Nicholas Cowdery in his essay 800 Years of Magna Carta, Law Society Journal, (June 2015) succinctly summarised the rule of law in the following statement: “A crucial aspect of the rule of law is affirmed by the charter: that justice will be done by following rules that have been stated in advance and are knowable by all and fair.” If only this statement were true when applied to superannuation.
When compulsory superannuation was established by the Keating Government, ‘justice’ was the principal goal: a fair go, a dignified retirement and a favourably taxed environment where workers could build wealth. It has been successful to a large degree in building the fourth largest retirement pool of savings in the world for a country with a relatively small population. A looming question remains, however, as to the social justice of retaining the current tax concessions for multi-million dollar pension accounts where the investment earnings are tax free. Should super be a place to stash money to gain tax concessions or should the allowable balance be capped at a level which provides a comfortable retirement? This issue has already become political and will re-emerge at the next federal election. Superannuation was conceived as an income replacement in retirement, not as an estate building tool.
As far as ‘rules stated in advance’ which are ‘knowable by all’, successive governments of both persuasions have sinned flagrantly against this principle on a remarkably regular basis. Rule changes, shifting goal posts, jargon, new acronyms and tax changes have all served to undermine public confidence in our superannuation system. The constant tinkering has rendered the ‘knowable by all’ element very difficult – just consider the shift away from the graduated contribution increase to 12% which had been enshrined in law. And let’s not forget the promises not to interfere with super. Was it a non core or core promise? Or perhaps it was a core non core promise.
The most recent proposed rule change has to do with superannuation governance and the equal representation rule which has served the system well since inception. Boards of industry funds regulated by APRA have 50% employer appointed directors and 50% employee appointed directors with strict fit and proper requirements in place. The government is now proposing to abolish this system and have a mandatory one third of independent directors with the chair of the board to be an independent director. No equal representation is required. There is a certain irony in the proposed legislation if one considers that industry funds as a sector have consistently out performed bank funds as a sector in three, five and 10 year returns, achieving this by superior investment performance and lower fees. Another irony is that industry funds have not had the well reported problems that some of the financial planning branches of major banks have had. In their effort to produce a profit, it seems that some financial planning branches of the big four banks have overlooked the best interest of their customers and placed them in more expensive, underperforming, in-house investment products.
So is the most recent proposed change put in place to fix a problem or is it more ideologically driven? There is no doubt that superannuation will become more important to the Australian public as the system matures further and accounts grow and there is no doubt that governments will look to super to help repair their budgets. It is important for governments to remember the primary purpose of superannuation – to provide retirement benefits for members and their dependants. Quite simple, really! Members of super funds are saving to create an income stream which replaces their salary at retirement. If this is achieved on a large scale, then reliance on the Age Pension will be reduced and this will assist future governments greatly.
Let’s state the rules in advance and make sure they are knowable by all. Most importantly, let’s ensure that the rules are fair!