I
f chief executives in the Australian financial services industry were looking to the Federal Budget to provide them with long-term guidance on Commonwealth policy, they would have been sadly disappointed.
The only clear pointers provided by the Government on the future shape of financial services policy was the reinforcement of the fact that Australians would have to work longer before they would be able to access the age pension. The age at which Australians will become eligible for the age pension will be lifted to 67.
In essence, this represented an acknowledgement that the two intergenerational reports commissioned during the term of the former Howard Government had been accurate in their assessment that something needed to be done to lighten the load on the centrepiece of Australia’s retirement income regime.
However, at the same time as flagging an increase in the age at which the pension will be accessed in the future, the Government also tinkered with the framework surrounding transition to retirement arrangements, with new limits on contributions making superannuation a less attractive investment option for high-income earners.
Underpinning the Government’s approach as outlined in the Budget was its release of the findings of the Australia’s Future Tax System (AFTS) Report on the retirement income system.
While many had expected that the report would recommend far-reaching changes to Australia’s retirement incomes regime, the opposite proved to be the case, with the Government apparently willingly accepting those recommendations that sought to maintain the status quo.
Nonetheless, the Minister for Superannuation and Corporate Law, Senator Nick Sherry, praised the report as “laying the foundations for a retirement income system that meets the challenges of adequacy, fairness, simplicity and sustainability in the context of an ageing population”.
In the words of Sherry, “The report finds that Australia’s three-pillar retirement income system — consisting of the means-tested age pension, compulsory saving through the superannuation guarantee and voluntary saving for retirement — is well placed to meet these challenges and should be retained”.
He said the report’s panel had found that tax-assisted voluntary superannuation contributions should be more fairly distributed, and questioned whether the current cap on concessions was appropriate.
The panel also recommended the age pension age be gradually increased to 67.
“Therefore, in conjunction with the pension reforms, the Government has moved to improve sustainability and fairness in the retirement income system in the 2009-10 Budget through reducing the concessional superannuation caps and adopting the panel’s recommendation on the age pension age,” Sherry said.
He said the Government had noted the panel’s recommendations with respect to retaining aspects of the current system, with improvements to ensure key challenges could be met in the longer term.
The minister then went on to outline the panel’s key recommendations:
- the current superannuation guarantee provides an adequate rate of compulsory saving and should be retained at 9 per cent; and
- the age at which Australians can access their superannuation (the preservation age) should be gradually increased to 67 years, subject to further examination of how mandatory retirement ages should be treated. This would complement the Government’s decision to adopt the report’s recommendation to increase the age pension age to 67 years.
Sherry then said the Government had noted the panel’s decision to defer final recommendations on other related issues until the December report to enable consideration in the context of the broader tax-transfer system.
Therefore, the bottom line is that the financial services industry will have to await the eventual release of the Henry Review on taxation and accept that whatever the recommendations of the review, its changes will not be implemented until the 2010-11 Budget.
Soft compulsion
What was not spelled out in the Budget but should be obvious to fund managers, financial planners and superannuation fund executives is the fact that in the absence of any foreseeable increase in the superannuation guarantee, the only option for sensibly increasing superannuation contributions will be a regime of soft compulsion.
Soft compulsion, as it has been envisaged by industry organisations, such as the Association of Superannuation Funds of Australia (ASFA), involves employees having a small percentage of any pay rises directed to their superannuation unless they specifically decide otherwise and formally opt out.
It is not clear whether the Rudd Government, based on the contents of the AFTS panel recommendations, has entirely abandoned a lift in the compulsory superannuation guarantee beyond the existing 9 per cent, but at the very least, it appears
to have slipped off the Australian Labor Party’s immediate policy agenda.
Something also glaringly absent from the Budget papers was any suggestion that the Government would move to tighten up the regulatory environment covering the financial services industry beyond what has already been announced by Sherry.
That said, the Australian Securities and Investments Commission is to get more funding to handle matters stemming from the global financial crisis and the Department of Treasury is to get additional funding to assist it to better deal with the increasing number of policy issues that have arisen.
The financial services industry for its part has tended to accept that the 2009-10 Federal Budget could have been much more punitive and, all things considered, it got off lightly.
