what's so super about super?
TRANSCRIPT
WHAT’S SO SUPER ABOUT SUPER?
by D.E. ALLEN*
1. Introduction Major changes are taking place in the provision of superannuation in
Australia. This paper examines the nature of these changes: the forces that have set them in motion: and evaluates some of their potential economic implications.
2. The provision of superannuation in Australia: a brief history There are two major components to the retirement incomes policy which
has operated recently in Australia: the government’s provision of an age pension funded from consolidated revenue plus private superannuation plans supported by taxation concessions.
The Commonwealth government’s age pension was introduced in 1909. For most of the subsequent period it has been granted on the basis of need established by a means test which has been used to limit the availability of benefit.
The coverage level, or the proportions of the eligible age group in receipt of service, widow, invalidity, and age pensions, is currently about 75 per cent. The age pension is available to men at the age of 65 and women at the age of 60, subject to residency, income, and assets tests. The standard pension is indexed to movement in the Consumer Price Index (CPI) and set at a level of about 25 per cent of average weekly earnings.
Australia differs from most OECD countries in that there is no requirement that retirees take their superannuation benefits in pension form. The Government has tried to encourage the taking of annuities rather than lump sums by setting a higher Reasonable Benefit Limit (RBL) for people who take at least half their benefit as a lifetime non-commutable indexed pension.
It has been suggested that the fact that preservation ages for superannuation benefits are set lower than age pension age, coupled with the tendency to take benefits in lump sums leads to the practice of ‘double dipping’. This involves taking a superannuation lump sum which has received the benefit of tax concessions, consuming it rapidly, and then qualifying via the means test for the age pension.
* Department of Finance’and Banking, Curtin Uiversity of Bchnology.
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3. The current provision of superannuation A broad outline of the complex nature of current provision for
superannuation in Australia is shown in Figure 1. The nature of the employment of an individual largely conditions the type
of superannuation scheme to which he or she belongs. There are two broad types of schemes: openely marketed schemes or employer sponsored ones. Superannuation funds which comply with the Insurance and Superannuation Commission’s (ISC) administered regulations can utilize tax concessions on contributions, fund income and on the benefits paid.
The openly marketed schemes can be divided into two broad groups: personal superannuation or rollover funds. The former is usually taken out by the self employed or by employees who do not have access to an employer sponsored scheme. Contributions may be made by single premium or regular savings plans.
Rollover funds were introduced to enable people switching employment or taking early retirement to preserve superannuation entitlements until the attainment of retirement age. Approved Deposit Funds (ADFs) are operated by the banks and other financial institutions whilst offices provide Deferred Annuities (DAs). Deposits in these funds are restricted to Eligible ’Exmination Payments (ETPs). They include payments to people leaving employment or receipts from a superannuation fund as an inducement to retire early. Rollover funds attract tax concessions in that tax liabilities on the funds are deferred until retirement age.
Government-funded age and service pensions
Superannuation supported by tax concessions
FIGURE 1 Funding retirement in Australia
Openly marketed
1 ’ Personal Unitised master superannuation Single premium
Regular premium
ADFs [Approved
Annuities)
’ Rollover funds Deposit Funds] [ DAs [Deferred
public sector
Busts public sector private
Employment based
SuDer- Income derived from investment not supported by superannuation tax concessions
animation L - sector
Source: “Safeguarding Super”, First Report of the Senate Committee on Superannuation, Canberra, 1992. p. 17.
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In the case of employment based superannuation there are two main types
1) “Defined benefit“ where the employer promises to pay a predetermined benefit and bears the investment risk. The main risk for the contributor is that the fund will perform poorly and the employer will not be able to make up the difference. 2) “Defined contribution” where the member bears the investment risk.
of funds:
Employer sponsored schemes can also be subdivided into contributory schemes, in which both parties make contributions, and non-contributory schemes where only the employer contributes. The usual practice is to set up a superannuation fund as a trust fund with a trustee bound by the relevant trust law. Case law has developed which establishes an obligation on the part of the trustee to invest money “prudently”.
Frequently small businesses enter into master trust arrangements whereby the administration and management of funds is undertaken by an independent trustee appointed by the promoter of the fund. Financial institutions, banks, and life insurance companies offer this type of fund.
Another option for employers is to set up their own fund trustee and administration arrangements but to contract out the investment of member funds by putting the funds in a pooled superannuation trust.
Public sector superannuation schemes are usually established under statutes of parliament rather than trust deeds, but nevertheless trustees are usually appointed to administer each scheme. They are subject to Commonwealth regulations concerning superannuation funds, are government guaranteed and are usually unfunded. It has been estimated that the unfunded liabilities of public sector super funds stood at about $80 billion in 1991.
Finally, a number of industry schemes have recently been established, in both the public and private sectors, in response to the decisions of various wage tribunals. These awarded workers a three per cent wage equivalent in the form of employer contributions to superannuation funds.
