Prepare for a superannuation ceiling:
Photo: Anna Kucera
As published in Financial Review Smart Investor on 15 April 2016
by James Frost
Paul Howes, KPMG partner and former AWU national secretary, believes superannuation contribution caps discriminate against women.
For a former Trotskyite, Paul Howes has some pretty damn sensible ideas about how to improve our superannuation system.
He recommends scrapping annual contribution caps, says we need to allow working mothers more flexibility around contributing to super and supports a blanket ban on gearing within superannuation.
However there is one change he would like to make that will see the typical reader of Financial Review Smart Investor a little uneasy.
That is to introduce a lifetime cap on contributions, effectively ushering in a return to the old reasonable benefit limits that were scrapped in July 2007.
Howes, the former National Secretary of the Australian Workers’ Union and KPMG’s current superannuation expert, is both precise but extremely comfortable when discussing one of the biggest open secrets in Canberra.
That the Turnbull government is considering putting a lifetime cap on how much money you can put in your fund.
“The quantum of that cap will require significant work to understand what impact a figure like half a million or a million will have on the budget. That should be looked at but the most important thing is that we move to a lifetime cap,” he says.
For those unfamiliar with Howes, it would be foolish to underestimate him.
The union protégé of Opposition Leader Bill Shorten and author of Confessions of a Faceless Man – his account of the 2010 election that installed Julia Gillard as prime minister – is highly articulate, driven, and knows superannuation inside out.
After all, big four accounting firms don’t just make someone partner because they need a stepping stone on the way to a safe Federal seat in the lower house (Howes aborted a tilt for the Senate in 2013).
Howes has been involved with super in one way or another all his working life, however his most high-profile contribution to date was as a board member and then deputy chairman at AustralianSuper.
During that time he helped steer the fund through a period of enormous change. That included internalisation of its investment management, the first direct investments in multibillion-dollar infrastructure projects and a series of mergers that would make the fund Australia’s largest, with more than $100 billion under management.
He rejected union pushes to mandate investments in waning industries such as manufacturing, saying that while funds should be free to invest in whatever they like, “they must stack up from a return on investment perspective”.
Howes is proud of the contribution he made, despite the position making him a target for elements of the right-wing media who viewed the involvement of unions in super as part of an elaborate conspiracy. Not that the stoushes bother him.
“If you spoke to the people on the left they would have accused me of being a capitalist sell-out running dog; if you spoke to people on the far right of politics I was some kind of terrible Marxist-Leninist.”
He certainly doesn’t begrudge the dozen or so BRW Rich Listers who have used the mandated flows of money to amass vast personal fortunes.
“I don’t think there was ever a meeting between Bill Kelty and Paul Keating about the best way to make a handful of fund managers multi-millionaires but having a healthy funds management sector in Australia isn’t a terrible byproduct of the superannuation system,” he says.
What he does think is a terrible byproduct is when the system is abused.
“If there are areas of the system that are being rorted it’s important that we resolve them but I think the important thing for policy-makers to keep in mind is that we need confidence in the system to make it work for everyone,” he says.
A critical part of ensuring that the system remains stable involves banning super funds from gearing up into property. Howes claims the ability of SMSFs to borrow as much as 80 per cent of the purchase price of a property presents too great a risk.
“I don’t think someone like David Murray would make a recommendation like this if it wasn’t important.”
When the restrictions around super funds gearing into residential property were relaxed in 2007, few would have imagined the amount of interest SMSF members would have in acquiring a largely illiquid asset.
While the gains experienced by SMSF members who geared up into properties in Melbourne and Sydney over the past decade have been prolific – all the more so thanks to the leverage employed – Howes still views the strategy as dangerous.
“My concern about leverage is the risk it presents, and I think there is an unhealthy level of risk attached to gearing. Elements of that system that have potential to fail should be looked at very closely.”
“Overly risky elements should be discounted because a market failure of a particular form of investment, no matter which one, will reduce confidence in the system as a whole and confidence is a prerequisite for a healthy system.”
Despite this, he has next to no faith in the will of either political party to push ahead with one of the most painless and obvious fixes to the system.
TOO HARD TO HANDLE
He believes that any legislation that hints at restricting an Australian’s ability to invest in property will be deemed too problematic and stuck in the too-hard basket.
The other area Howes feels is ripe for improvement is the contribution caps; however with Treasurer Scott Morrison being clear about making the system more equitable, it’s a campaign with significantly more momentum.
Howes believes that the current caps discriminate against women who take time out of the workforce to raise a family and are then hamstrung by the caps of $30,000 or $35,000 when they return.
“Green-lighting lifetime contributions to super in the place of annual limits is a smart and sensible thing to do,” he says. “It recognises the inequality that exists and provides a fix for the different nature in which people are working today.”
The prospect of lifetime caps is unlikely to bring readers much joy. Indeed, the impact of a rumoured lifetime cap of $500,000 on one’s retirement income will be enormous.
If we assume a relatively benign rate of return such as 5 per cent, it will see a fund of this size throw off just $25,000 or slightly more than what the Association of Superannuation Funds of Australia says will fund a modest retirement for one person.
However, ASFA’s definition of what constitutes modest retirement is contentious. For a single woman aged between 65 and 85, it suggests $2 a week for cosmetics, $2.50 a week for periodicals and $10 a week for alcohol are sufficient.
And as for his own investing preferences, Howes is not keen to elaborate, other than to say that spending 20 years in the union movement isn’t the best way to build a fortune.
Pressed on whether he prefers shares or property, however, he is happy to provide the following insight.
“Property, mate. It’s the conservative in me.”