Legislating the objective of superannuation gathers momentum

Legislating an objective for superannuation is a priority of the new Federal Labor Government, with the draft objective released by the Treasurer on 20 February 2023. Consultation on the objective is open until 31 March 2023.  With this background in mind, how will the superannuation industry be impacted by a legislated purpose for superannuation? More importantly, what should the primary objective be? And is the proposed approach of embedding the objective in legislation appropriate?

The idea of legislating a superannuation objective has been vigorously debated ever since it emerged as a recommendation of the Financial System Inquiry in 2014.

Is the purpose of our superannuation system to simply save for retirement, or to help Australians save for their first home? Can or should it be drawn down on in circumstances other than to fund retirement, for example, in financial hardship or permanent disability, or to cover the costs of living expenses in a pandemic or epidemic? Should notions of dignity, equity and sustainability play a part in its purpose? 

The argument for legislating an objective for superannuation is that it will improve Government accountability and transparency in policy development, by giving successive Governments what will hopefully be clear non-derogable guidelines to inform future superannuation policy.

In this article, we explore the potential impacts a draft objective will have on the superannuation industry, and what benefits legislating an objective may bring.

Key Takeaways

1. The Federal Labor Government has proposed a legislative objective for superannuation, which encompasses notions of dignity, equity and sustainability, to improve accountability and transparency in superannuation policy development.
   
   
2. It is unclear whether the objective is intended to complement and be separate to superannuation trustees’ legal and regulatory duties, or whether superannuation trustees will have a new revised duty to act in the best financial interests of their members having regard to the filter of the superannuation objective.
   
   
3. Subject to the details and how the legislation is framed, a legislative objective for superannuation has the potential to guide superannuation trustee’s investment decisions into more equitable and sustainable assets and that would appear to be the Treasurer’s intention.
   
   
4. Concurrent with the notion of an ‘equitable and sustainable’ superannuation system, the Treasurer has announced that from 2025‑26, Australians with over A$3 million in superannuation will be taxed at a concessional tax rate of 30% (applied to future earnings) – an adjustment from 15%. The concessional tax rate of 15% will continue to apply for the significant majority of Australians with balances below A$3 million (which amounts to almost 99.5% of the superannuation population).

What should the primary objective of superannuation be?

It may be surprising to learn that our more than A$3 trillion superannuation sector does not have a clear objective enshrined in legislation, however Government consultation is now open on the Government’s following proposed legislative objective for superannuation:

“The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”

The Government have focused this objective on ensuring that Australians have savings and income for retirement, which would appear to limit the Government’s future ability to allow draw downs on superannuation to fund things other than retirement e.g. home loan deposits or assistance with cost-of-living expenses. In other words, there should be little appetite for early release of superannuation in Australia.

A focusing question based on this objective will be how dignity, equity and sustainability are interpreted by the superannuation industry. The Consultation Paper provides some guidance on how these terms are defined but it is clear that it will open a ‘Pandora’s box’ of issues regarding legal interpretation, and the scope of any revised duties placed on the shoulders of superannuation trustees when it comes to exercising their investment powers in the best financial interests of their members. The executive summary of the Consultation Paper itself makes it explicitly clear that the Treasurer is keen to “leverage greater superannuation investment in areas where there is alignment between the best financial interests of members and national economic priorities, particularly given the long-term investment horizon of superannuation funds.”

We’ve previously considered the scope of a superannuation trustee’s duties as part of the Australian chapter we contributed to a global report – A legal framework for impact – and concluded that institutional investors such as superannuation funds can use their power and influence to generate a positive sustainability impact. It’s possible that legislating an objective for superannuation will further enhance the ability of trustees to consider broader environmental and societal goals, including nation-building projects.

We unpack how the superannuation industry may interpret the proposed legislative objective and its implications below.  

How will the superannuation industry be impacted by a legislated purpose for superannuation?

Superannuation trustees are currently subject to various statutory and general law duties, including to act in the best financial interests of beneficiaries. These duties need to be complied with, whilst accounting for risks to the ‘sustainability’ of retirement incomes, such as the financial risks of climate change.

Under the proposed legislation, superannuation trustees may feel compelled to make sustainable and equitable investments having regard to the proposed statutory objective, despite the Treasurer’s comment that “the objective is not intended to guide the regulation of trustees’ conduct”. Whilst some major superannuation funds have already embedded environmental, social and governance (ESG) standards into their investment decisions – think investments in renewable projects and affordable housing – other trustees may decide to invest in nation-building projects to align their investments with the proposed ‘equitable and sustainable’ language in the proposed objective.  As is often the case with superannuation reform, the devil will be in the detail regarding its impact on the superannuation industry and wider Australian economy.  

The Government will need to craft the legislation in a way that is mindful of the risk that the objective may blur or, worse still, interfere with the existing duties of superannuation trustees. It is also unclear at this stage whether there is intended to be any consequences under the legislation for non-compliance with the legislated objective (however that is to be measured and assessed).

The Treasurer has been quick to act in seemingly the Government’s first step towards ensuring that our superannuation system remains fiscally ‘sustainable’ – from 2025‑26, Australians with over A$3 million in superannuation will be taxed at a concessional tax rate of 30% (applied to future earnings) – an adjustment from 15%. The Treasurer confirmed that the concessional tax rate of 15% will continue to apply for the significant majority of Australians with balances below A$3 million (which amounts to almost 99.5% of the superannuation population).

Is the proposed approach of embedding the objective in legislation appropriate?

Embedding a superannuation objective in legislation is an appropriate and necessary step, for two reasons:

1. it brings the superannuation industry in line with other prudentially-regulated industries, such as the banking industry and life insurance industry, which are currently guided by the stated objectives in their governing legislation. These objectives compliment the stated objectives in the Corporations Act 2001 (Cth) governing the provision of financial services in Australia generally; and
   
   
2. as stated in the Consultation Paper, a legislative objective will seek to provide certainty to regulators, policy makers, and Government, and will ensure that the industry has clear non-derogable guidelines to inform future superannuation policy. The Consultation Paper proposes to rely on the objective as an accountability mechanism against which future superannuation reform and legislation will be measured.

Following this, and in recent years, the key superannuation regulators have been proactive in enacting reforms to improve outcomes for superannuation fund members.  These reforms have enshrined in legislation new conduct obligations for superannuation trustees, and broadly align with the proposed superannuation objective. For example, superannuation trustees must now rigorously asses their funds’ performance to ensure their compliance with APRA’s prudential standards and to avoid being ‘named and shamed’ by APRA for their underperformance. Superannuation trustees must also take a member-centric approach in monitoring and reviewing members’ outcomes as part of ASIC’s design and distribution obligations.  

Politics and business interests have often dictated the use of Australia’s retirement savings, such as allowing draw downs on superannuation to fund home loans and cost-of-living expenses during COVID-19. A clear legislative purpose for superannuation will limit political ideologies from feeding into superannuation policy, and will focus its purpose on preserving savings to deliver income for retirement. Superannuation trustees themselves will be empowered to invest in nation-building projects if they see fit, but only if in doing so, they are acting in a manner which is consistent with their duties under superannuation legislation and the general law.

Conclusion 

A clear legislative objective for superannuation is a necessary step in ensuring Government accountability and transparency in superannuation policy development. However, the specific details regarding how the objective will impact the superannuation industry and other sectors of the Australian economy remains to be seen.

The Government is seeking stakeholder feedback on the draft legislative superannuation objective, including its benefits, practical application, and alternative wording. Specific consultation questions are outlined at the end of the Consultation Paper. We are watching the debate carefully, and look forward to providing further insights on any material developments.