The sheer complexity and variety of superannuation schemes gives rise to a number of problems which will be reviewed in subsequent sections of the paper. The current arrangements governing superannuation in Australia are overly complex and have evolved haphazardly. The current system lacks proper prudential controls, is difficult to enforce, is subject to complex and confusing regulation, and is inequitable. The superannuation system cannot be considered in isolation but has to be evaluated in the context of the Australian taxation and social security systems. It is part of the industrial relations process and has a major impact on capital formation. The relations between persons in the workforce and the rest of the community have to be weighed. There are issues of equity and cross-subsidisation involved.
There is a requirement for a unified system of control of the schemes. At the moment a number of authorities have an influence on Australian superannuation. These include: the Insurance and Superannuation
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Commission, Australian ?Bx Office, Australian Securities Commission, Department of the Tkeasury, Attorney General’s Department, plus State Governments (in relation to trust law, stamp duties, plus other indirect taxes).
There are a number of resultant anomalies. Superannuation contracts provided by life offices are subject to both insurance and trust law, whilst some other superannuation products are subject only to State trust laws. Immediate and deferred annuities can be offered by registered life offices and friendly societies but not by their competitors.
The prudential controls of the industry are inadequate. There are currently no standard guidelines to govern the provision of information about the adequacy of trustee investment policy across the range of superannuation products.
The above problem is related to the lack of sanctions which would enforce trustee compliance with reporting standards, if adopted. A good case can be made for the comprehensive reform of the industry and the Government does seem to be moving in this direction. A number of issues related to this theme will be taken up in this paper.
4. The source of the Government’s concern There are a numbr of economic considerations that are influencing
government policy in this area. Australia has an ageing population and the proportion of the population in retirement is expected to double to 20 per cent of total population over the next 40 years. This prospect increases the government’s concern that adequate provision be made for retirement income, before the event via superannuation scheme contributions, rather than after the event from taxpayers’ and government revenue.
Reference is frequently made to ‘crude dependency ratios’: the ratio of labour force participants to dependent persons. Table 1 provides details of these ratios for various industrial countries.
Country 1980 2000
Sweden 71 61 United 69 64
France 69 59 Australia 62 60 United States 57 62 Japan
Kingdom 65 63
2025
82 68 79 71 78 78
The above figures suggest that Australia has relatively favourable demographic prospects. The real issue is whether the Australian labour force of the future will be prepared to support the aged and ensure that they have adequate living standards.
A budgetary problem may arise from the support of the old because the funding is largely from social security funds. The Government favours the view that the aged should be encouraged to provide for themselves.
5. The economic situation of the old The economic lot of the aged in Australia has improved over time but they
still lag markedly behind the worlung population and relatively to pensioners in other OECD countries. The Australian pensions system features relatively low replacement rates. In 1986, disposable annual income (income after taxation] of the average Australian aged 65 to 74 was 53 per cent of the national mean annual income. By contrast, Canada’s aged enjoyed an annual income equivalent to 71 per cent of average weekly earnings, Germany 63 per cent, the U.S.A. 75 per cent, Sweden 82 per cent and the UK 55 per cent.
Table 2 provides a breakdown of the principal sources of current income in 1986 for members of the population aged 65 and over. The figures in lhble 2 show a very heavy reliance upon the age pension and related benefits.
Australia classifies its aged into two groups: a small, relatively prosperous group that receives no public income assistance and a much larger group that receives a pension.
( 0 0 0 )
Government income 1218.0 security payments Interest, rent, 196.9 dividends Superannuation or 80.8 annuity payments Own business, 25.6 trade or profession, or share in partnership Wages or salary 16.3 Other income 9.2
Total 1546.7
TABLE 2 Principal sources of current income by number and proportion of population aged 65 years
and over,. 1986
%
78.7
12.7
5.2
1.7
1.1 0.6
100.0
A large proportion of the latter group are eligible for a Pensioner Health Benefit Card after being subject to an income and assets test. PHB card holders can receive a wide variety of transport, health, household, and recreation concessions.
A major influence on the circumstances of the aged is whether or not they own a house. In 1988 about 70 per cent of age pensioners were home owners. Home ownership is one of the main bulwarks against dire poverty.
The evidence suggests that the bulk of pensioners within Australia are not particularly well-off, though poverty is a relative rather than an absolute concept. The government appears to be convinced that increased personal private pension provision is required and has undertaken a number of measures to ensure this. These measures will also introduce an element of compulsion in superannuation savings.
In recent years there has been a persistent domestic savings gap of about 5 per cent of GDP. In effect, domestic investment has outstripped domestic savings by this margin. This deficit has been financed by inflows of foreign savings which have put further pressure dn the balance of payments. The encouragement of increased satrings is undoubtedly a key macroeconomic issue. However, the government appears to be concentrating on the stimulation of savings via certain types of approved superannuation provision. This is being encouraged by tax concessions which apply to a limited number of forms of savings and a limited number of schemes. These issues will be reviewed in later sections of the paper.
