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SG rise to 12 per cent comes at a cost

Columnist
— 1 minute read
On the surface, the move to raise the super guarantee to 12 per cent is welcome, but a potential tax rise could mitigate any opportunity to raise the retirement savings of Australian workers, Frank Gullone says.
Although support for the rise in the superannuation guarantee (SG) has been almost universal from the superannuation industry, its future and that of the resources super profits tax hinge on the Labor government being returned to power.

It is expected both measures will be dumped if the coalition wins the next election.

Politics aside, the proposed and present tax arrangements could undermine some of the benefits arising from an increased SG.

As proposed, the federal government would get a double whammy in tax receipts from the increased SG funds going in as super funds are taxed, and members will be paying more tax on their money as it passes through their super fund to eventual retirement.

Then there is the windfall from the proposed increase in tax on mining companies.

Most, if not all, funds would have money invested in mining companies, but because of their projected lower profits as a result of the super profits tax, it is expected there would be lower dividend returns to super funds.

And why would you invest in a mining company that's paying a lower rate of dividend?

Most funds would have to maintain a weighting relative to an index and the mining companies make up such a big part of the indexes.

Funds must maintain substantial investments in them - but should they at the cost of lower returns?

The market at the moment stands at $1.3 trillion.

When the SG moves to 12 per cent, it will get it to the $2 trillion mark a lot faster, and most of the funds have the bulk of their money invested offshore.

However, offshore - Europe and the United States - are not looking great, so it all comes down to a matter of timing and a matter of viable investment vehicles in which to invest to provide those returns to people who are going to retire in the next five to 10 years.

The task of investment has got harder and recent volatility reminds us of that.

Members need to be more confident about investment markets before they move to balanced options or invest more heavily in equities or other asset classes.

Superannuation funds are running out of avenues of available investment options in Australia, meaing most of their portfolios will be invested offshore.

The super funds will be giving rise to industries overseas rather than locally. The imposition of a mining super profits tax may make local investment even more unattractive.

So while the move to 12 per cent is a good one (I think, however, it should be 15 per cent because of the baby boomer demographic forces at play), in this tax environment a lot of the benefits will be lost in increased taxes that will have to be paid by superannuation funds and also by members.

Unfortunately, the lack of bipartisanship over Australia's superannuation system will have those in the industry on tenterhooks leading up to the next federal election.

In my opinion, legislation around superannuation needs to be left alone for a period. Every time legislation changes, an enormous amount of effort and cost goes into not only changing systems but also training people to educate members about the changes - it's a very costly exercise.

Think back to the choice legislation.

It affected a miniscule number of members, yet millions of dollars were spent implementing choice-related software, training people on what choice means, updating websites and educating members.

Our system is held in the highest regard. Most western countries are looking at Australia and wanting to move to a system like ours, which has now become essentially a defined contribution environment.

Most others - the United Kingdom and US - are probably defined benefit environments, and they are all looking at ours and want to move to it. But they are stalled by the required change in legislation and required change to employer/employee relationships.

Although its system is much different to ours, it probably bears remembering what an unfunded and government-only sponsored pension system such as Greece's can do to the social stability of a nation.

This is why whatever political party holds the reins of government, it should present policies that promote stability and certainty to the investment community.

Cost savings, efficiency in the delivery of superannuation and reasonable retirement incomes can be achieved by having a stable, simple system that is not overtaxed and is understood by super fund members.

 

SG rise to 12 per cent comes at a cost
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