Inequality will rise if government blocks superannuation increases, actuaries warn

If superannuation rises are blocked inequality will rise further, Rice Warner has warned.

If superannuation rises are blocked inequality will rise further, Rice Warner has warned. Photo: TND

Boosting the superannuation guarantee (SG) to 12 per cent by 2025, as currently legislated, would help stem rising inequality and help make up for the slump in wages which is delivering increasing wealth to business people and investors, research by actuaries Rice Warner has found.

Australia, the report found, had the lowest level of inequality of 12 major countries with the mean, or average, level of wealth 2.1 times the median level. The median is the line at which half the population sit above and below.

But the wealth gap is under pressure, with the wages share of the economy falling from from 60 per cent to 52 per cent over 40 years. Given wage rises  seem likely to remain minuscule in the current environment, Rice Warner said the scheduled rise in the SG, currently under review by Treasurer Josh Frydenberg and PM Scott Morrison, was important in holding back inequality

The scheduled SG rise, starting at 0.5 per cent in July, “would increase retirement benefits for the lowly paid – and give them more dignity in their old age,” the report found. Many of these people are  “struggling now,” Rice Warner found.

The SG rise would not benefit high income earners as “they generally salary sacrifice up to the maximum concessional contribution of $25,000 a year already.” But it would benefit middle Australia, the people that lost out when the government tightened the means test for the age pension a few years ago.

Where the growth is

Recent figures from regulator APRA showed that not-for-profit superannuation funds are continuing to grow in size while the for-profit sector and self-managed super fund balances fell or were flat.

Over the 12 months to December 31, the total of balances in not-for-profit industry super funds rose by 0.015 per cent  to $724.66 billion while the figure for public sector funds was virtually flat, up 0.01 per cent to $669.93 billion. For-profit retail funds, however, saw balances dwindle 5.5 per cent, to $593.92 billion, while SMSFs declined slightly by 0.1 per cent, to $764.2 billion.

SMSFs, which have only 7.4 per cent of total super fund members, have for some years been the largest segment but have declined relatively in recent years as industry funds have grown. Overall there was a 2.2 per cent increase in the value of total superannuation assets under management to “$3,043 trillion over the 12 months to 31 December 2020 as financial markets recovered throughout the second half of this period,” APRA said.

Research from the Australian Institute of Superannuation Trustees, which represents the not-for-profit sector, found that those funds had performed  significantly better than the retail sector over the last five years, with returns 23 per cent higher. Profit-to-member super funds, on average, outperformed retail funds by 23 per cent.

Not-for-profits, which include, industry, public sector and corporate funds, returned an average of over 7 per cent a year over five years while the retail sector returned 5.7 per cent.

“Outperformance was greatest among industry funds, where annualised five year returns were, on average, 7.6 per cent, or one third higher than retail funds. This difference equates to an industry fund member with a super balance of $100,000 at the start of 2016, being about $13,000 better off at the end of 2020,” AIST’s research found.

As a result the average industry fund member’s super balance would have grown to about $146,000, compared to $133,000 for a retail fund member starting with the same balance, said AIST.

To help weed out underperforming funds the government’s Your Future Your Super legislation currently before parliament should measure returns from all funds, not just default funds, said AIST CEO Eva Scheerlinck.

“A one or two percentage differential in annual investment returns has a huge impact on the financial outcome for members in retirement,” Ms Scheerlinck said. “It should be legislated that every super product is subject to annual performance testing. Any exclusion simply lets underperforming funds escape scrutiny and eats away at member returns” she said.

The shrinkage of the asset base of retail super funds was an ongoing result of the findings of the Hayne banking royal commission which called out major misconduct in the sector, noted Ian Fryer, research director with Chant West.

The decline in SMSF assets  was probably an indicator that some members had moved out of the sector after losing confidence in their ability to manage their own money during the pandemic share market collapse, Mr Fryer said.

The New Daily is owned by Industry Super Holdings

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