6. Recent changes in superannuation provision At the core of the new policies are the changes which are taking place
in the compulsory provision of superannuation in Australia. The Commonwealth Government introduced a superannuation guarantee levy (SGL) from 1st July 1992. This will be applied prospectively in respect of all employers who fail to satisfy the prescribed minimum funding standard in relation to contributions in respect of their employees. Employers with payrolls of above $1 million are required to pay at least 4 per cent superannuation which will rise to 9 per cent by the year 2002.
The Government’s retirement income target for a person on average weekly earnings [AWE) is 40 per cent of that level of income. This will ultimately be achieved by a 9 per cent contribution from employers and it is planned that employees will contribute a further 3 per cent.
It was suggested in the “Super Guarantee Bills” (Senate Select Committee, June 1992, p 28) that around 25-30 per cent of eligible wage and salary earners have no superannuation cover and that the SGL was designed to extend cover to this group. However, as both contributions and benefits are linked to income, it follows that the greatest benefits flow to those with the higher incomes and longer periods of service. Those with relatively low lifetime earnings attract lower contributions, pay proportionately higher charges and benefit less from taxation concessions. Indeed, some representatives of disadvantaged groups saw little gain from the SGL in the
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evidence they presented to the Senate Select Committee on Superannuation (“Super Guarantee Bills”, 1992, p. 28). Casual and part-time employees, the unemployed and women who move in and out of the labout force, all tend to lose out.
The SGL thrusts the bulk of the costs of formalising superannuation arrangements upon employers. These costs are likely to impact upon employment and job creation, private sector investment, the level of economic activity, inflation, and international competitiveness. In the long run the levels of wages will probably adjust to compensate for the increased costs of superannuation. Most superannuation systems in developed countries require fairly equal contributions from employers and employees, as can be seen in Table 3.
Austria
France
Germany
Italy
Japan
United Kingdom
7. Taxation and superannuation The current structure of retirement income provision is a dual combination
of a means-tested public age pension and private retirement income in the form of private and occupational superannuation. The age pension provides a floor for retirement income whilst tax concessions and the SGL encourage and enforce personal provision for retirement. Table 4 describes the broad details of the taxation of superannuation for the two categories (funded and
Compulsory Contributions for Retirement
Employer 12.55% Employee 10.25%
Employer 8.20% min Employee 7.60% min
Employer 9.35% Employee 9.35%
Employer 14.8%-30.4% Employee 6.1%-10.8%
Employer 7.25% Employee 7.25%
Employer 10.45% (Average) Employee 2%-9% depending on level of earnings
TABLE 3 Retirement income Systems in Selected Countries-Contributions and Benefits
United States Employer 6.2% I EmDlovee 6.2%
Retirement Income Stream
40%-73% of actual final earnings
40%-75% of career earnings
40%-45% of final earnings
80% of final career earnings
Flat social security plus earnings related benefit
20% of revalued earnings with effect from 2000
258-608 of assessable earnings
Source: Second Report of the Senate Select Committee on Superannuation, “Super Guarantee Bills’’, (June 1992) p. 22-23.
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unfunded) and draws on the treatment by Bateman and Piggott (1992). The treatment of taxation is categorized into three sections: contributions by the contributors, the taxation of fund income, and the taxation of the benefits.
Contributions by employers to complying funds (one which falls within the definition of a superannuation fund in the Occupational Superannuation Standards Act 1987) are tax deductible up to the amounts required to provide benefits within the reasonable benefits limit (RBL) (RBL refers to the maximum benefit from superannuation in a tax concessional form in the person’s lifetime). Contributions by employees are normally made out of after tax income but there may be further tax concessions for the self-employed worker.
The taxation of fund income was introduced in July 1988 at a standard rate of 15 per cent. Nevertheless the treatment of fund earnings is fairly complex. Superannuation funds have the benefit of access to imputation, and imputation credits can be set off against either income or capital gains tax. The latter applies to all assets disposed on or after 1 July 1988. Foreign source income, depending on its nature may be taxed on either a remittance or accruals basis. These features mean that the taxation of superannuation fund income is sensitive to the nature of the composition of the portfolio. Income in the form of rent and interest is fully taxed, but franked income from shares is tax free and may carry additional tax credits which can be offset against other income taxation.
The taxation of benefits depends on the type of benefit and its source. If it is from a funded source it will have been taxed whilst an unfunded source will not have borne tax. Benefits can be taken in lump sums or eligible termination payments (ETPs) or alternatively in the form of superannuation pensions or complying annuities. Taxation of ETPs can be broken into three components: undeducted contributions which are tax free, an amount up to the RBL which is taxed at concessional rates, plus further amounts above RBL which are taxed at normal rates.
