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Superannuation and retirement 

At last a Budget with minimal changes to superannuation


The 2022/23 Budget only includes one widely applicable change to superannuation - an extension of pension minimum drawdown relief (see below for details). This year of respite will be welcomed by an industry still struggling to digest a long and complex pipeline of changes implemented in recent years while also preparing for previously announced initiatives taking effect over the next couple of years (as outlined below).
 

The lack of change also supports the Government’s desired positioning ahead of the election as the party that can be trusted not to meddle with the superannuation system – in particular, ruling out any adverse tax changes such as some of the policies that Labor took to the previous election.  
 

But is it a missed opportunity?


While some stability is welcome, there are some changes Mercer would like to have seen – in particular some concrete measures to work at reducing the gender super gap and to improve the fairness of the super tax concessions regime – see our feature article: Gender superannuation savings gap – she’ll be right?

 

2022/23 Budget change - Extension of pension drawdown relief


The Budget includes a further 12-month extension of the COVID-19 temporary relief under which the minimum superannuation pension drawdown rates have been halved for the three years to 30 June 2022. 
 

As part of its response to the coronavirus pandemic in early 2020, the Government reduced the superannuation minimum drawdown rates by 50% for the 2019‑20 and 2020‑21 income years. Last year the Government extended the reduction to 2021-22 and it has now undertaken to provide a further 12 months extension, until 30 June 2023.
 

The minimum drawdown requirements determine the minimum amount of a pension that a retiree has to draw from their superannuation in order to qualify for tax concessions. The Budget papers indicate that the extension recognises the continuing volatility of financial markets and will allow retirees to avoid selling assets in order to satisfy the minimum drawdown requirement.

Federal Budget

Mercer’s Perspective

 

The argument for an extension of the drawdown relief seems fairly thin given the recovery in share markets since the pandemic induced fall in early 2020.
 

However, volatility has certainly increased since the Russian invasion of Ukraine and the extension of the drawdown relief gives the Government the opportunity to promote itself as the party that will best protect the interests of self-funded retirees during the election campaign. It also avoids the potential otherwise, for the scheduled expiry of the current relief at 30 June 2022, to be portrayed (albeit unreasonably) as an adverse change.
 

It will be interesting to see if Labour commits to the same extension if it wins the election, as the Coalition has framed this measure as dependent on it being returned to Government. 

 

 

Implications for super fund trustees

  • Trustees will need to prepare for the extension, noting that the required changes to regulations will not be made until after the election and may be dependent on the outcome.
  • Trustees will be familiar with the member communication requirements and administrative impact from their experience over the last three years - and will have more time to prepare than last year, when the extension was announced on 29 May and the regulations were not amended until late June (though regulations are unlikely to be amended much earlier this year given the expected election timing in the second half of May).

Implications for employers

  • No implications

Implications for individuals

  • The additional flexibility will be welcomed by retirees, particularly those who have sufficient resources outside super to meet their current living expenses and so can afford to take a lower drawdown in order to maintain a higher amount in their earnings tax exempt superannuation pension.

 

 

2022-23 Budget changes – Minor superannuation and retirement measures

 

The Budget also included two narrowly applying superannuation-related measures and a change to reduce disincentives for pensioners continuing some work during retirement:

  • NSW Police: The Australian Government is providing transitional funding (in the order of $2.5 million) for the equal sharing of the costs of reimbursing New South Wales police officers who incur an additional tax liability from making voluntary superannuation contributions that exceed the statutory cap on concessional contributions. Funding covers liabilities incurred from 2016-17 to 2019-20 with reimbursements made in arrears over a five-year period. The funding will also contribute to the cost-sharing of any fringe benefits tax that results from reimbursing police officers in these situations.

  • Future Fund: The Government will amend the law to exempt wholly owned Australian incorporated subsidiaries of the Board of Guardians (Future Fund Board) from corporate income tax, recognising the Future Fund Board itself is exempt from income tax. The measure will have effect from the subsidiaries’ first income year after Royal Assent of the enabling legislation.

  • Working pensioners: The Government, at a small projected cost ($1.9 million over five years), will extend the pension suspension period and Pensioner Concession Card access period to two years for pensioners that receive a nil payment due to their partner’s employment income or working hours, where this has also resulted in the suspension of their partner’s pension for up to two years.

Upcoming super changes already announced or legislated

 

As noted above, while the 2022-23 Budget left super relatively untouched, a substantial number of previously legislated or announced initiatives are scheduled to take effect over the next couple of years. A selection of these measures is outlined in the tables below.
 

