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Change super at our peril, says Bill Kelty

by: KATHERINE JIMENEZ and ANDREW WHITE
From:The Australian
September 29, 201212:00AM

Source: The Australian


BILL Kelty - a founding father of Australia's superannuation system - has warned the Gillard government to stay away from tax changes to super in its search for savings and new revenue to meet the pledge of a budget surplus.

Mr Kelty said further changes to superannuation risked undermining confidence in the system at a time when years of volatile markets and low earnings had already made it vulnerable.

" I think you've got to be very careful about changing the tax system and increasing it because there is increased uncertainty," Mr Kelty told The Weekend Australian.

"These are decisions for a generation and when you start tampering with it then you don't tamper with it for the day, you tamper with it for a generation.

"So you don't want to tamper too much with that and say in addition to the relative decline in earnings, what we are going to do is impose another adjustment process, that is a higher level of tax on it," he said. "That, I think, would be a very silly thing to do."
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The federal government has been canvassing the industry for potential savings to meet its pledge of a budget surplus for 2012-13 amid collapsing tax revenue and a raft of spending programs in health, welfare and education.

Speculation about where the cuts will fall include lowering the taxable income level at which higher concessional tax rates for super contributions kick in, and reviewing tax breaks on borrowing to buy property through self-managed super funds.

But the prospect of a bigger tax take from super comes amid legislative changes that have sparked a wave of mergers among the increasingly powerful industry funds and volatile markets that have discouraged people from making contributions.

Mr Kelty was secretary of the ACTU and worked with federal treasurer Paul Keating in 1992 to usher in compulsory superannuation.

He said governments should be "very careful" about changing or increasing taxes on the superannuation system.

If there was "continuous tampering ... in an environment of low earnings and uncertainty, then that does undermine superannuation".

"Every international report looks at Australia's superannuation system and they say it's one of the best in the world.

"When you want to tamper with a system that is already the best in the world, then you do it at your own peril."

Industry consultant SuperRatings said last week that super fund balances were only now approaching levels reached before the global financial crisis.

The Organisation for Economic Co-operation and Development released a report this week finding Australia's $1.4 trillion superannuation system had among the best average returns - 4.1 per cent net of fees - in the developed world last year.

But it also found that the average allocation of 50 per cent of assets to equities increased the risks of those funds.

Garry Weaven, the chairman of the union-linked Industry Funds Management, backed Mr Kelty's call. "There is an awful lot of regulatory change around the edges, which on balance a lot of it is probably causing more uncertainty than fixing things," he said.

"In that environment, and combined with the fact that markets have been terrible since 2008 - and will continue to be volatile - everyone has to be very careful about creating any further negatives and uncertainties around the industry."

Mr Weaven and his industry funds have become increasingly powerful in the superannuation system, accounting for about a third of balances, or $450 billion in funds thanks to their links with the trade union movement and low-cost management.

Ian Silk, the chief executive of the $43bn AustralianSuper industry fund, has declared his intention to become the "sixth pillar" of the financial system, alongside the big four banks and AMP.

The fund is on track to reach $100bn in funds in the next five years, rivalling the longer-established AMP as the largest super manager in the country.

It is using its growing scale and low-cost mantra to drive down fees in the once lucrative funds management and stockbroking industry.

Last year, the fund completed a merger with Western Australia's Westscheme and is in the process of taking over super services for computer giant IBM Australia.

It and other large funds are awaiting changes to capital gains tax rules to begin another round of mergers that will reduce the number of industry funds from 56 to an expected 30 giants within three years.

But the funds are also seeking to broaden their appeal and want members outside their traditional industrial base.

Legislative changes to entrench low-cost default superannuation funds through the MySuper reforms next year have sparked fierce competition with profit-driven retail funds.

Millions of inactive funds that still pay fees to industry funds are also set to be eliminated under so-called auto-consolidation rules overseen by the Australian Taxation Office, potentially underming the size and cost base of the industry funds.

The Association of Superannuation Funds of Australia chief executive Pauline Vamos said its message to the government was that "tinkering with fundamentals of the system does destroy confidence".

"Super has already done its fair share over the last couple of years with the reduction in co-contributions, the reduction in contribution caps, the excess contributions tax ... the higher tax on people who leave Australia and take out their super," she said. "So a lot of these measures have actually provided the government with millions of dollars in revenue."

The government has indicated it is looking to raise billions of dollars out of Australia's super industry as a way of funding new policy measures such as education and disability reforms.

Most of the speculation is centred on the high-income earners and self-managed super funds - the fastest-growing sector within Australia's $1.4 trillion market - as being the hardest-hit areas.