Rice Warner CEO, Michael Rice, goes through the superannuation changes contained in the 2017 Budget
Introduction – Super Changes, what are the implications?
Ross Greenwood: Welcome to Work Life Money for another week. Great to have your company. Of course, this was budget week. A big week, I’ve got to tell you. There are subtle changes in superannuation in regards to this budget. We’re going to cover that very shortly with one of this country’s leading actuaries, that’s Michael Rice.
But also, I want to take you back many, many years because this is about a career and a working life, an incredible working life in many ways for a young man who found fame with one of our most famous pop groups very early in his life: Athol Guy, the bass player for The Seekers. But what he went on to do is quite amazing that shows everyone of us that even if you are successful very early in your career, you’ve still got to keep adapting and changing to keep yourself interested.
Plus also Pru Goward, on the status of women and the way in which they can actually come out much worse off in their ’50s as a result of failed marriages and if they can’t find the work. Plus, one of Australia’s most famous entrepreneurs during the 1980s, a mining entrepreneur who’s now big in cars, massive. In fact, he’s going to be selling one of Australia’s most iconic cars at a bid auction happening over the next week or so. All of that and plenty more right here on Work Life Money.
Ross: First up on the program, let’s go to the federal budget this week and of course, the superannuation changes. Now, it would be fair to say that the changes to superannuation are not as radical as last year’s changes. Bear in mind also, it became a significant election issue last year, the real heartland, in particular, of many coalition voters. In other words, wealthier people in Australia who found that their superannuation benefits were going to be clipped in regards to tax and also the amount that they could have in their superannuation funds being restricted really did certainly, I think in hindsight, hurt the government in its chances in the election, which of course it had only one by one seat in the lower house.
What about this year’s budget? Well, there are not so many changes but let’s try and get through some of them with one of Australia’s leading actuaries and in fact, the largest independent actuary in this country, Michael Rice from Rice Warner. Many thanks for your time Michael.
Interview with Michael Rice, CEO Rice Warner
Michael Rice: That’s a pleasure Ross.
Ross: Can you just tell me this budget certainly did not have the scope of changes that the previous budget did have. It’s almost as though the government maybe understood that people might have been a little weary of the number of changes out there.
Michael Rice: It’s true. In fact, I think after last year’s budget, which you remember had to be or redone in September as well, they decided that that was enough in this term. But they’ve still crept in a couple of little ones. What would a budget be if there wasn’t something on super?
Ross: What you’re saying is they just couldn’t help but touch the budget in some way? Now, I know there’s some about, say for example, people selling their house and having extra caps to put money into superannuation or young people that are being able to use their superannuation to be able to top-up money in a tax efficient environment, to be able to save for a home deposit. They seem to be the key messages that were out there. Is that all of it?
Michael Rice: There are a couple of little minor things that– well, not for the people concerned. That there are 92,000 people who lost their age pension in January with the new means test. They’ve been given back their pension on concession card.
Ross: Actually, that’s a big thing because a lot of people try and get even a dollar of pension so they have that pension on concession card because it means so much to them with the savings on utilities, with the savings on travel, a range different areas. Isn’t it?
Michael Rice: And the PBS, the discounted pharmaceuticals which is quite important if someone’s sick.
Ross: Yes, it’s so true. Those 92,000 people who are at the margin when they made the rules change from last year, that those people now have got that card back. When do you anticipate they’ll start seeing the cards coming through?
Michael Rice: I think that one is almost automatic. The issue for that though is when you do that grandfathering, you’ve now got 92,000 people that technically are not eligible for the card, who’ve got to be kept in the system. They could live for another 20, 30 years. This just adds more complexity to everything we do.
Ross: Anything else sitting out the other people should know about?
Michael: Apart from the two big things you mentioned?
Michael Rice: Well, there’s CGT Relief. This is a bit complex, but when funds merge — and as you know, there’s constant rationalization and consolidation in the industry. But a wind up of a fund, for whatever reason, triggers a capital gains events and then the gains and losses are crystallized. That can be many millions of dollars for a fund and it could mean that the member’s account balance will be reduced slightly for the extra tax that has to be paid. Since 2008, there’s been tax relief on mergers. They’ve said that this is not a CGT event and we’ll just carry forward, the assets, as if they were always in the same fund, so they’ve extended that relief to June 2020.
I think part of this is to encourage funds that were thinking of merging of actually going ahead and doing it in that time frame. As you know, the Productivity Commission is looking at superannuation has come up with a few reports that says that there are funds that lack scale or lack efficiencies in various areas. They should consider whether they’re actually acting in the best interest of their members.
Ross: I’ve got to say one thing Michael and that is going back quite a number of years, when I was on the board of an industry super fund and we sought to merge with another organization, this is before those Capital Gains Tax exemptions or reliefs were put in place. The merger did not go through simply because of that Capital Gains Tax issue, which is interesting and that makes absolute sense.
And as you say, it’s a technical issue. But the point is, from the member’s point of view, the bigger superannuation fund gets the more efficient that superannuation fund is, simply because the costs are being shared over so many people. That’s the way in which you gain efficiencies and bring down the fees inside superannuation funds regardless of what type of superannuation fund it is.
Michael Rice: That’s true. Moving on, there were a couple of other little things. You remember when the Future Fund was set up in the glorious days when we had lots of surpluses. That was basically a sovereign fund that will hold assets to pay for future liabilities for federal public servants and politicians and judges and the like. That’s because those old defined benefit funds were unfunded: no money was set aside for the liabilities. At the time the Howard Costello government created that fund, they thought that they would be ongoing surpluses so that by about 2020 there’d be enough money in the fund to take care of all the liabilities for the whole of the future.
But of course, from the day it was set up, we’ve heard deficits and no more money has been locked up. The government has extended the lock up for another year because technically from 2020 it could start throwing that money down to pay those benefits.
Ross: What you’re saying is ultimately the government does not have to try and top up that load. It can hold the money in the fund, allow it to continue to accumulate and to rise which means that there’s more money out there to pay the public servants superannuation over the longer term.
Michael Rice: It’s true. The equation works a bit like this: the fund has a target of CPI plus 51/2%. It’s slightly under that but it’s pretty high bar. The government can borrow money at less than 3%, so it actually makes more sense to let the deficit rise because it’s not costing as much as this fund can earn.
Ross: It’s not a bad subject that one as well because that is an absolute key, not only the funding of the government into the future, but also then in the way in which you pay the public servants and their superannuation liabilities over the very long term. I tell you what, there’s been some big issues coming out of the budget. Anybody who’s got an issue can actually join us on worklifemoney.com.au. Send us an email. If you think you’re affected by the budget, we’ll try and get some answers for you as well. One of Australia’s leading independent actuaries, Michael Rice. Always great to have him on the program. Michael, we appreciate your time today.
Michael Rice: That’s great. Thank you, Ross.