The RBL sets the limit on the amount of benefit that a person can receive on a concessionally taxed basis. The manner of calculation of the marginal RBLs is designed to encourage the take up of complying annuitiesfsuperannuation pensions by the award of more generous RBL limits, up to 60 per cent greater, for annuitiesfsuperannuation pensions than for lump sums.
Knox (1991) concurs that the taxation support provided to occupational superannuation in Australia is regressive. This is because higher income earners receive a greater share of the benefits because of their higher rates of coverage, ability to make higher rates of contributions, and the larger differential between their income tax and superannuation tax rates. This follows from the fact the superannuation tax system is more of a flat tax system, especially where lump sums are concerned.
It is argued that a good tax satisfies three criteria: neutrality, equity, and simplicity. The taxation of superannuation meets none of these. The tax support is focused on superannuation and does not result in a level playing
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field in the case of savings generally. Any move to extend that tax favoured treatment of savings in general would serve to further level the playing field.
Equity comes in two forms, horizontal and vertical. The first suggests that individuals in similar economic circumstances should be treated equally, whilst vertical equity suggests that capacity to pay should be considered. It can be seen in Table 4 that horizontal equity does not apply because of the diverse range of tax treatments applied to contributions.
There is a lack of vertical equity because those with higher incomes are able to receive a greater level of tax support.
A good tax should be simple to administer and to understand. The current system of taxation of superannuation is very complex. Any changes which broaden the net and bring more of the self-and casually-employed into the system, plus make the system easier to administer and understand, should be welcomed. Simplicity of administration suggests low compliance costs.
8. The market for savings The growth of the assets of the life offices and superannuation funds was
not dissimilar to that of other financial institutions through the 1980s. However, the future growth of superannuation has led to a focus on the competition between the superannuation sector and other financial intermediaries. For example, banks and superannuation funds are dissimilar in their activities. The banks attract short-term deposits and serve a transactions and payments function whilst the super funds are long term savings vehicles. The banks can issue deposit instruments, for which there is a welldeveloped market and can therefore engage in liability management. By contrast, the balance sheets of life offices and superfunds represent policy holder’s “equity”. The two types of institutions compete more directly in the discretionary component of members’ equity, as represented by rollover funds and insurance bonds.
The major difference on the assets side between the two sets of institutions is the importance of direct lending by the banks. This comprises more than 50 per cent of their domestic assets. By contrast, life and super funds have traditionally held a good proportion of their assets in property and equities. (A detailed discussion of their investments is provided in the next section.) Policies aimed at stimulating savings via superannuation have to consider the nature of their investments.
However, the arguments in favour of both increasing superannuation provision and of boosting savings appear to be soundly based. The question is whether superannuation should be the sole focus of a policy aimed at increasing savings? A related matter is whether savings in the form of superannuation provisions are likely to be boosted at the expense of other forms of savings? There is a debate whether savings have remained constant or fallen during the last decade. EPAC’s (1988) study reported falling rates of saving during the last decade. On the other hand Edey and Britten-Jones (1990), suggested that saving has remained fairly stable. The future
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concerns centre on the extent to which there is substitutability between superannuation and other forms of saving.
Cusworth (1991) suggests that in Australia superannuation has developed as a predominantly industrial issue, and is considered mainly in terms of
TABLE 4 The Tax 'R-eatment of Superannuation
Type of Scheme
Funded'"'
(Taxed source)
Unfunded
(Untaxed source)
Gyntribut ions
Employer: Deductible if within contribution limits
Employee: Deductible in some circumstances
No contributions
Fpd Income
Contribut- ions: Deductible contributions (generally employer) taxed at 15%, undeducted (generally employee) untaxed
Earnings : Taxed at 15%
No iiivestment s
Benefits : Lump Sum
Less than age S5: Taxed at 20%'d'
Age 55 and over: (less than) Threshold, 0% Threshold - RBL, 15%''' (greater than) RBL, ordinary raLes
Employee Contribut- ions: Free of tax (where undeducted)
Less than age 55: Taxed at 30%'''
Age 55 and over: (less than) Threshold 15%'" Threshold - RBL, 30%'" (greater than) RBL, ordinary rates
Benefits : Annuity
Less than age 55: Taxed aC ordinary rates
Age 55 and cver: Taxed at ordinary rates less 15% rebaLe
Undeducted purchase price'gJ
Free of tax
Less than age 55: Taxed at ordinary rates
Age 55 and over: Taxed at ordinary rates
(a] Some public funded schemes are constitutionally protected from taxation by the Commonwealth. In these instances, the fund income (both contributions and earnings] remains untaxed but the benefits a r e taxed as for unfunded schemes.
