Superannuation system’s days of constant growth are over

The superannuation gravy train is over as changes erode confidence in the system.

The superannuation gravy train is over.

The days when steadily rising growth of the super industry — which has been part of the Australian financial system for the past decade or so — are gone.

The cutbacks in super contribution ceilings and constant changes to super have been eroding confidence in the system for some time.

But the real cost of the federal government’s sweeping changes to super outlined in May are now beginning to bite.

The predictions made about the May changes having a substantial impact on superannuation are now becoming apparent in the figures coming through.

The release of the latest quarterly superannuation performance figures by the Australian Prudential Regulation Authority highlight the sharp drop in personal contributions to super in the June quarter over and above the compulsory minimums.

Personal contributions to superannuation plunged by more than $800 million during the quarter when compared with the June quarter last year — from almost $8 billion in the 2015 June quarter to $7.17bn in the June quarter this year.

The sharp drop in super contributions has come at a time when super funds are paying out an increasing amount as more Australians move into retirement.

The net effect of lower new contributions and higher benefit payouts has seen a fall of almost 14 per cent in net contributions to the super industry to $34bn in the June quarter.

Money is still coming into the system because of the compulsory 9.5 per cent superannuation guarantee requirements but growth is starting to flatline.

Our much vaunted $2 trillion super industry looks like remaining at about just that.

The figures show the retail super funds have been the hardest hit of all APRA-regulated sectors.

Personal super contributions to industry funds were down from $2bn in the June quarter last year to $1.86bn in the June quarter this year. But personal contributions to retail super funds were down from $4.6bn in the 2015 June quarter to just over $4bn in this year’s June quarter.

(The impact on the $620bn self-managed super fund sector is not included in the APRA figures as it is regulated by the Australian Taxation Office, which will not know the impact of the latest changes until SMSFs submit their tax returns later in the year.)

But the numbers confirmed the comments made last week by AMP chief executive Craig Meller, who reported a 50 per cent fall in cash flows into the company’s wealth management arm in the last six months of the year.

The figures give the lie to the federal government’s argument at budget time that the measures would only affect a small percentage of rich people.

The changes not only sought to cap the total amount which can be rolled into tax-free super to $1.6m but introduced even more cutbacks to contribution ceilings.

The current concessional levels of $30,000 a year and $35,000 a year for people over 50 will go down to $25,000 a year from July 1 next year. And this follows a cutback from highs of $50,000 and $100,000 for people over 50 in 2008-09.

While these changes have steadily cut back the extra amount people have put into super over recent years on a concessional basis, the big change in May was the announcement of an instant cap of $500,000 on all post-tax super contributions backdated to July 1, 2007.

There are two factors at play here. There was the impact of the actual announced changes that did stop some people in their tracks from contributing any more to super. And there was the even bigger shock to confidence in the system from the unexpected changes from a Liberal government that had been elected on a clear promise of no unexpected negative changes to super.

As PwC head of super David Coogan told The Australian this week, the May budget had seen a big fall in voluntary contributions to super even for people who were already well below the $500,000 post-tax super cap.

People considering putting extra money into super, he said, were now “spooked” by the changes and the concern about what more changes might be in store for the system at time when they were planning for their retirement.

The latest figures should not be a shock to anyone except those who believed the government line that the changes had a very limited impact.

While the industry super funds said they were happy with the budget package given its assistance to low-income workers, the retail super funds were not prepared to speak up against the changes.

There is a lesson there in companies hiding behind industry bodies and not publicly lobbying for their own interests and arguing their own case.

But more important is the fact that the structural changes to the super industry from the recent changes are now becoming more apparent.

The ready pool of funds we had available to cushion Australia in the years post the global financial crisis is now hardly growing and could begin to fall as rising payout levels start to eat into lower total contribution levels.

Meanwhile Scott Morrison, who has been telling the banks what to do with their interest rates, is now trying to tell the super funds where they should be investing their money, with the Treasurer having moved to start closing the door to one of the biggest single sources of new capital coming into the country.

All in all, it’s an interesting stance from a Liberal government whose proposed changes to super tax concessions went much further than the Labor Party would ever have dared to go.

The Turnbull-Morrison government has made its decisions on super and the consequences are now starting to play out.