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Where to for super? David Murray at the Retirement Incomes Forum

This week’s inaugural Sustainable Retirement Incomes Forum included some of the heaviest hitters in superannuation policy, headlined by Financial System Inquiry Chairman, David Murray, and Assistant Treasurer, John Frydenberg. Although the Forum and its independent committee represent the best chance of a policy consensus emerging, it also emphasised these are strange times for the superannuation industry:

1. The Assistant Treasurer told the Forum:

“The Government will, of course, consider good ideas put forward as part of the Tax White Paper process and any changes recommended by that process will be taken to the Australian people at the next election.”

He even expects changes to be announced soon to encourage the development of post-retirement products, which Cuffelinks will outline next week in more detail. However, the Prime Minister has repeatedly ruled out changes to super tax arrangements in this term or the next if reelected, and on the same day across Canberra, he told Parliament:

“We do not support burdening the retirees of Australia with new taxes. That is our position. We made it very clear prior to the last election that there would be no adverse changes to superannuation in this term of Parliament and that is a commitment we have abundantly kept. We have no plans for further taxes on superannuation beyond this term of parliament because we do not believe that the people's savings are a piggy bank to be raided by government whenever it is in trouble.” Hansard, 3 June 2015.

2. At the Forum, Shadow Treasurer, Chris Bowen, explained the rationale for the Labor Party announcing its policy to tax earnings on super pensions over $75,000, admitting it was conventional wisdom in opposition not to foreshadow any new taxes. Politically, the Labor strategists must have decided there is more upside in winning the ‘fairness’ argument than upsetting thousands of self-funded retirees with higher super balances.

3. The industry body representing large retail and industry funds, ASFA, has put out a Tax Discussion Paper recommending that:

“There should be a ceiling on where the system should stop providing taxpayer support for accumulating retirement savings or supporting incomes in retirement. On analysis, it is ASFA’s view that the ceiling today should be above $2.5 million.”

This proposal allows opponents of super concessions to argue that even a peak body representing the super industry is arguing for limited access to super concessions.

4. David Murray told the Forum that inaction on superannuation is damaging the long term confidence in the system, creating disengagement and a lack of trust. Others argued it is the ongoing tinkering that undermines confidence.

5. Also at the Forum, former senior politicians Amanda Vanstone and Craig Emerson pleaded with the industry to make superannuation far simpler to understand so that the average Australian would engage better. Emerson recited a Latin verse and said superannuation might as well be written in the classic Roman language, while Vanstone asked for an equivalent of Twinkle Twinkle Little Star rather than the current complexity.

Strange times indeed. To the Forum’s great credit, there was much valuable policy debate in a high quality agenda and a Communique issued at the conclusion, signed by six industry bodies, linked here.


The following are edited highlights from David Murray’s speech. Next week we will have detailed extracts from Josh Frydenberg, including Treasury's plans to encourage post-retirement products.

David Murray at the Committee for Sustainable Retirement Incomes, 2 June 2015

(Transcribed and edited with my headings for ease of reading).

On building a strong retirement system

The Financial System Inquiry wanted to put forward an approach where we would try to stem any loss of credibility in the superannuation system, which is a risk to its long term survival. So how do we maintain momentum in this debate and improvements in the system?

In our deliberations, we came across one firm whose approach was, “How can you beat the Defined Benefit pension system? It has all the elements that people need about security of outcome and pooling of risk. Try to make your Defined Contribution system as close as you can to the Defined Benefit system." That was really helpful.

On costs and efficiencies

We first looked at efficiency and realised the costs were too high. We thought there was no plausible explanation for the level of costs. We were mindful with this level of costs there was substantial misallocation of resources in the economy from other skilful work. We couldn’t see any correlation between what was happening with the costs in the system and member benefits and outcomes.

Also, in terms of efficiencies, there was less engagement with members in the system, and that starts right at the beginning, when for the majority there is no choice up front, and no choice only exacerbates no engagement. With the information asymmetry which is a feature of any superannuation plan, that only invites more politics into the system.

On risk concentration

In the retirement phase, we looked at longevity risk and sequencing risk, and the tendency for trustees to hug the mean. Making a high-risk fund the default fund meant there was not a great incentive for trustees to look at sequencing risk as members approached retirement. They could be left in a worse position at the worst possible time. Adaptation to different classes of members was not really apparent in the system.

The emphasis on balanced funds as the default option together with the imputation system gives rise to heavy equity allocation in superannuation. That happens in a system where there are significant risk concentrations in the equity market. The top few companies comprise so much of the index, skewed towards some mining companies, banking and a bit of something else. There are concentrations in there that are not healthy from a normal portfolio perspective.

On gearing

We made some comments on gearing in the superannuation system. I can tell you that it was the fastest decision we reached. It was easy to conclude that to put gearing into both the banking system and the superannuation system is a crazy thing to do. I know plenty of lawyers and accountants and the way it works in self managed funds is not a pretty sight. The sooner it is dealt with, in my opinion, the better.

On the need for an objective

The most important observation we made was that it is impossible to make progress on the superannuation system absent a clear, single objective. In our view, superannuation, the name says it all: superannuation means an income in retirement to replace an income at work. We felt the system could only progress based on an income in retirement. Some people say it should be a retirement savings system. They’re not the same thing, and this comes down to the politics and whether the age pension system and superannuation system together in managing longevity risk are substitutes or not. That’s the burning question.

On politics and the need for change

There was a great economist who said, “That which is unsustainable will change.” If we think about how we’re going to move from here, we can give up on this system, but that would be a big move. But if we don’t do anything, we’re going to keep a system in which member disengagement keeps feeding on itself. In financial systems where there’s always this problem of informational asymmetry, disengagement breeds lack of trust and lack of confidence, which can bring down systems. If we keep going this way, disengagement makes politicisation of the system all the more attractive for the political process, it drives more constant change, which feeds on itself and grows more disengagement. In fact, we’ve got to go the other way.