(b) Refers to complying funds. (c) These tax rates apply for complying funds. For non-complying funds the top personal
marginal rate of 47% applies. (d) Plus Medicare levy (1.25%). (e) Refers to complying annuity or superannuation pension. ( f ) Where the commuted value of the annuity exceeds the relevant RBL, the excess must
be commuted to a lump sum which is then taxed a t ordinary rates. (8) The undeducted purchase price (UPP) is the sum of undeducted employee Contributions. Source: H. Bateman and J. Piggott. "Australian Retirement Income Policy", Australian Tax
Forum, 9, 1992. p. 9.
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employed wage and salary earners. These constitute just under half the civilian population aged 15 and over. Those groups which are not wage or salary earners are likely to suffer discrimination because they do not have the same opportunities to gain the tax advantages and financial security which superannuation offers. Women are at a disadvantage because they constitute just over 40 per cent of wage and salary earners and they are twice as likely as men to be outside the labour force. Similarly, casual and part-time workers, domestic workers, unemployed and physically and mentally handicapped persons tend to fall outside the net.
Superannuation is only one form of domestic savings. Younger families tend to invest the bulk of their savings in housing. Investment in superannuation and life insurance tends to increase up to the age of 55. Nevertheless, tax incentives and the inclusion of superannuation benefits in industrial awards are resulting in strong growth in superannuation savings which are now the fastest growing component of the financial asset holdings of households. Investment by households in government securities, bank deposits and building society deposits have shown flat or declining trends and are therefore losing ground relative to savings in the form of superannuation. On some estimates, superannuation funds are expected to rise to about $600 billion by the year 2000 (about $370 billion in 1990 dollars). Their current level is $125 billion. The nature of the investments of super schemes becomes a key issue, since they are likely to dominate the market for savings.
9. Superannuation scheme investments Australian Bureau of Statistics data suggest that a current breakdown
of the investment portfolios of superannuation funds would reveal about 25% in equities, 15% in non-residential property, 40% in loans and securities (including about 17% in the paper of banks and financial institutions), and a further 13% in overseas assets. Table 5 provides a breakdown of super fund investment by both superannuation funds outside life offices (Panel A) and by life offices (Panel B).
The removal of the 30/20 rule has led to a diminished role for Commonwealth Government securities and local government securities. These now account for about 22 per cent of the assets of non-life funds. The information in Table 5 (Panel A) suggests that super funds provide funds to other financial institutions by making deposits and by purchasing bank bills. These make up about 17 per cent of non-life funds’ assets. Direct loans to the private sector account for only 3 per cent of this group’s assets.
This is the main area where the banks and the super funds compete directly in similar types of assets. Edey, Foster and Macfarlane (1991) note that “the increasing importance of rollover funds has helped create a large ‘discretionary’ component of superannuation assets which could conceivably be switched to banks if the tax incentives were different.
Investment products such as insurance bonds would also come within this discretionary category”.
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To the extent that these assets are placed by the super funds in bank deposits they are not claiming funds that would have been placed with the banking industry but they are adding another layer of costs which could have the effect of raising the bank’s marginal costs of funds.
A potential source of concern is the fact that superannuation fund investments tend to be concentrated on secure and long-term investments. When direct investment in industry takes place, it tends to be focused on the larger listed companies.
3verseas Assets Equities Fixed Assets Commonwealth Government Securities Local ti Semi Government Securities Other Loans to the Public Sector
Financial Institutions Bills of Exchange (mainly bank bills) Loans to Private Sector Other (mainly unit trusts)
CDs and Deposits with
TABLE 5 Panel A: Asset Composition of Superannuation Funds Outside Life Offices: June 1991
$ billion
10.0 18.2 10.3 3.8
6.2
7.0
9.4
3.6
2.3 5.0
75.8 -
Per cent of total
13 24 14 5
8
9
12
5
3 7
100 -
Panel B: Life Offices’ statutory fund assets: June 1991
Public sector securities Deposits, loans and placements Housing loans Bills and promissory notes Shares Fixed assets Foreign currency assetsf Other assets
Total
$ Billion
14.6
13.1
1.0 5.0
25.4 14.3 11.8
9.1
94.3
Per cent of total
15.5
13.9
1.1 5.3
26.9 15.2 12.5
9.7
100
* Overseas assets estimated. Source: Panel A, Assets of Superannuation and Approved Deposit Funds, ABS 5656.0, and ABS, as reported in: M. Edey. R. Foster and I. Macfarlane, “The Role of Superannuation in the Financial Sector and in Aggregate Saving: A Review of Recent ’Rends” (December 1991) Reserve Bank of Australia. Panel B, W. Fitzgerald and 1.R. Harper. “Super Preferred or ‘level playing field’?’’, Third Annual Melbourne Money and Finance Conference (December 1991).
