Super objective 'needs broader vision and more detail'

Legislating an objective for the superannuation system will help prevent ad-hoc and inefficient policy, superannuation industry bodies say, but the proposal needs a rationale and more detail.

The Australian Institute of Superannuation Trustees (AIST) along with other industry bodies broadly support the wording in the government’s proposed objective.

In a consultation paper released in February, the government proposed that the objective should be “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.

The AIST said: “In our view, the objective should capture the principles of preservation, compulsion, universality, adequacy, integrity, equity and cohesion as vital elements of the system. The proposed wording recognises many of these principles explicitly.”

Further clarification needed

However, AIST is calling for an accompanying explanatory memorandum (EM) to the proposed bill that clearly sets out the rationale for the objective and the principles underlying the chosen wording.

“This will allow any future legislation or regulation to be measured against the objective and its underlying intent,” it said.

“The wording rationale in the discussion paper is a good start but several concepts should be expanded on and reinforced. The EM should also clarify the interaction between the objective and the SIS Act, which provides for numerous ancillary purposes of super that are not explicitly addressed within the objective.”

“For example, the discussion paper states that words ‘deliver income’ emphasises the principle of superannuation – to provide income in retirement”.

AIST said the EM should explicitly confirm that retirees, and especially those with modest levels of retirement savings, are not precluded from accessing these as a lump sum.

“The objective must not undermine the benefits of letting retirees choose how they access their retirement balances. Many members are retiring with relatively modest balances, and they should not be precluded from accessing some or all of this as a lump sum,” it said. ”Access to a lump sum may help retirees clear debt or for other purposes that help them prepare for retirement aligned with their needs.”

Concept of equitable and sustainable

The discussion paper links equitable and sustainable together as a single concept signifying that the system should provide similar outcomes for people in similar circumstances and government support should be targeted to those in need.

“This approach is consistent with the Retirement Income Review which identified that retirement income inequalities largely reflect factors outside the system, however this does not, in our view, give equity the weight that it deserves as its own concept nor give it sufficient framing against which to measure a policy’s consistency with the principle,” AIST said.

The definition of equity in the discussion paper does not capture differential impacts of policy settings.

In 2020, New Zealand instituted its own objective for its retirement income system.

“While not explicitly calling out structural factors in the objective itself, it has provided a framework against which to test the impact of current policies and retirement savings outcomes for specific cohorts in their regular Review of Retirement Income Policies,” said AIST.

“The recent 2022 review gave particular focus to the experiences of Māori, Pacific Peoples, and women, while also recognising the need for future reviews to consider people with disabilities and wider demographic groups reflective of the country’s changing population.”

“This nuanced approach recognises that gender, ethnicity, financial literacy, accessibility and other factors intersect and interact with retirement policy and lead to widely different outcomes, and allows policy settings to be adjusted to better target government support.”

Without further detail about what constitutes quality, industry bodies fear the existing framing risks a broad brush ‘anyone can use this so it’s fair’ approach to current and future policy settings and risks embedding and exacerbating existing structural inequity.

CPA Australia has also said that the subsidiary objectives outlined in the consultation paper must be agreed on to support the objective and clarify its boundaries.

It has also outlined that before an objective of superannuation can be set, a long-term vision for Australia’s retirement savings system must be clearly articulated.

“It should provide a clear purpose and goals encompassing not only superannuation but also the age pension, non-superannuation income, savings and assets, care and residency arrangements in retirement and how these goals can be achieved,” said the accounting body.

$3 million threshold a premature step

CPA Australia said it supports the principle that fairness and equity in government support of superannuation must be a primary characteristic of an ideal retirement savings system.

“We agree that the level of total government support should be subject to limits which are reasonable, but do not compromise adequacy,” it said.

“However, we believe the government has acted prematurely with this announcement while it is still consulting on and yet to define the objective of superannuation.”

It said policy changes should only be made once the objective of superannuation – and retirement savings – was defined by the government.

“This is a piecemeal change that should not be made in isolation. Constant and piecemeal changes undermine the community’s confidence in the superannuation system and government policy. The objective of superannuation consultation paper identifies this risk,” it said.

The submission strongly recommended the government does not proceed with implementing this measure until after an objective of superannuation is defined and legislated.

It also said any changes to superannuation thresholds should not proceed in isolation.

“These changes must be considered as part of a broader discussion regarding superannuation tax, concessions provided and the complexities created by the myriad caps, thresholds and limits currently in place. Any discussions regarding superannuation reform must also consider the interaction with the tax and transfer system,” it said.

Australian Super also referred to the $3 million threshold policy in its submission, which will see members with balances above $3 million hit with an extra 15 per cent tax.

The industry fund said while the $3 million threshold would meet the thresholds for delivering a dignified retirement and improving equality in the system, there are other areas where the policy may fall short.

“The discussion paper notes that an equitable superannuation system ‘targets support to those most in need’. This principle would be better achieved if a portion of the budget savings from the measure were directed to superannuation measures to support equity in the system, with better targeting of tax concessions to those who need it more,” the discussion paper stated.

The government has promoted the policy on the basis that it will make the system more sustainable by reducing pressure on the federal budget.

“However, the discussion paper notes the importance, of stability and confidence for the community. The absence of indexation of the threshold means that future parliaments will have to consider whether or not to change the threshold,” Australian Super said.

“This raises questions about whether the change, in the words of the discussion paper, enhances the robustness of the system to ‘demographic, economic and social change’.”