Perverse incentives will lead to superannuation exodus

In a blow to the super industry, an ill-conceived shift in policy will encourage more retirees to turn to the pension.

A policy shift pushed by former Treasurer Joe Hockey and former PM Tony Abbott will likely encourage middle class retirees onto the full government pension.

Superannuation has been a magnificent growth industry and, for a while there, it appeared that it would continue to grow at a rapid pace for decades. However, an important part of the potential growth in the superannuation businesses of AMP, CBA, Westpac, NAB and ANZ plus the industry funds is now under threat by government actions on two fronts.

Firstly, the long-term growth outlook encompassed the belief that over the next decade a large number of retired Australians would supplement their superannuation incomes with the government pension.

From January 1, that sharing is being confined to a much reduced and narrower asset base in all segments of the market, including couples and singles with or without residential dwellings.

As I have pointed out previously, the government has passed legislation that incentivises Australians in the target range of assets to take money out of superannuation and place much more reliance on the government pension (Savage pension swipe will come as a Christmas surprise for many, October 26).

Secondly, for those who have more substantial assets in superannuation — i.e. exceeding $1.6 million — the government’s $1.6m tax-free capped fund plan will be a costly nightmare for many large funds to administer. Administration is much easier in a self-managed fund.

In just two months, on January 1, for a couple, once your assets rise above $816,000 there is no pension but you are allowed to have $375,000 in assets and gain full pension.

There are similar ranges for other pension classifications. Once you have assets within the target range, to maintain income at the pension level you need to earn 7.8 per cent on your money. That’s not achievable at present rates without high risk, so the retiree is being incentivised to exit superannuation, either gradually or quickly, a major blow for those running superannuation funds.

From the government’s point of view, there will be an initial big boost to the bottom line as pensions are slashed on the 313,000 people affected.

Accordingly, ignoring the human anguish being caused, Malcolm Turnbull and Scott Morrison will look good from a budget perspective.

But Australians respond quickly to incentives, so, by the 2020s, the governments of that decade will regard the actions of the 2015 Abbott government, which passed the legislation, as a classic example of gross irresponsibility.

How could Tony Abbott’s former chief of staff Peta Credlin plus Tony himself and former Treasurer Joe Hockey have been so stupid as to encourage middle class retirees onto the full government pension?

Over the weekend I was reading Peta Credlin’s weekly article, which this week emphasised the need for Australians start to earn an income rather than rely on government handouts. I have sympathy with much of what she said and she put her case with great clarity.

Yet she also supervised the government plan designed to herd retired people out of partly relying on income from their own savings into the full government pension.

The current government has the social services minister Christian Porter trying to get people off the government purse and the “Human Services” Minister Alan Tudge implementing legislation designed to do the reverse.

My guess is that the infamous “$10 million club” (public servants with pension plans worth at least $10m and rising) have been tricking gullible politicians yet again.

They have given a clear incentive to retirees who own a home and who, and in the case of couples, have combined assets between $375,000 and $816,000, to liquidate superannuation and expand or renovate the family home because every $1,000 (in the trigger band) that is diverted to the family home is rewarded by extra pension at the rate of $78 a year (7.8 per cent).

The retiree’s home can be tailored for one or more members of the family who will no doubt contribute cash so not affecting the pension.

The “$10m club” has introduced into their fund a scheme that embraces the same principle — if their spouse dies they can team up with a young mate (male or female) and after a specified time that young mate can receive 67 per cent of the public servants lifetime pension when the public servant dies. There is a clear similarity.

Peta, Tony and Joe began with good intentions — a couple with $1m in investments should not receive the government pension.

But they left the difference in savings level between the full pension and non-pension too narrow and made the pension reduction too rapid.

There is now no easy solution but along the way someone needs to come up with a carrot for those with, say, $600,000 in superannuation to use those assets to fund part of their retirement instead of liquidating them via cruises or investing in a bigger residential house.

Daryl Dixon calculates that for a single person to invest money to earn a $20,855 indexed pension (the government level) would require $900,000.

For a couple to gain the government full pension of $32,776 would require a stunning $1.3m in assets.

Low interest rates have priced superannuation out of the market for a large number of people. The government’s ill-conceived legislation will at first cause the deep shock that comes with slashed income. Then will come the realisation of what needs to be done.