Top ten problems with our super system, and how to fix them

Under the current system, a consumer has no clear path to find an independent adviser. Even I don’t know where to go to find a list (if it exists) of all financial advisers that are truly independent of financial organisations and commission incentives, and who charge a fee.

How to fix it. Once and for all, reward the independent advisers with a special category. An adviser can use the “independent” term when the adviser is not employed or aligned with a financial organisation, can be paid without having to recommend a financial product, and does not receive volume bonuses when recommendations for a certain product reach a certain level. Alternatively, we can return to the old way of giving out financial services licences, where you had advisers who provided financial advice, and dealers who sold financial products. And then require all advisers who don’t have the “independent” tag to verbally say to prospective clients, “I am not an independent adviser”.

8. A little knowledge is very dangerous

The super industry is professing to be looking after the retirement needs of Australians. I beg to differ. Certainly, they are investing super contributions and accumulating super savings, but superannuation is a concessionally taxed investment vehicle with the sole purpose of providing for retirement.

So, we’re talking about tax, and retirement. The super industry (including the government) have sidelined the one profession who knows about tax - the accountants. Accountants are also the key point of contact for Australians when considering retirement.

Besides accountants and fee-based advisers providing strategic retirement advice, very few players in the super industry understand the non-super tax rules in retirement, the age pension rules, and the relationship between the super rules and the age pension.

Rather than fighting among themselves, the super industry needs to look ahead to the next ten years for what fund members need if they want to remain relevant to super fund members.

How to fix it. The expert panel running the super review should start talking to the organisations who have the most to do with prospective retirees, including government-funded organisations, such as NICRI and the Financial Information Service. Clearly, the accounting bodies should be involved and the associations representing retail investors and seniors as well. Also, see Problem 2.

The remaining two problems are more specific, but they apply universally to Australians:

9. Co-contribution for all

The co-contribution scheme is one of the more innovative superannuation policies. The government puts extra tax-free money in an individual’s super account if the individual makes a non-concessional (after-tax) super contribution.

The rationale behind the scheme is to encourage those on lower and middle incomes to save for retirement. Depending on how much income you earn, you can receive up to $1,000 a year (for 2009/2010) as tax-free income paid directly into your super fund when you make an after-tax contribution of up to $1,000.

Currently, full-time carers and parents rearing children full-time cannot access the scheme. A scheme, with an objective of targeting women, has failed because the women who could benefit the most are not eligible.

How to fix it. The co-contribution scheme should be available for all Australians of working age and older, and up to the age of 74 (rather than 70). Also, see problem 4.

10. Relying on the goodwill of employers: salary sacrifice

If you’re working under an industrial award, your remuneration is typically your wages plus 9 per cent super. If you negotiate a salary, your salary package amount usually includes your employer’s superannuation contribution, unless you agree otherwise. Your employer then calculates SG on the basis of the cash component of your salary, which means that because you have a salary sacrifice arrangement in place, you lose some of your SG entitlements. In some instances, an employee can negotiate that the cut in SG entitlements doesn’t occur but the employee is relying on the goodwill of the employer for this to happen.

Some industrial awards expressly require that SG contributions be calculated on your full salary, before deducting any salary-sacrificed contributions that an individual chooses to make.

How to fix it. Expressly legislate that any SG calculations are calculated on the full salary, before deducting the salary sacrificed contributions.