The soul and purpose of Australia’s superannuation system is to be laid bare. As we move towards legislating the objectives of superannuation, we would do well to stop and consider broadening our focus to also consider the public policy objectives of our retirement income system.

Trust and confidence in the superannuation system has been eroded. Continued legislative tinkering over the past decade or so has created an accurate perception of uncertainty.

Therefore, it should come as no surprise that David Murray’s Financial System Inquiry (FSI) has recommended enshrining the objectives of the superannuation system in statute, with the intention of creating stability, certainty and hopefully trust and confidence in the system.

The continued growth in the value of assets within the system has attracted attention from many corners, resulting in persistent suggestions that the superannuation system could be used for anything from funding home deposits for first homebuyers to funding healthcare and investing in infrastructure.

However, most importantly there has been uncertainty about the role of superannuation in relation to the age pension, and concern about it being a vehicle for concessionally taxed (i.e. publicly funded) estate planning. Settling on the public policy purpose of the system therefore has merit. However, deciding to define the purpose is one thing – defining it is something much more difficult.

Sole purpose test

So then, why do we need an objective for superannuation, when we already have one in the sole purpose test? Section 62 of the SIS Act does indeed provide that a superannuation fund is maintained solely for core and ancillary purposes which generally relate to the provision of benefits for members’ retirement or to other beneficiaries on death.

While the test is actually interpreted as a dominant purpose test, it does provide a reasonable basis for understanding an important part of the superannuation system. The sole purpose test defines the purpose of each of the superannuation funds within the system, yet tells us nothing about the role of the superannuation in the context of our broader retirement income system.

Retirement income policy

A fundamental distinction needs to be made between the superannuation system and the retirement income system. The retirement income system is broader than the superannuation system and should be considered as consisting of the “three pillars” of the age pension, occupational pensions (superannuation funds and retirement savings accounts), and private savings.

The objectives of each pillar of any nation’s retirement income system should operate in a complementary fashion towards meeting the overarching objectives of the retirement income system. Defining the objectives of only one pillar of the retirement income system in isolation is difficult at best, and ultimately compromised without clear objectives for the retirement income system.

Public policy objectives should be directed towards the retirement income system more broadly. This simply reflects that the most important aspects of the retirement income system relate to the systemic integrity and balance between the components (three pillars) and the functions each pillar is intended to fulfil.

. . . to substitute or supplement . . .

The Assistant Treasurer has announced intentions of legislating (in a separate Act of Commonwealth Parliament) the objectives for the superannuation system which were proposed by the FSI. The proposed primary objective of the superannuation system is:

“To provide income in retirement to substitute or supplement the age pension.”

How very diplomatic. While this proposed primary objective captures a generalised objective of the system, it doesn’t provide any direction or certainty as to the balance between the pillars of the retirement income system. There is actually an inherent conflict between substitution and supplementation.

Substitution implies that the policy settings for the system should be formed to replace the age pension, with the outcome being that the savings rate and tax concessions will need to be higher.

Supplementation implies that the objective of the system is to provide income in addition to the age pension, and accordingly requires a lower savings rate and the removal of means testing creating a universal age pension.

There is naturally some uncertainty as to the actual ability of any individual to save for retirement,  hence the need for a state guaranteed aged pension as a safety net. Yet this doesn’t mean that an objective can’t be defined to guide policies for those who do have a typical employment life cycle. This inherent uncertainty built into the wording of the objective devalues the utility of defining an objective in the first place.

Inclusion of the intention of supplementing the means tested age pension creates a degree of arbitrage and uncertainty in considerations of adequacy. Where an aged pension is universal (hence not means tested), the objective of the superannuation system can clearly be directed towards supplementing the aged pension, with mandatory contribution rates and prospective limits of tax concessions formed accordingly. The function of the superannuation system would then be framed at bridging the gap between an adequate and a comfortable retirement.

Including supplementation of the age pension in the objective of the superannuation system makes a category error, in that the means testing for access to the age pension is certainly a critical aspect of the retirement income policy environment, yet does not fall within the ambit of the superannuation system.

The central problem is uncertainty as to the extent that the occupational pillar of our retirement income system (the superannuation system) is also intended to fulfil functions of the first pillar, the aged pension. In determining to define public policy objectives, we have an opportunity to build trust and certainty. However, to limit our focus to setting objectives to the superannuation system is a missed opportunity to define the objectives of our retirement income system.

Regards

Jonathan Steffanoni
Principal Consultant, Legal and Risk

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