Thank you for downloading the Smart Investing podcast from index fund manager Vanguard Investments Australia, on the web at vanguard.com.au

This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is Super loser out of political tug of war

It was first published on Friday 27 April 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

Superannuation is a tug of war between the demands on today’s cash flow and the long-term benefit of saving more for your retirement years.
Which would you choose from the following: a holiday or new car this year or a larger voluntary contribution to super?
Our political leaders are facing a comparable question along the lines of: would you prefer a budget surplus next year or a bigger social security bill in 20 years?
Australia’s fiscal situation is the envy of developed countries around the globe but there is considerable short-term pressure to find savings to bring the government accounts back to the promised surplus and superannuation tax concessions are both real and sizeable.
What the right level of tax concessions for superannuation should be is a legitimate issue of public policy and debate, particularly around the question of equity. Revenue foregone by the government by way of tax concessions to super has to be justified in terms of long-term community benefit – in particular providing a dignified retirement lifestyle for greater numbers of retired Australians.
However, a key ingredient required for the long-term success of superannuation policy and its ability to deliver the federal government’s objective of more Australian’s either self-funding or at least partly funding their retirement is confidence and engagement with the system by fund members.
The superannuation system is busily trying to digest a raft of significant changes to the system – many of them administrative and operational and not that visible to individual fund members but they promise to deliver significant, long-term cost savings.
What will be more visible to fund members is:
    •    Raising the super contribution rate from 9 per cent to 12 per cent - albeit it will phase in slowly and take until 2020 to be fully implemented.
    •    Development of the MySuper offer that will provide members in the default offer with a simple, low cost product that will be more comparable across funds.
    •    Halving the concessional contribution caps for people aged 50 and over (if your account balance is more than $500,000).
    •    Disappointing returns and periods of dramatic market volatility following the global financial crisis
A key design feature of our superannuation system is that it is market-linked and individual fund members, by and large, take 100 per cent of the investment market risk. The system has a defined contribution structure – not defined benefits. Following the global financial crisis a defined benefit scheme would certainly have looked more attractive to most retirees but there are good public policy reasons why it is structured the way it is – both government and corporate balance sheets would look dramatically different if they were accounting for personal pension liabilities.
But while taking on long-term investment market risk may be an acceptable trade-off for the ability to choose funds, investment options and contribution levels the issue for the policy makers is judging when the seemingly relentless changing of rules undermines fundamental confidence in the system. In other words when does legislative risk outweigh the tax concession incentive to the point that people stop contributing more than the basic mandated amount?
If you want evidence of how powerful changes in government policy settings can be you need look no further than the Australian Tax Office’s statistical overview of self-managed super funds that was released earlier this month.
The ATO report draws on data from SMSF tax returns and covers the five-year period up to June 30, 2010. It shows that contributions peaked in the year ended June 2007 but that was an extraordinary year when reasonable benefits limits were abolished and a transitional contribution limit of $1 million was in place.
So it is not surprising to see that according to the ATO annual contributions to SMSFs have fallen 67 per cent. Contributions to all super funds – including the large institutional funds have fallen 34 per cent by way of contrast.
Contributions to SMSFs since 2007 have continued to fall each year and are now, according to the ATO, back below 2006 levels. Clearly the lowering of concessional contribution limits has had a major impact and while the SMSFs sector is typically home to higher net wealth individuals the ATO report shows that more than 50 per cent of SMSFs have less than $500,000 in assets and the median account balance per member is $285,000.
SMSF trustees are self-directed individuals so the drop off in contributions is suggesting that confidence in the system – be it legislative or market driven – is at a low ebb.
The trade-off for any super fund member be it SMSF or large public offer fund is a simple one. The trade-off for getting a tax concession on the superannuation account is that you cannot access your money and for younger people you are talking 30 to 40 years.
Members of super funds are constantly being urged to look beyond the short-term – a message that perhaps applies just as well in the political world as the investment one.

And that concludes the column

Super loser out of political tug of war

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

To receive the column by email each week go to vanguard.com.au and register with Smart Investing.

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.