‘Sole Purpose’ or ’Objective’ of Superannuation?
For many individuals and families, superannuation may be the largest individual asset (net of debt) that they hold at the time of their retirement.
Section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA 1993) established the ‘sole purpose’ of our superannuation savings, which are:
- for our retirement,
- able to be accessed prior to our retirement where we have reached our ‘preservation age’, and
- released on death by payment to our death benefit dependents or to the legal personal representative of our Estate.
Simple.
Back in 1992, superannuation assets were estimated at $148 billion.
As at the June 2023 quarter, the total asset value of all superannuation assets per the APRA quarterly statistics was $3,541.4 billion dollars (now we are into the trillions!). (https://www.apra.gov.au/sites/default/files/2023-08/Quarterly%20superannuation%20performance%20statistics%20-%20September%202004%20to%20June%202023.xlsx)
No wonder everyone wants to get their hands on our superannuation!
The Government has recently extended the consultation period for updating the sole purpose of superannuation under the guise of an ‘objective’ of superannuation.
The intention is that this new objective will guide future legislative changes to our superannuation system.
The Superannuation (Objective) Bill 2023 describes the objective of superannuation as to:
‘preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.’
Clearly, the focus of the objective is to assist the member during their retirement. This aligns with the retirement element of the sole purpose test in the SISA1993.
There are four key words/phrases in this proposed ‘objective’ that require further clarification from the Explanatory Memorandum:
1.36 The focus on delivering income in the objective makes it clear that superannuation savings are intended to be used in retirement.
This clearly indicates that the government is looking to superannuation to provide an income stream in retirement. The further assistance of government support for those who require this helps to ensure a minimum standard of living for all.
1.38…'dignified' denotes a standard of financial security and wellbeing in retirement which allows the person to participate economically and socially in their community.
It is not intended that every fund member has the same perception of a ‘dignified retirement’ – differing lifestyles both pre and post retirement will shape perceptions for each individual about what this means to them.
1.46 …the concept of equitable in the objective reflects that superannuation policy can have a distributional impact across Australian society
1.47 While equity is a subjective concept, in this context it captures the importance of a system that delivers similar outcomes to people in similar situations and targets support in the superannuation system to those most in need.
Not all superannuation fund members will receive the same benefits – accumulation balances at retirement will still be impacted by a range of factors, including the member’s choice of superannuation fund to hold and grow their superannuation balance.
While not overtly stated, it could be that ‘equity’ in this context relates more to the tax benefits different individuals receive from the superannuation system, as those with larger balances may benefit more than those with smaller balances, due to the concessional tax treatment of superannuation contributions and earnings.
1.50 ‘Sustainable’ signifies that the superannuation system should be robust to demographic and economic change and cost-effective in achieving its objective.
The sustainability of our superannuation is also linked to the governance framework in which it operates, as well as the reluctance to make changes to the system for most members. This stability increases our confidence in the system, so that we continue to believe in and invest in it. Basically, as a community, we believe that it is in our best interest to grow our superannuation balances.
There is no mention in this proposed ‘objective’ of superannuation of any residual amount being available at the end of a ‘dignified’ retirement – the government’s plan seems to be that members will have exhausted their superannuation balances at the time of their death.
Intergenerational wealth transfers from superannuation sound grand, but in reality, for most of us there may only be a relatively small balance remaining in superannuation on the death of a member that flows to their Estate. Once distributed by the Estate, these funds are available to circulate within the economy and support further consumption, savings etc.
As long as we comply with the current superannuation laws (and the new objective of superannuation is not intended to change any of the existing laws), why is the government interested in whether we spend all of our superannuation balance or leave some to our families to spend on our passing?
There may be other levers available to the government to reduce a member’s superannuation balance as they age. Apart from encouraging members to voluntarily make additional superannuation withdrawals, the government could increase the minimum annual pension requirement.
With the introduction of the new Division 296 tax on superannuation balances in excess of $3m, the government has another lever to their ‘equity’ strategy, helping members reduce their superannuation balances during their retirement.
Any change that increases the taxation of superannuation contributions or balances will encourage some members to either withdraw funds or reduce future contributions. We have seen this with enquiries from members regarding the imposition of the new Division 296 tax, which is not due to commence until 1 July 2025.
As mentioned previously, it is the integrity and stability of our superannuation system that encourages employers and members to support the system and comply with their obligations.
In the Financial Review today (24/10/23), there is a push from the not-for-profit /charity sector to enable gifting directly from a members superannuation account on their demise in the form of a death benefit, rather than the current position where any funds remaining on death being directed towards a member’s estate, and being distributed in accordance with the deceased’s Will.
How does this fit into the government’s suggested objective of superannuation?
Considering the volume of funds within superannuation, there have been other suggestions to invest in affordable housing and other infrastructure – in The Australian today they was an article commenting that CBUS had made a $500m contribution to the governments' Housing Australia Future Fund (HAFF).
Large capital projects, like the HAFF, that provide long term returns may seem well suited to superannuation funds, but is this the best use of member funds? Do investments in these types of assets provide the best possible return to the member, or do we offset the potential of obtaining a greater financial return by investing to obtain a community benefit that is generated from these types of investments.
Is the objective of superannuation to support community projects? Maybe there are circumstances where this can be an objective, where it can be reconciled with the provision of benefits to members in their retirement.
Can these large community projects generate sufficient financial return to support the superannuation members in their retirement? Maybe this is the key question, as if this can be the outcome it will provide benefits to both the member and the greater community.
Where large industry or retail funds undertake these investments, but self managed superannuation funds don’t have sufficient scale or may choose not to include these investments, does this make the self managed fund members less community minded? Hopefully this is not the case.
Maybe we all should be considering what the objective of our superannuation should be and starting a conversation regarding the use of this growing pool of funds.
Michelle Wilson
24 October 2023
