Super uncertainty solved with… more uncertainty

By now, the main tenets of the government’s proposed changes to superannuation – such as a slight phased increase to contribution caps and a limit to tax-free pension phase income – have been thoroughly disseminated.

After repeatedly refusing to comment on its plans for the sector prior to the Budget, the government shocked pretty much everyone with its 9am press conference on Friday 5 April.

Financial Services Council (FSC) chief executive John Brogden made no secret of the fact that he had been unprepared for the announcement at an FSC press conference later that day.

“We haven’t heard that before and they’ve done it without any consultation with industry,” he said in reference to the $100,000 tax-free limit on pension income.

While the announcement was unexpected it’s perhaps not entirely surprising given the degree of speculation around superannuation, not least in the mainstream media. It’s hard to remember a time when super was such a hot topic, not just within the financial services industry but in the broader public consciousness.

It’s possible the government felt it couldn’t allow that debate to continue raging on the front pages right up until the Budget was delivered, but if it was the government’s intention to arrest the debate, boost confidence in the sustainability of the system and remove uncertainty, it may have missed the mark.

There are several reasons for this. Firstly, there is a federal election on September 14 and the government will have limited opportunity to get any of this legislation passed before then.

Secondly, the fact these changes were announced with no consultation means industry will have plenty to say and no doubt recommended changes, putting further time pressure on the formulation of draft legislation.

Thirdly, several expert analysts have suggested that some of the government’s modelling and assumptions are flawed.

A Mercer report has claimed there are flaws in treasury’s modelling. Specifically, using treasury’s tax expenditure figures to shape superannuation policy, without taking into consideration the age pension savings, is flawed and misleading, the report found.

Mercer senior partner Dr David Knox described the move as “short sighted and defective”.

The potential revenue gain for government is much lower than the quoted value of the superannuation tax expenditure due to several shortcomings with Treasury's approach, he said.

It ignores future age pension costs, which will “inevitably” increase if super benefits are reduced due to higher tax on contributions, earnings or benefits. It also ignores any redirection of contributions to other tax-effective investments that would occur if the super rules became less favourable, Mr Knox argued.

The fourth issue is that it could be argued the changes to the tax treatment of future super earnings amount, essentially, to a retrospective tax structure. People who have been making voluntary contributions to their super based on a certain set of assumptions have now had the goalposts moved – again.

Minister for Financial Services and Superannuation Bill Shorten has repeatedly gone to lengths to emphasise that the changes are not retrospective – including stating as much in several press releases.

He told ABC’s The World Today: “Our changes are not retrospective. They will be prospective. This effectively means – and you can assume over the last 10 years on an average of a 5 per cent return – that people who have accounts currently in retirement above $2 million will be the only people affected.”

Yes, it is only a small proportion of people that will be affected. But, those people may have been making voluntary contributions to their super based on a set of expectations regarding how those funds would be treated in their retirement. The government is proposing to change those rules, and while it may be playing semantics there is an argument there this is effectively a retrospective tax on money that has already been contributed.

Commentators have long been suggesting the constant tinkering is damaging confidence in the system and causing those who may otherwise have made voluntary super contributions to look for other modes of saving (or spending). By any reckoning, the treatment of those earnings will still be far more generous inside super than outside – but who knows whether all those affected will see it that way?

At a press conference in Canberra, Mr Shorten said: “What drives people crazy in superannuation is the sense of constant tinkering, the sense of changing the goalposts.”

That is certainly true and, regardless of the outcome of the latest round of proposals, it is hard to be convinced that we have seen the end of the tinkering.