Any move to lift the super threshold could strip the industry of $50m in annual fees.
A stoush between the superannuation industry and the government is looming over a possible recommendation to increase or index the threshold that keeps low-income workers outside the $2.6 trillion super system, which could strip the wealth management industry of at least $50 million in annual fee revenue.
Following the Productivity Commission’s landmark report into the superannuation sector last month, momentum is growing among consumer groups to review the $450-a-month threshold to qualify for mandatory super payments, which has never been increased since it was legislated nearly three decades ago.
The Productivity Commission found more than half a million more employees are seeing 9.5 per cent of their wages locked away until retirement than would be if the threshold had been indexed to inflation, which would leave the threshold at more than $1000.
The commission’s investigation of the super system found entrenched underperformance and overcharging in the for-profit fund sector, a tail of underperforming trade union funds that refuse to merge despite it being in their members’ best interests, and an industry content to preside over a system that acts as an “unlucky lottery” for many savers.
It found one in four funds failed to meet benchmark performance returns and that low-balance savers and low-income workers were dudded by the system.
While the Productivity Commission made no recommendations about the $450 threshold in its draft report, it is likely to use upcoming hearings to consult with the industry and consumer groups on the threshold.
Any recommendation to raise or index the threshold would represent a blow for both the wealth management sector and the federal opposition.
A Labor-dominated Senate inquiry into unpaid superannuation recommended abolishing the $450 threshold so that all workers, no matter their income, had a portion of their wages going towards their superannuation.
Erin Turner, CHOICE campaign director, said the Productivity Commission’s review confirmed the super system “doesn’t work well for the people who need it most”.
These included people on low incomes, women taking career breaks and young people switching jobs, she said.
“We need the system to be re-engineered so that it isn’t built on a series of assumptions that best suits a relatively well-paid full-time worker that works for one company,” Ms Turner said.
“The threshold for mandatory contributions should be examined carefully, alongside of settings for default insurance and how accounts are first chosen or allocated.”
The superannuation industry generates hundreds of millions in revenue each year through fees charged to small accounts. Based on a modest monthly member fee of about $8 a month, plus fees for administration and investment, the industry could be gaining an extra $50m in revenue each year thanks to the extra workers being captured by the super system.
According to the Association of Superannuation Funds of Australia, which has campaigned to abolish the threshold, an estimated 365,000 Australians (predominantly women) are missing out on a total of about $125m of super contributions each year because of the threshold.
ASFA says low-income earners who work on a casual or part-time basis are largely affected by this rule, as they may work a number of jobs that each pay below the super guarantee threshold.
Menzies Research Centre policy director Holly Dorber said maintaining the threshold at such a low level often reduces the take-home pay of workers for the benefit of big money managers and life insurance companies.
“While the super industry has been busy campaigning for years to abolish the $450 threshold altogether, it’s clear what should actually happen is that it should be increased,” said Ms Dorber, a former policy adviser to Financial Services Minister Kelly O’Dwyer.
“Funds themselves have been the biggest winners from the low rate of the current threshold and young people, low-income earners and workers with multiple jobs have seen little to no financial benefit from being forced to divert almost 10 per cent of their wages into a super fund.”
Critics of the super system argue the government should postpone or scrap the planned increase of the super guarantee from 9.5 per cent to 12 per cent until underperforming funds have exited the industry.
“The threshold cuts in really low,” said Alex Dunnin, research director at Rainmaker.
“A lot of low-income workers are casually employed and superannuation probably isn’t their first priority. They’ve got rent and bills to pay.
“If most superannuation people had their way, you’d be paying a super guarantee rate of 500 per cent of your salary.”
By Michael Roddan
The Australian Business Review
12 June 2018