFs to be the only super funds to gear up to buy investments?

Finally, while it will have a very long-term impact, any move to extend the retirement age to 70 may have an earlier flow-on by putting pressure on the government progressively to lift the access age for super to prevent premature draw-downs.

Of course, all this is in the future and any changes would be prospective rather than retrospective. But, for all super investors, it raises the prospect that we may have seen the best of a golden era in our superannuation system.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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