1 July 2022 changes already legislated

Some important changes to superannuation will occur from 1 July 2022 under current legislation, including a number of measures announced in last year’s Budget and legislated since then. 

 

 

Change from 1 July 2022 (already legislated)

Superannuation Guarantee (SG)
  • SG rate to increase from 10.0% to 10.5% (scheduled to increase by 0.5% each year to 12% from 1 July 2025)
  • The $450 minimum monthly earnings threshold to be eligible for SG contributions will cease to apply
  • The SG Maximum Contribution Base will increase from $58,920 per quarter (equivalent to $235,680 per year) in 2021/22 to $60,220 per quarter (equivalent to $240,880 per year) in 2022/23

Work Test for voluntary superannuation contributions
  • Work Test to be removed for voluntary employer, non-concessional and salary sacrificed superannuation contributions for those aged 67 to 74
  • This measure also extends the non-concessional superannuation contributions bring forward rule up to age 74
  • Those aged 67 to 74 will still need to meet the Work Test to be eligible for a tax deduction for personal contributions
  • Super funds will no longer have to apply the work test at the time they accept a contribution (or receive a deduction notice)

Downsizer contributions
  • Eligible individuals aged 60 or more (currently 65 or more) can choose to make a downsizer contribution into their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home

First Home Super Saver Scheme (FHSSS)
  • The maximum amount of voluntary contributions that can be released under the FHSSS to increase from $30,000 to $50,000

APRA Performance Test

  • The annual investment performance test, first applied to MySuper products last year as part of the Your Future Your Super reforms, extends to Trustee Directed Products from 1 July 2022
  • APRA is to complete the 2022 Performance Tests by 31 August 2022, based on returns to 30 June 2022

Retirement Income Covenant
  • A new obligation for superannuation fund trustees (other than SMSFs) to develop, implement and regularly review a Retirement Income Strategy for members who are retired or are approaching retirement

Changes previously announced but not yet legislated

Superannuation and retirement-related measures previously announced but not yet legislated include: 
 

Financial Accountability Regime (FAR)
  • A Bill is currently before Parliament to establish FAR, which will extend the Banking Executive Accountability Regime (BEAR) to all APRA-regulated entities – including superannuation trustees and related entities - as recommended by the Financial Services Royal Commission
  • Proposed to apply to the superannuation sector  from the later of 1 July 2023 or eighteen months after FAR commences

Compensation Scheme of Last Resort (CSLR)
  • A package of Bills is currently before Parliament to establish a CSLR as recommended by the Financial Services Royal Commission

New financial reporting and auditing obligations for super funds
  • A Bill is currently before Parliament to align super fund financial reporting and auditing obligations with those that apply to public companies and registered schemes.
  • Proposed to apply for years of income beginning on or after 1 July 2023

Non-arm’s length expense (NALE) provisions
  • The Government recently announced it ‘intends to make legislative changes to ensure the non-arm’s length expense provisions operate as envisaged’.
  • The announcement followed intense lobbying about the ATO’s interpretation of the NALE provisions, whereby a minor breach could cause all of a fund’s income to be taxed at 45%.

Two year commutation option for legacy pension products

 
  • Measure announced in the 2021/22 Budget but details still being developed
  • To allow retirees to exit (fully commute) certain legacy retirement pension products, together with any associated reserves, for a two-year period

Improving the Pension Loans Scheme (PLS)

 

A Bill currently before Parliament includes changes announced in the 2021/22 Budget which would, from 1 July 2022:

  • Permit eligible participants in the PLS to access up to 50% of the maximum annual Age Pension in one or two lump sum advances each year 
  • Introduce a new “No Negative Equity Guarantee”

 

 


Superannuation gender gap – she’ll be right?

 

The Women’s Budget Statement released with the 2022-23 Budget recognises the significance of the current gender gap in pay and superannuation savings for women.  In particular, it acknowledges the impact of prolonged historical, lower female workforce participation rates and adverse earnings differentials has led to markedly lower current median super balances for women compared with men – the gap peaking at almost 35% between the ages of 50-54 and still at 23.4% for the retirement age bracket of 60-64 (based on 2018-19 data). 

 


Based on the Women’s Budget Statement, the Government’s overall assessment is that “the most effective way to reduce gender gaps in retirement is by reducing them in working life.”