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Venture capital and small business finance are likely to be the losers. The current proposals should bias the flow of savings in favour of intermediaries providing approved long term savings instruments and against those with a short term focus which do not enjoy any tax advantages. Deposits in banks and other financial intermediaries will therefore be relatively reduced. Bank deposits have traditionally formed the basis for loans to farmers, small businesses and mortgage loans.
Other countries are taking a much broader approach to across the board encouragement of savings. For example, in the UK, the Tax Exempt Special Savings Account (TESSA) was introduced on January 1, 1991 to encourage long term savings through tax relief on earned interest. Anyone over 18 can open such an account which must be held with a bank or a building society. Specified amounts may be invested tax free, over a five year period, and after five years the whole principal and interest can be withdrawn free of tax.
The thrust of the superannuation changes in Australia currently appears to be in the opposite direction and seems likely to concentrate an increasing proportion of the flow of savings in the hands of a select band of institutional investors. It is possible that opening up competition for superannuation related savings to financial institutions in general would serve to offset this trend.
10. Competition and concentration in the superannuation industry Commonwealth government initiatives have increased superannuation
coverage from 40 per cent of employees in 1983 to 67 per cent in 1991. There are over 100,000 superannuation funds with fewer than 200 members, funds whilst a mere 500 of these funds account for 99 per cent of the industry value.
There are many forms of fund management vehicles described as ‘pooled’ or “collective” investments. These include unit trusts, approved deposit funds and trustee common funds. Many of these types of investments are “prescribed interests” as defined in the Corporation Act 1989. This definition excludes any interest arising in relation to shares, debentures, partnerships, life insurance policies, and retirement villages and trusts not promoted by professional investors. It has been established by the Australian Law Reform Commission (1991) that about $65 billion is invested in prescribed interests.
Morgan (1991) suggests that the funds management industry is characterised by the existence of significant entry barriers. A fund of around $1 billion is required to support the cost of setting up a sophisticated financial management structure. There are currently about ten fund managers of this size: three of the major banks, Banker’s Trust, the largest insurance companies and a few others.
It takes a long period of time to set up a team and to establish a track record. This suggests the existence of considerable entry barriers and any measures which serve to reduce competition between existing players must be viewed with concern.
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The tax incentives and compulsory measures directed at increasing superannuation provision have had a major impact on the Life Insurance industry which now manages in excess of 40 per cent of all superannuation savings. The superannuation business of the life companies has increased from 30 per cent of total business in the 1970s to over 65 per cent by the beginning of the 1990s. Two mutual life companies, AMP and National Mutual, dominate the business and account for about 70 per cent of the total. However, the deregulation of the Australian financial system has led to increased competition from the four major retail banks who are now using their extensive branch networks to chase market share. Their four life company subsidiaries increased their market share in total premiums to about 3.48 per cent in 1991.
11. The regulation of superannuation Klumpes (1991) draws attention to the fragmented nature of the current
regulatory framework governing superannuation. There are three federal regulatory bodies which have overlapping responsibilities for the governance of superannuation product ownerslpromoters. The Insurance and Superannuation Commission (ISC) adopts the role of industry regulator for the life industry via the Life Insurance Act 1945 (Cth), and the super- annuation industry via the Occupational Superannuation Standards Act 1987 (Cth) (OSSA). Any superannuation products which fall within the ambit of “prescribed interests” are subject to Corporations Law and are monitored by the Australian Securities Commission (ASC).
The banks’ relationship with life company subsidiaries and any superannuation products offered directly are subject to Reserve Bank of Australia (RRA) control via the Banking Act 1959 (Cth). Finally, the Australian Financial Institutions Commission (AFIC) has been proposed to act as state- based regulator of non-bank financial institutions offering superannuation products. Furthermore, the state-based Government Insurance Commissions have business worth about 5 per cent of the total superannuation business of the life companies, which they voluntarily report to the ISC. They are not subject to direct regulation. Table 6 summarizes the current regulatory structure.
This diverse system of regulation produces a number of anomalies. Klumpes (1991) points out that the Life Insurance Act of 1949 was not formulated in terms of life companies having superannuation business. The growth of investment-linked policies in subsequent years forced the Life Insurance Commissioner to accept the status quo which involved life insurance companies offering superannuation policies which had the same contractual obligations to policy holders as customary life policies.
These businesses are regulated as statutory funds rather than superannuation funds under the Life Insurance Act. The subsequent establishment of the ISC and the institution of OSSA meant that many of these funds were also accountable as “approved funds” to the ISC
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superannuation section. This led to anomalies such as the case of deferred annuities, which, whilst very similar to Approved Deposits Funds, are not covered under OSSA.
There is a degree of ambiguity in the regulation of super products offered by the banks. The Reserve Bank is charged with the responsibility under section 16 of the Banking Act of ensuring the protection of all Australian depositors of banks. It is not clear whether the life subsidiaries of the banks are captured under this control. In the event that the banks are permitted to create “retirement savings accounts” they will presumably come under RBA regulation.
