Treasury has released for consultation the Superannuation (Objective) Bill 2023 and Superannuation (Objective) (Consequential and Transitional Provisions) Bill 2023 for feedback, following on from stakeholder engagement earlier in the year on the need to legislate the objective of superannuation to provide a share direction for government, the super industry and Australians (as superannuants).
The proposed objective of super is:
‘to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.’
As part of the explanatory memorandum, the key concepts within the objective of superannuation have been outlined as follows:
1. Preserve savings
‘Preserve savings’ means superannuation savings should not be accessed for purposes outside of retirement income, apart from in exceptional circumstances. This recognises that super receives concessional tax treatment to incentivise saving for retirement and exists as a vehicle to provide income in retirement, not to meet other lifetime costs prior to retirement. When savings are preserved, the compound returns on super help
individuals’ savings to grow over a long period of time and enhance financial security in retirement.
Only in exceptional and unforeseen circumstances, there is an existing legal framework for the early release of super which allows preserved superannuation savings to be released as a last resort for acute and rare incidents, such as permanent and temporary incapacity (including insurance payments), terminal medical conditions, compassionate grounds for specific expenses, and severe financial hardship. This principle is not changed by legislating the objective of superannuation – members will maintain recourse for early access for genuine and exceptional hardship.
2. Deliver income
‘Deliver income’ means super savings should be drawn down to provide individuals with a source of income during their retirement. The objective is not prescriptive about how income is provided to individuals. Some may elect to receive their superannuation as a lump sum from which they can draw income from directly, or choose other financial products which are designed to ultimately provide an income stream during retirement. ‘Deliver income’ can also mean the provision of an income stream via insurance payments, for example when an individual has retired early due to injury or illness.
Superannuation savings belong to the member and the objective is not prescriptive on what must happen with this income, as this is a decision for individuals. It is expected most income will be spent to fund consumption or other costs and services that need to be met during retirement, including leisure, housing, utilities, transport, health and aged care.
The focus on delivering income in the objective makes it clear that super savings are intended to be used in retirement. In this regard, the objective complements core trustee obligations under superannuation legislation: the best financial interests duty, the sole purpose test and the retirement income covenant (for APRA regulated funds only).
In the context of the objective of superannuation, ‘dignified’ denotes a standard of financial security and wellbeing in retirement which allows the person to participate economically and socially in their community. ‘Dignified’ does not mean the same level of income in retirement for all Australians and many Australians will rely on a combination of superannuation savings, government support and private savings to achieve a dignified retirement.
As a subjective concept, ‘dignified’ allows individuals to apply their own values and judgements about what a dignified retirement is to them. Accordingly, community expectations of a dignified retirement may change over time which should be reflected in policy-makers’ assessment of this concept. The inclusion of dignified in the objective indicates there is a certain standard of living in retirement to which the super system should strive to deliver for Australians, alongside Government support.
‘Dignified’ also reinforces the concept of ‘delivering income’ and clarifies the need for trustees to ensure they know their members’ needs and support members to optimise their standard of living in the retirement phase.
4. Government support
As Australia’s super system continues to mature over time, more individuals are expected to retire with larger super balances, but many Australians will continue to rely on government support to substitute or complement their super and private savings to achieve a dignified retirement.
Government support is provided by all levels of government and may include the Age Pension, Commonwealth Rent Assistance, and the Home Equity Access Scheme. While many Australians rely on government support to achieve a dignified retirement, it is noted that not every Australian will draw upon government support, particularly as the super system continues to grow and mature.
The inclusion of Government support in the objective reflects the important link between superannuation policy and government support, and provides certainty to all Australians by articulating the existence of a social safety net. Policy-makers need to consider their interaction in making policy decisions relating to the superannuation.
The inclusion of the concept of equitable in the objective reflects that superannuation policy can have a distributional impact across Australian society, and policy-makers need to be aware of these impacts when making changes to the superannuation system. While equity is a subjective concept, in this context it captures the importance of a system that delivers similar outcomes to people in similar situations and targets support in the super system to those most in need. It does not mean that every policy change to superannuation must be aimed at affecting the equity of the system. However, policy-makers should give appropriate consideration to the system-wide impacts on equity of proposed changes.
‘Equitable’ does not mean that all individuals will receive the same benefit from the system, nor can superannuation address every perceived inequity. Differences in demographic factors and structural inequities can flow through to outcomes in the superannuation system. This includes intergenerational inequity and outcomes for different groups including women, First Nations Australians, vulnerable members and low-income earners. In this context, it also acknowledges the important role of policy action outside the super system to address underlying factors that can flow through to superannuation outcomes.
‘Sustainable’ signifies that the superannuation system should be robust to demographic and economic change and cost-effective in achieving its objective. It is about ensuring superannuation policy meets community needs and expectations, and responds appropriately to external factors that impact retirement incomes. For example, policy-makers will need to consider how superannuation evolves over the long term to reflect the changing needs of Australians due to increasing life expectancies and an ageing population.
Sustainability also reflects the Australian economy’s capacity to support the system and the need for it to be fiscally sustainable for the Commonwealth Government from a budgetary cost from both tax expenditures and government contributions. Superannuation plays an important role in enabling Australians to save for their retirement, reducing reliance on the Age Pension. Tax concessions have a role in incentivising Australians to save for retirement but come at a significant and growing cost to the revenue required to fund services, so they need to be targeted at where they are needed most. Policy-makers will need to weigh up these types of factors when assessing future superannuation policies against the objective of superannuation.
The inclusion of ‘sustainable’ in the objective does not change how superannuation funds invest, or what they can invest in. Trustees must continue to comply with existing legal obligations when formulating investment strategies, particularly acting in the best financial interests of members. The inclusion of sustainability acknowledges that the superannuation system can only deliver on its objective in the long term if it is underpinned by a robust framework and is economically and fiscally sustainable.
The Government has consultation open on this exposure draft until 29 September 2023 to seek stakeholder feedback. You can read more about this exposure draft legislation of the Treasury website:
PS. Both Tim & Aaron will be explore the details of this exposure draft legislation in the Changing Face of SMSF webinar to be held on 21 September 2023 at 11:00am AEST.