The Government calls out a number of contributing factors to the superannuation savings gap including: 

  • the pronounced differences in average earnings between men and women upon entry into the workforce and how that tends to grow rather than diminish over time;
  • the impact of child caring responsibilities on mother work patterns and labour participation over a working life;
  • reduced education and employment opportunities for women.


Accepting the problem exists and needs to be better addressed, the Government points to a range of measures it supports (most of which have been previously announced or implemented), to reduce the superannuation gender gap over time by:

  • reducing barriers to women’s workforce participation and increasing women participation rates – including through:
    • improved access and provision of childcare – primarily as announced in previous Budgets (total current expenditure of $10 billion in 2021/22) with some minor additional allocation in the 2022/23 Budget to services in remote and regional areas ($19.4 m over five years!)
    • paid parental leave scheme changes to increase flexibility of existing measures under an Enhanced Paid Parental Leave (PPL) scheme ($346m more over five years) – by integrating the current 18 week Parental Leave Pay with the two weeks Dad and Partner Pay schemes for families.  There are also some positive adjustments to the associated income test to access the scheme that has been announced, where a mother is a higher income earner and their partner has little or no income.
       
  • narrowing the gender pay imbalance - without much detail on how this might be accelerated in practice in the private sector other than announcement of additional funding to the Workplace Gender Equality Agency (WGEA) – a statutory agency tasked with promoting and improving gender equality in workplaces. Large employers (non-public sector employers with more than 100 employees) are required to report annually against standardised gender equality indicators and WGEA provides employers with insights on their results, including performance benchmarking against industry peers and an online database;

  • maturing of the super system, with past measures targeted to support women’s economic security in retirement.  One of those measures announced in the 2021/22 Budget and now legislated is removal of the $450 per month income threshold for Superannuation Guarantee contributions from 1 July 2022.  Other 2021/22 Budget measures legislated to operate from 1 July 2022 and expected to improve the super gender gap (assuming women are more likely to make and have capacity to make contributions later in working life) include:
    • removal of the work test for non-concessional and salary sacrifice contributions to super for ages 67 to 74; and
    • reduction of the eligibility age for downsizer contributions from age 65 to 60.
       
  • other previous measures including:
    • the low-income super tax offset;
    • contribution splitting between partners;
    • protecting super from erosion by fees and insurance premiums (low balance account restrictions - Protecting Your Super caps and rules);
    • five year catch up of unused concessional contributions caps for saving balances under $500k;
    • more transparency on family superannuation assets in family law property splitting proceedings with the ATO to provide information direct to the Courts as required.

Mercer’s Perspective

 

A problem cannot be addressed unless it is recognised and understood.  The Government has called out the significance of the issue of the superannuation savings gender gap and the range of measures it considers are sufficient to address and reduce the problem – over time. 
 

However, these measures run the risk of proving inadequate over the long term. Also for the generation of women in the mid to later stages of their working life, those measures will not come soon enough to make a significant difference to their position at retirement – through no fault of their own.  It is not enough to simply acknowledge their predicament as a by-product of history and move on.
 

In Mercer’s view, there is much more that could be done now to improve the effectiveness of the super system to build sustainable and equitable retirement savings for men and women and in doing so tackle head on the gender super gap for women at all stages of their working life.  We suggest consideration of:

Fixing superannuation concessions by:

  • increasing the income limit to receive the Low Income Super Tax Offset (LISTO) from $37,000 to $45,000;
  • increasing the maximum LISTO payment from $500 to $710 – equivalent to tax paid on employer super contributions of 10.5% on an income of $45,000;
  • introducing a new LISTO payment of 15% of concessional contributions for individuals under the tax free threshold;
  • increasing the carry over period for unused concessional contributions from 5 to 10 years;
  • introducing a government superannuation contribution of $4,200 to all primary carer’s in the first year of a child’s life

 

Funding the above and rebalancing super savings away from higher income earners  (predominately men) towards lower income earners (predominately women) by:

  • requiring all individuals with super balance in excess of $5 million at age 70 or 75 to withdraw those savings out of super;
  • apply minimum draw down rules to all superannuation assets
  • apply a common 15% tax rate on all investment income (10% on realised capital gains) – treating super and retirement savings the same and removing the necessity for the pension transfer balance cap
  • removing tax on death benefits 

 

For more on these proposals please refer to the Mercer thought leadership paper:

Mercer, Fixing super tax concessions – A fairer system for all Australians February 2022.

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