The recommendations within the super system in my view go a long way to helping to do that. If we go down that path, we can demonstrate to people that you can have little gains for the benefit of people who own the money in the system, not a shared community asset. It’s individual property of individual people. If we want to really help the members of the superannuation system more, we should make continuing changes which take into account the superannuation system, the tax system, the housing system and the pension system. That is the only way we can fix the value shortfall that we identified in our report.


David Murray has not approved this transcript, taken from a recording at the event. Graham Hand is Editor of Cuffelinks and was a guest of the Committee for Sustainable Retirement Incomes.


Gina Davidson
July 01, 2015

“Gearing in the superannuation system is a crazy thing to do and the way it works in self-managed superfunds (SMSFs) is not a pretty sight”.

The above makes a great sound-bite for David Murray (and others), but it has no basis in fact. According to the ATO’s statistics collated from the tax returns submitted by every SMSF: At 30 June 2013 we had 509,000 SMSFs in place but only 2.73% of SMSFs had limited recourse borrowing arrangements in place (= geared investments).

There is no evidence that borrowing has caused large scale problems for this very small number of SMSFs that engage in this practice. Yes, all investments carry risks and there will always be unscrupulous operators out there. This is not new. It is not caused by a small number of SMSFs borrowing to invest. It is not solved by banning borrowing in SMSFs.

David Murray also wants to see compulsory “post-retirement products” (Recommendation No 11 from the ‘Financial Services Inquiry’). Apparently retirees can’t be trusted to manage their money sensibly and need to be saved by ‘Big Business’ who will provide these nice products.

Going back to the ATO statistics for the year ended 30 June 2013: The number of retirees who pay themselves lump sums from their superfunds has gone down every year since 2009. It was only 6.8% for the year ended 30 June 2013. We don’t know whether these retirees sensibly used lump sums to pay off home mortgages or whether they irresponsibly bought Ferraris and gambled in Las Vegas. But whatever they did with their lump sums, it was a very small minority of retirees. And it leaves 93.2% of retirees who very sensibly paid themselves an income stream.

Promoters of compulsory post-retirement products, like David Murray, emphasise that these products give retirees a guaranteed income – potentially till death. “Compulsory” means that retirees will have to hand over their superfund balance to ‘Big Business’ and in return ‘Big Business’ pays them an income. How much of an income would it be? Hand over $1,000,000 to ‘Big Business’ and get $35,000 income per year till the day you die? If you die early, ‘Big Business’ keeps it all? What happens to the retiree’s guaranteed income if ‘Big Business’ goes bust before the retiree dies?

The UK had such compulsory retirement products for decades. They were excellent for ‘Big Business’. The UK has recently abolished them because they were very poor value for retirees. Yields as low as 3.5% were not uncommon.

Having a wider choice of options for retirees is great. Putting safe-guards in place to protect investors from unscrupulous operators is also great. But when we hear words like “compulsory” and phrases like “borrowing for SMSFs needs to be banned” we need to examine the facts and also see who will really benefit the most from such changes.

Joseph Pilger
June 09, 2015

It is fascinating to observe: we have never clearly defined where we want to go and how we get there, but we consistently ask "are we there yet" and complain about the quality of food on the journey. May be we need to reflect and ask more of these questions and provide long term answers.

Melinda Houghton
June 07, 2015

The rhetoric from some demanding change is that the highest income earners are saving the most tax.
It's very hard for non-high income earners to save tax, when they don't pay much.
I work hard everyday for real people to get good advice, but you can't save something you don't spend.

June 05, 2015

No mention of the very generous pensions paid to politicians. Go figure.

OK if $2.5 million is a fair amount of super, as mentioned above, then no more pensions to politicians. They are handsomely remunerated by the taxpayer.

Just pay them $2.5 million and let them fend for themselves instead of sucking on the taxpayer teat.

Should the politician be tossed out before retirement then the $2.5 mil may be invested in super or SMSF the same as any other ordinary Australian taxpayer and no access to funds until retirement age, currently 65.

Don't hold your breath.

Robert Holmes
June 05, 2015

?Great newsletter, keep it up The Philo Market Monitor is wonderful and I find it most informative and valuable All the best Robert

Clive Newland
June 05, 2015

As a start why can't all forms of Superannuation be treated similarly? That is, Government and Union based funds, Private Funds and Self Managed Super Funds.

Treat accumulated total funds the same in tax law. If a retiree is paid a pension and has no accumulated funds total then use a multiplier (say 20 times the annual pension) to give every retired person an actual, or calculated, accumulated sum.

Then any new taxes can be raised on the total accumulated funds when they are above what is considered reasonable ($2,500,000 has been suggested).

Trust in the system would be increased, and taxes more readily agreed to, when the newly taxed could see all retirees would be treated similarly whoever they were, politicians, unionists, business leaders, or ordinary people - that is all pension fund arrangements would be covered whether the funds are State or Federal Government Pensions, Politician's Pension schemes (important that this group is included to see that equality runs through the whole system), Union run funds and Private Pension funds - along with SMSFs.

My fear with all the talk about Superannuation Reform is that all action will be directed to and focus on SMSF, and in a very unfair way, leave the rest of the industry untouched.

June 05, 2015

The system has gone too far in allowing it to be used as a tax haven. There should have been limits imposed a long time ago. Now it is up to politicians to gradually " catch up " with what is fair. There needs to be a mandated minimum set aside for an annuity in order to replace the Government Pension.


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