Round table: Raising the Superannuation Guarantee

Money Management’s round table at the Investment and Financial Services Association conference also considered the future of Australia’s Superannuation Guarantee.

Present:

JM: Jim Minto (managing director, Tower)

BB: Brian Bissaker (chief executive, Colonial First State)

DR: Don Russell (global investment strategist, BNY Mellon Asset Management)

GF: Gerard Fitzpatrick (general manager of policy and government relations, Financial Planning Association)

BL: Barry Lambert (chairman, Count Financial)

RK: Richard Klipin (chief executive, Association of Financial Advisers)

MT: Mike Taylor (managing editor, Money Management)

MT: I don’t think we’ve ever had a round table where the Superannuation Guarantee has come up and there hasn’t been pretty broad unanimity it should go beyond the 9 per cent. So I’m going to ask, why won’t governments of both stripes just do what seems to be the logical thing to do, which is lift the guarantee?

DR: It was certainly a brave thing to do at the time because in a sense moving, say, from 9 per cent to 12 per cent would be quite a small change compared to what was done originally, which was to legislate across the entire economy.

And the interesting thing, which I think people forget now, was that it was done in the midst of a recession, it was actually designed very much with the notion of helping fund the recovery, so it was set up to step it up from 3 per cent to 9 per cent through the 90s as the economy recovered to provide private savings to be there to balance out the recovery and private investment.

So in a sense it’s easier now than it was some time ago. You could quite easily step it up in a relatively moderate way over a number of years.

These things are always difficult to sign onto, but in some ways it’s a lot easier now than it was back in the 90s, and I think one of the missing ingredients that people need to discuss is that it is not employers that pay ESG (Employer Super Guarantee), it’s individuals who pay ESG because it’s compulsory saving. All the experience of the 90s was that it had no effect whatsoever on the profit share, it had no effect whatsoever on real unit labour costs; in fact real unit labour costs continued to climb all through the 90s while we were stepping up ESG. So the people pay ESG, people pay super, it’s compulsory savings they put aside for their retirement.

So I think the industry has to make that point, and then it becomes a question of timing and people being willing to stand up and make their decision.

JM: I agree with Don. It’s people’s own money. If we got rid of compulsory super tomorrow people’s pay packets would go up by that amount. So we’re saying we don’t trust them to save the money, and we’d be saying we’re going to take some of your future income out of your pocket and put it into your super because we don’t trust that you’re going to be able to do it yourself. And once the Government compels that it creates a tax structure, it’s not efficient from a tax perspective either, and it then has the proxy guarantee obligation, so the bigger this gets the more the Government feels obligated to do something about it around the cost efficiency of it, how it’s invested and, ultimately, how it’s dispersed, when there’s a downturn.

I think there are a lot of pros and cons around what we should do. I fundamentally believe in the purpose and benefit of it, but I think it’s going to be a big ask.

I think there’s an ideological position here, whether we’re going to have what I call a big super or a small super system.

I don’t think we’ll ever have no super, but I’ve come from an environment where there was no super, people did their own thing. Small super just means a minimum ESG contribution, nothing over and above that, and do anything you like outside super.

Big super is sweep it all in here, crank up the contributions, go back, and dial up the additional contributions people can make. Those changes that were made in the Budget, they should have been either signalled as a directional movement or as just short-term technical revenue grabbing initiatives because, boy, they’ve confused people. It’s really the exact opposite direction the Government is headed in to raising the 9 per cent.

So my view is there’s no way it’s going up at this time and we can’t afford to do it anyway. Consumers are about to face high fuel prices, grocery prices and mortgage interest rates taking more money out of their pockets; there’s no financial room to fund it in the next three or four years.

GF: I do see there is a challenge here, but it is appropriate that we set a mark down that that’s something we would like to see changed. I think it was interesting in the interim Henry report that came out in May that they said [9 per cent was the system] ... and it’s what do we do to ensure the people who are coming through in the next 10 or 20 years have adequate funds in their super to meet their retirement needs. The advantages that you can create [to make super more effective is] it can be traded off against the costs that we might have ... I think now is the time for people who have a view on this to be making these comments to the Henry Review because they have put their interim reports out, and I think it was to test the water in some ways as to what the views are amongst industry and stakeholders. We have an opportunity now before the report is finalised to put our views very clearly.

BL: I think it should go up. Obviously with the 9 per cent no one complained, we all said it was a great thing. Keating was a leader rather than a politician. He was a lousy politician, but he led, and when we get another leader you’ll see it will go up because, quite frankly, it’s really another form of a tax. The Liberals suggested it is an impost on small business, that’s nonsense, the employee pays it, and when they introduced that 3 per cent, employers said to the employees, ‘By the way, this year we’re putting your pay rises into your superannuation. You didn’t get a pay rise, you got 3 per cent super.’

Assuming 9 per cent is not enough, the Government will have to put their hand in their pocket, so we’ll all have to pay it through a tax.

So, in a way, the compulsive superannuation is a far better tax you might say than going out and taxing Mum and Dad, because as Hewson proved, you don’t win elections by promising to tax people more. It probably won’t be Rudd [who raises the ESG] because he’s too worried about getting re-elected.

But you will get a politician one day who realises that they introduce this and they’re going to be in office for the next 10 or 15 years because every employee will love them… It is really another form of tax, because by putting 12 per cent into super, or whatever it might be, it means that the Government won’t have to put their hand into their pocket in 20, 30 or 40 years’ time. It’s another form of tax that you can sell to the electorate, you can’t sell tax increases. You’ve also got less people paying tax of course as we’re getting older, so it should happen, but it won’t happen until you have a leader as Prime Minister.

BB: The anecdotal evidence that I point to in our businesses is when we look at the account-based pensions, which have been very successful in the last 15 years or so, there’s very, very small amounts of commutations made each year compared to the capital value. Also, from the advice side of our businesses … the thing that brought it back to me was the amount of concern retirees had to make their money last.

JM: The ideological position here is that the people who have financial planners and advisers without superannuation are always going to provide for their retirement; they were going to do it, that’s why they’ve gone [to a financial adviser].

So the system, other than giving them some tax benefits and so on, does nothing for them, that’s the brutal reality. If there wasn’t one they’d be doing it just as they do in other jurisdictions. It’s what you’re doing with all the people below them that’s interesting, because these people in middle Australia are saving up cash.

So it’s those people who aren’t getting advice who are having to do it and don’t understand it and so on, the great unadvised group that I keep passionately arguing in the interests of. We’re ideologically saying they must do more, whereas the big government, a left-leaning government potentially, would say it’s our mandate to look after them anyway through a public provision and we should let the guys who have got their planners, their own money and their own aspirations do it themselves.

This is an edited transcript of the round table discussion.