Are generous defined benefit super balances in Govt’s sights?

Just weeks after the Government’s announcement around the $3 million cap on superannuation 15% tax concessionality, Treasury is understood to be examining the situation around defined benefit superannuation funds.

Financial Newswire has been told that superannuation fund executives are concerned at suggestions that Treasury has been examining the perceived advantage being enjoyed by members of defined benefit funds, the majority of which have been closed to new members of many years.

The irony, however, is that Commonwealth public servants and members of the Senior Executive Service in particular have long been regarded as major beneficiaries of defined benefit arrangements.

Concerns about the rumoured Treasury examination has come as pre-Budget submissions have urged that the number of people with existing high superannuation account balances should not be used by the Government as an excuse not to lift the concessional contribution cap.

Major accounting firm, BDO has renewed calls for the Government to use the Budget to replace the annual superannuation contribution cap, currently sitting at $25,000, with a lifetime cap.

In doing so, the submission pointed to the number of people who had obtained a “distortional advantage” from more generous caps but said this should not stand in the way of the current population of workers.

“The level at which the concessional contributions cap are currently set does allow individuals to appropriately save for their own retirement within the current superannuation system. In particular, the contributions cap restricts them from saving for their retirement during their later years of working, generally in which such saving is financially affordable for them,” the submission said.

“Whilst many taxpayers save for their retirement progressively during the years that they are earning income, it is simply not affordable for the vast majority of the taxpaying community to do so. With the costs of rent and mortgages, raising and educating children taking almost all or most of their funds during their early and middle income producing years, most of them do not have the extra funds to put into retirement savings until towards the end of their working lives. Over the last 10 years, the concessional superannuation contribution cap for older workers has reduced by three quarters from $100,000 p.a. to $25,000 p.a.”

“The previous Government’s Retirement Income Review indicated that there are a small number of retirees that were able to build up substantial balances in their superannuation accounts during the previous years when there were no or substantially higher contribution caps. There is a perception that the reduction of the contribution caps is in some way rectifying this anomaly. However, the cutting of the contribution caps to such low levels now does nothing to mitigate the possible policy defects that allowed the small number of retires to take inappropriate advantage of the superannuation system in the past.”

“BDO submits that the level at which the concessional contributions cap is set should be reviewed in light of evidence (either to be collected or, if already collected, to be made public) on the adequacy of such savings for a range of scenarios. Such a review should have regard to the effect of capping on the current population of workers and not based on the people who have obtained a distortional advantage out of the superannuation regime because of the previous more concessional rules.”

“BDO suggests the best alternative would be to replace the annual contribution cap rules with lifetime concessional contribution cap including appropriate transitional arrangements. The lifetime cap number should be meaningful to allow a person and their family to be self-sufficient in retirement.”