TABLE 6 The Regulation of Superannuation Products
REGULATOR
ISC Life Insurance Group
ISC Superannuation Group
RBA
ASC
AFIC
UNREGULATED
JURISDICTION
Life companies registered under Life Insurance Act
‘Approved funds’ under OSSA
~
Australian banks registered under Banking Act
‘Prescribed interests‘ as defined in the Corporations Act
State-based non-bank financial institutions Other state-based financial institutions
PRODUCTS REGULATED
single premium policies (eg: deferred annuities) Annual premium policies (eg: superannuation bonds 1 Regular premium policies (eg: super- annuation funds) Immediate annuities
Superannuation funds: -defined benefit (employees) -accumulation (personal) Approved Deposit Funds Superannuation Bonds Pooled Super Trusts
Bank-owned life companies Retirement bank accounts
Approved Deposit Funds Superannuation funds: -accumulation (personal) Pooled Super Trusts
Products managed by friendly societies
Superannuation funds and rollover funds managed by: -State GIO‘s (NSW, OLD, VIC, SA, WA) -Allocated pension funds
Source: P.J.M. Klumpes, “Financial Deregulation and the Superannuation Boom: A Crisis in Australian Financial Services Regulation?”, Department of Commerce, Australian National University, (November 1991).
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The Martin Report raised the issue of potential conflicts of interest arising from bank control of managed fund activities. The Martin Committee recommended that: “Regulators should satisfy themselves that appropriate systems are in place to ensure adequate separation of the banking and funds management activities of financial conglomerates” (p. 166). They further recommended that in advertising material the banks should: “state clearly that the bank does not guarantee any fund it manages” (p. 168).
There are about 70 state-based friendly societies which are regulated by state laws. Some of them offer rollover type super products such as deferred annuities and since July 1992 have been subject to AFIC regulation. The SGIOs are not subject to any financial regulation at all. The current situation is certainly very fragmented but the Government is moving to strengthen the powers of the ISC as the sole industry regulator; to provide it with greater powers and to extend its industry coverage.
12. Industrial relations issues The treatment of superannuation as an industrial issue associated with
the award wages system introduces additional complications and difficulties. The Industrial Relations Commission will be given the power to offset future wage claims against the effects of the government’s superannuation policy. One consequence of this linkage is the limitation of individuals’ rights to choice of scheme. This has happened because superannuation has been paid into a limited number of superannuation funds which are often specified by the award. The unions and the Industrial Relations Commissions do not have a direct economic interest in the responsible management of pension funds. Yet they have considerable influence in the choice and establishment of approved schemes. It would be more equitable if employer and employee had much greater discretion.
13. Disclosure of information about performance, fee structures and commissions
One consequence of the fragmented control of superannuation is an inadequate and uneven provision for the disclosure of information about superannuation products both before and after the point of sale of these products. The Senate Select Committee on Superannuation produced an issues paper “Super Charges” [August 1992) which discussed a number of options for reform. It noted that “Prior to 1 July 1992 when the Occupational Superannuation Standards Regulations (OSSR) Amendments came into force, disclosure of fees, commissions and other charges was significant for its absence from the regulatory framework covering the superannuation and life insurance industry” (p. 33). It raised a number of questions about further options for reform which included the possibility of capping fee levels, standardised documentation, standardised disclosure requirements, and further regulatory reform.
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Broad-reaching changes have also been recommended by the Law Reform Commission in its report on “Collective Investments: Superannuation’’ Report No 59 (March 1992). These have included recommendations that documents issued by super funds should use plain language, give adequate information about benefits, and a range of other recommendations including the provision of information about performance related to relevant benchmarks. There was also a recommendation that fees and charges be fully disclosed.
In August 1990 the Australian Accounting Research Foundation (AARF) produced Australian Accounting Standard AAS 25: “Financial Reporting by Superannuation Plans”. The intention was to provide relevant, reliable and comparable financial information about matters such as the benefits which have accrued to plan members, the assets available to meet those benefits and changes in the value of those assets during the reporting period.
Subsequently, in August 1991, the AARF released an exposure draft ED 53: “Accounting for Employee Entitlements”. ED 53 included proposed standards for the recognition and measurement of expenses, liabilities, assets and revenues relating to employee entitlements which include superannuation entitlements.
Actuarial investigations are currently required under the OSS Regulations for defined benefit superannuation schemes and under the Life Insurance Act 1945 (Cth) for superannuation investment schemes offered by life insurance companies. Actuaries make assessments of whether the value of future contributions will be sufficient to cover the long term contingent liability to pay retirement benefits.
Clearly steps are being taken in the right direction. The trouble is that the fragmented nature of the industry means that not all schemes are captured under the provisions.
