Australia's unique private pension system could become a model for governments trying to shed their social security programs.
Or, it could remain a nightmare of complexity.
The jury is out on this triple-taxed, mandatory superannuation system that aims to shift the prime responsibility for retirement income to the private sector. Now, some 75% of all retirees obtain their pension from the government through the equivalent of social security.
On the bright side, the private system - in which employer contributions became mandatory in 1992 - should boost accumulated pension assets to between $400 billion and $500 billion Australian by the end of the decade from about $170 billion today. (In U.S. dollar terms, that's a growth to between $286 billion and $358 billion from about $122 billion today.) Resultant benefits could be significant. Not only should expanded pre-funded pension assets help lighten the government's pension responsiblity - at a time when more of the population approaches retirement - but also they should help raise the national savings rate, expand the capital available for business and ultimately push gross domestic product growth.
In his 1993 "National Saving" report to the government, Vincent W. FitzGerald, executive director of the Allen Consulting Group Pty. Ltd., Melbourne, estimated mandatory contributions should lift national saving by 0.75% of GDP over the next decade.
But the pension system, called superannuation, also has dazzled Australians in its complexity. While many experts are pleased the government has grappled with the problem of increasing ranks of retirees, they lament the oft-changing solution has confused many people.
Said Warren M. Gray, president of Association of Superannuation Funds of Australia Ltd., "since 1983, when (superannuation) benefits began to be taxed, the government has not left the system alone." While "the government has sought to be equitable with its program, the rules have become too complex" for "old and new members. The very thing that should be certain is the very thing that's been tampered with," he said.
And, because the rules are so confusing, too few workers are making needed voluntary contributions. "Additional contributions from employees by our clients are not going up - not because of one event, but because the system has been getting more complex," said Bruce Loveday, managing director, Pyrford International (Australia) Ltd., Melbourne.
But workers' voluntary contributions to superannuation may be necessary if the program is to succeed. According to the "National Saving" report, an 18% contribution rate "looks ultimately .*.*. more appropriate .*.*. as it would over the decades make most Australians independent of the (government's) age pension."
But the government's Superannuation Guarantee Charge, the mandatory program that took effect in mid-1992, falls well below that figure. That program requires employers to contribute 9% of employees' salaries to superannuation when mandatory contributions reach their peak in 2002. (The percentage rises gradually from the current 3% of salary for small companies and 5% for large ones.) In coming years, employees may be required, although this hasn't been decided, to contribute another 3% of salary, bringing total annual contributions to 12% - still well short of 18%.
Thus, as superannuation rules now stand, the government won't be able to exit the retirement business.
And superannuation isn't getting any simpler. To make matters more complicated, prudent man rules, under Superannuation Industry Supervision legislation, take effect in July. Meant to ensure the safety of the pension contributions, the rules provide new fiduciary standards in the overseeing of a superannuation fund. Among the rules: formulate an investment strategy for the fund, give members access to pertinent information and keep trust assets segregated from corporate funds.
According to Towers Perrin Australia, the SIS legislation was composed of seven bills totaling 236 pages of provisions.
A separate issue has centered around the taxing of superannuation. Some observers believe the 1988 advent of triple taxes on superannuation schemes did little to inspire confidence in private pension arrangements. Effectively, in 1983, the government had introduced a benefits tax. Five years later, in an effort to reduce its budget deficit, Canberra unveiled two new superannuation taxes. While reducing the original benefits tax rate, it imposed taxes on contributions (15%) and investment income (15%, but reduced by such deductions as administrative costs and imputation credits to an average of 4% to 5%, experts say).
While the taxes may bolster the government's coffers, they effectively reduce the accumulation of private pension assets.
Triple-taxation also sent a chilling message to employers. Even before taxes threatened to crimp superannuation's asset build-up, employers saw the inexorable mounting of superannuation's liability.
Since the mid-1980s, thanks to union prodding, superannuation plan membership had spread from a perk for highly paid employees to a widely dispersed benefit. By the time compulsory contributions arrived in 1992, upward of 80% of Australian workers stood under superannuation's umbrella. The advent of taxes was just another reason to be fearful about future superannuation liabilities.
Employers naturally have tried to shed their liability. As one way, apparently, a fair number have switched from defined benefit to defined contribution plans.
While it didn't cite reasons, a 1992 survey by Towers Perrin Australia showed the number of defined benefit pension plans fell to 42% of the total in 1992 from 62% two years earlier. Over the same period, capital accumulation (defined contribution) plans climbed to 22% of the total from 14%, and combination plans rose to 31% from 22%.
As the pension burden has risen, some companies have found creative solutions. In 1990, CSR Ltd., Sydney, combined its defined benefit and defined contribution plans into one A$750 million plan. (The defined benefit plan had closed to new members in 1987.)
Once the plans were joined, the defined benefit plan's surplus was used to fund employer contributions to the defined contribution fund. "There were considerable tax benefits in doing this," said Mr. Gray, who also is secretary of the CSR staff superannuation fund. Fully funded schemes are exempt from superannuation's contributions tax.
In 1992, the superannuation plan of the Broken Hill Proprietary Co. Ltd., Melbourne, combined its defined benefit and defined contribution plans to form one A$2 billion fund. (Formally, Haematite Properties Ltd. is the name of the trustee of the fund for BHP workers.) According to Colin Wirth, group manager superannuation at BHP, both funds are fully funded, and contributions come from the surplus assets.
However, in BHP's case, taxes and mandatory contributions weren't the motive for combining the funds. Instead, Mr. Wirth cited a desire to "increase equality" of the funds. "We had had two funds for two different classes of workers ... but we didn't want one set of things for one group and another for another group ... we wanted one umbrella fund for all workers."