Super uncertainty
However, both ASFA and the Investment and Financial Services Association (IFSA) have cautioned that the Budget changes have served to reignite uncertainty in the minds of Australians about superannuation.
The chief executive of ASFA, Pauline Vamos, pointed out that Australia’s compulsory superannuation system was only beginning to mature, with around 10 per cent of Australian retirees relying principally on superannuation for their retirement and a further 20 per cent placing some reliance on superannuation income.
“It’s important to recognise that the majority of people are still retiring on low superannuation balances,” Vamos said.
“Average retirement balances are currently around $140,000 for men and $70,000 for women.”
She said around 50 per cent of retirees in accumulation superannuation funds had less than $56,000 — something that created the need for the industry and the Government to find ways to enable them to catch up on their superannuation savings.
“We already know that the age pension alone is not enough for a dignified standard of living in retirement,” Vamos said.
“Any boost in the pension is always welcome because it is a safety net, but we must do everything we can to encourage Australian workers to fund their own retirement.”
For his part, the deputy chief executive of IFSA, John O’Shaughnessy, said the key to retirement savings was all about people being able to plan effectively and with certainty.
“It would be enormously helpful if we could get all political parties to agree on the essential framework and ground rules once and for all so that public faith in what is a world-class system is not so easily shaken,” he said.
O’Shaughnessy described the Budget cuts to the contributions as a disappointing decision, “Primarily because a reduction in the contributions caps penalises older Australians who haven’t had the chance to accrue large super balances, either due to their age or time spent away from the workforce to raise a family”.
“Most of the people affected have not had the benefit of a savings system with compulsory super guarantee contributions for their entire working life, and certainly not too many years at today’s rate of 9 per cent,” he said.
“This change will also disadvantage many self-employed individuals who lack a regular income,” he said.
Retirement strategies
While the Budget has provided the financial services industry with few policy road signs, the changes to superannuation and other arrangements have served to provide an increased workload for many financial planners.
Analysing the changes and their implications for the financial planning community, MLC said the reduction to the contribution caps would affect salary sacrifice and transition to retirement pension strategies.
It noted that in addition, the cap would not be increased for 2009-10 and that grandfathering arrangements would apply to ensure that the employer funding rate for existing defined benefit arrangements in place at May 12, 2009, are deemed to meet the new reduced cap.
MLC said that on this basis:
- clients have six weeks to make the most of the higher 2008-09 concessional contribution cap. For this purpose, contributions must be received and recorded by the fund no later than June 30, 2009;
- from Budget night to the end of June, advisers should give priority to the following:
- checking clients’ year-to-date concessional contributions and having those under the relevant threshold consider making the most of the current year caps;
- some clients may wish to implement a prospective salary
- sacrifice arrangement for the remaining six weeks of this financial year, or if they are eligible, make personal contributions up to the concessional contribution cap for which they can claim a tax deduction;
- clients eligible to claim a deduction for personal contributions may wish to consider selling capital gains tax (CGT) assets (such as shares) and contributing the proceeds to super before June 30, 2009. That is, making a personal deductible contribution up to the higher 2008-09 concessional contribution cap to reduce or eliminate any CGT liability;
- for funds with reserves (especially self-managed super funds), consider distributing reserves before June 30, 2009, especially if the amounts will count towards the concessional contribution cap; and
- from July 1, 2009, ensure clients reduce any salary sacrifice arrangements so that their total concessional contributions do not exceed $25,000 if under age 50, or $50,000 if age 50 or over. It is very important to take into account employer contributions made under superannuation guarantee requirements, voluntary employer contributions or employer contributions separately made for insurance cover within super or for super fees. The consequence of exceeding the concessional contribution cap is that the client is liable for an additional 31.5 per cent tax (and the excess also counts toward their non-concessional contribution cap).
Once planners have finished this body of work, perhaps they should brace for the policy issues that will flow when the Henry Review of Taxation is finally tabled later this year.
In the meantime, no one should expect a Government facing a $57.6 billion deficit and no likelihood of a surplus until 2015 to be in the business of readily offering further tax concessions to superannuation or any other form of investment.