14. Conclusion: is super really ‘super’? It is clear that there is much to be said for broader and more adequate
provision of superannuation. Australia appears to lag behind many other developed countries in this respect.
Superannuation is a relatively tax-favoured form of investment. It could be argued that there would be much to be gained from spreading the favoured tax treatment to all forms of saving and levelling the playing field to a greater extent. One means would be to allow the banks and financial institutions tax concessions on all forms of savings accounts. Certainly broadening the type of available superannuation vehicles would serve to increase competition in the industry. This can be justified on a number of grounds; one of the most important of these would be that individuals would be provided with greater freedom of choice to invest savings for superannuation in vehicles that matched their own requirements.
This arrangement would have the further merit of serving to encourage the portability and flexibility of schemes. In turn, this would also encourage labour market flexibility and responsiveness to changes in market circumstances.
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A broader range of schemes would also promote ease of access and greater equality of coverage. Women, part-time and casual workers, the self- employed etc. would find it easier to participate in flexible schemes which could be set up in their own names.
This will enable market factors to determine the allocation of funds and supports the Campbell Committee’s concept of “competitive neutrality”. Farmers, small businesses, and venture capitalists should benefit. The banks are uniquely well-placed to assess business and mortgage loans to smaller clients. They have economies of scale in information gathering via their extensive and ongoing client relationships through their branch networks. The typical superannuation fund is not suited to this type of investment.
The level of savings could be increased by this type of development. The bulk of the wealth of the less privileged members of Australian society is held in interest bearing accounts.
The institution of tax relief all forms of savings would promote both horizontal and vertical equity in the tax system. It would also encourage the savings of individuals who are not well-catered for under current provisions.
Complexity and compliance costs for businesses could be reduced. The employer could direct contributions to a selected range of complying funds. In the case of a bank savings account contributions could be deducted by direct debit from salary payments. Records could be kept for both employee and employer.
In summary, there are many good points in favour of the Government’s superannuation policy, yet much remains to be achieved. One major drawback is that super is still more super for the relatively privileged than for the under-privileged.
REFERENCES AGPS (1991), “A Pocket Full of Change-Banking and Deregulation”, House of Representatives
Standing Committee on Finance and Public Administration, Chairman S. Martin, Canberra, November.
AGPS (19811, “Australian Financial System: Final Report of the Committee of Enquiry”, (The Campbell Report), Canberra.
Australian Accounting Standard AAS25 (1990). “Financial Reporting by Superannuation Plans”, AARF August.
ED 53 (1991). ”Accounting for Employee Entitlements”, AARF August. H. Bateman and J. Piggott (1992). “Australian Retirement Income Policy”, AUStIdiM ?hx Forum,
T. Callen (1991). “The Balance Sheet of the Household Sector in the 1980s”. Reserve Bank
J. Creedy and R. Disney (1989). “The Australian Pension Scheme: Some Basic Analytics”,
N. Cusworth (1991), “Superannuation Issues”, Confederation of Western Australian Industry. A.W. Dilnot (1990). “The distribution and composition of personal sector wealth in Australia”,
pp. 1-26.
of Australia Bulletin. November.
Economic Record, December, pp. 357-368.
Australian Economic Review.
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M. Edey and M. Britten-Jones (1990), “Savings and Investment”, pp. 79-145. in S. Grenville. Ed, Australian Macro-Economy in the 1980s. Proceedings of a Conference held on 20121 June 1990 Reserve Bank of Australia, Sydney.
\Nv. Fitzgerald and LR. Harper (1991), “Super Preferred or ‘Level Playing Field’?’‘, Third Annual Melbourne Money and Finance Conference, Sebastopol, Victoria, 6-7 December.
P.J.M. Klumpes (1991), “Financial Deregulation and the Superannuation Boom: A Crisis in Australian Financial Services Regulation?”, Commerce Research Paper No 1, Australian National University, November.
D.M. Knox (1991). “lhx, Super and the Age Pension: the Issues of Cost, Equity and Incentives”, Research Study No. 14, Australian %x Research Foundation, Sydney.
D.M. Knox (1991), “The Objectives and Distribution of the lhxation Support Provided to Occupational Superannuation in Australia”. Third Annual Melbourne Money and Finance Conference, Sebastopol, Victoria, 6-7 December.
The Law Reform Commission (1992). The Companies and Securities Advisory Committee, “Collective Investments: Superannuation”, Report No 59. Sydney, March.
Senate Select Committee on Superannuation (1992). First Report, “Safeguarding Super”, Canberra, June.
Senate Select Committee on Superannuation (1992). Second Report, “Super Guarantee Bills”, Canberra, June.
Senate Select Committee on Superannuation (1992). Issues Paper, “Super Charges”, Canberra, August.
Report of the Committee to Review the Functioning of Financial Institutions, Chairman the Rt. Hon. Sir Harold Wilson (1980). HMSO, June, Cmnd 9937.
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