Seven looming changes to superannuation you should know

Some of the key features of Australian superannuation are facing significant changes.

Suddenly the settings for superannuation are under review. Apart from some tentative, though lucrative, meddling with superannuation by the last Labor government there has been little significant change under the ­Abbott government — but that may be about to change.

Put simply, the key features of Australian superannuation — the superannuation guarantee, the tax-free status of retirement income, the multiplicity of superannuation funds and the unique status of industry funds — are in jeopardy.

It’s become achingly obvious in recent times that what we have is an impressive superannuation savings system — the emphasis here is on the word “saving” or “accumulation” as they call it in the industry. The problems really only start when the saving period ends and you start spending. In other words, when the “accumulation” years are over and it’s time to use that money to finance ­retirement.

Outside of institutional superannuation such as the big “retail” funds from the banks or AMP, and the union-linked industry funds such as Australian Super and CBUS, we also have the exceptionally healthy DIY sector. Despite furious lobbying against the DIY brigade from both industry funds and retail funds, this sector continues to thrive in good times or bad.

Each of these forms of superannuation will most likely be affected by the proposed changes circulating in Canberra at present. I’ve put what I regard as the seven most crucial issues below.

1. Tax-free income in super is now under threat

A willingness to permit taxation of superannuation income is now coming from the most unlikely corners. The most common call is to put a maximum of tax- free income per superannuation member at about $150,000 per annum. Remember this would be per member.

A DIY fund run by a couple could have a household retirement income of $300,000 per annum — that’s tax free. When it comes to the crunch it is hard to defend tax-free incomes higher than this level and there is a very strong chance this change will come through.

2.The “starting minimum” of $200,000 for DIY is nonsense

Finally, some of the key players in the wider financial industry have put to rest this myth perpetuated by larger funds who wish to stop losing members to DIY funds. ASIC the regulator would be comfortable with this starting figure, and if you have a complex fund with multiple interests then you are going to pay excessive fees if you have less than $200,000. But for a conventional fund run by the average investor the figure can be a lot lower — there is nothing stopping a diligent investor starting a DIY fund with $100,000 or even less in ­certain circumstances.

3.Even industry insiders are giving up on the original super guarantee contribution timetable

Earlier this week Sally Loane, the pragmatic head of the Financial Services Council, used the group’s national conference to call for a 12 per cent SGC by 2022. We were supposed to be moving steadily from today’s SGC of 9.5 per cent to 12 per cent by 2019 under a plan that goes back to the days of Paul Keating.

The problem is the Abbott government is showing no intention of following the plan, having “frozen” the rate at 9.5 per cent, which means under the current plan — and assuming no more changes — we won’t get there until 2025. Loane’s campaign for a SGC target of 12 per cent by 2022 confirms the reality around what is really happening to the original SGC plan.

4.There are too many small institutional funds and they cost you money

Industry consultants Chant West’s head of research, Ian Fryer, says mini-funds are too small to get the efficiencies or indeed the skills clearly exhibited by large funds. Usefully, Fryer puts a number on the problem — if your fund has total assets of less than $5 billion it’s probably the fiefdom of a regime that doesn’t want to be swallowed up the bigger operators in the sector ... but it would be a lot better for you if they succumbed to the inevitable.

5. Industry funds will be made to change their boards

This change is already underway: new legislation means industry funds must now have a majority of independent directors. The implicit criticism here is that industry funds don’t operate in the same way as other funds when it comes to corporate governance.

There is actually precious little evidence to suggest this variation on corporate governance has cost fund members, in fact industry funds continually come out on top when it comes to income attributable to members. Nonetheless, the change is going to happen and it’s going to cause enormous personnel upheaval among industry funds as they will need an estimated 300 new fund directors across the sector — whether the disruption upsets the sector in terms of its current robust results record remains open to question.

6. Geared residential property is likely to survive in DIY super

There have been regular initiatives to challenge the relatively recent inclusion of “geared” or “mortgaged” residential property in DIY super funds. However, the bulk of the arguments against letting SMSFs borrow to buy property are linked to contemporary issues in the property market rather than any fundamental flaws in our super system.

The most sensible argument is that if you can buy highly geared hedge funds with your super fund or investment, it is surely a more conservative option to allow individual to make investments in an asset class they have a much better chance of fully understanding. Industry speculation is now that gearing in super will survive.

7. It’s time to set the rules in stone

Earlier this week Michael Keating, a former head of the PM’s department in the Keating era, came out with the powerful observation that the only way to stop politicians fiddling with super was to actually enshrine the key principles of the superannuation system in law.

Essentially there is no law that says super is for retirement income creation and protection. Such a move would stop successive governments taking the easy route of siphoning money out of the super system to plug everyday problems in the national accounts. Hopefully Keating gets this idea past the post.

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