Treasury wants Industry Super to explain ‘over egged’ forecasts

29 Apr Treasury wants Industry Super to explain ‘over egged’ forecasts

Michael Roddan – Australian Financial Review – Wednesday 29 April 2020

Treasury dug in over a spat with Industry Super Australia, demanding the lobby group explain its “significantly higher” estimated impacts of withdrawals under the early access scheme and after a departmental official claimed the over-egged forecasts were inconsistent with regulatory guidance.

ISA, which represents 15 union-and-employer-backed industry super funds with $412 billion under management, had asked Treasury to apologise after the department accused the lobby group of using “nominal” rather than “real” figures to warn members against drawing down on their savings.

While such a move would dramatically inflate the expected hit to retirement balances that younger members would suffer if they accessed their savings early, ISA rebuked the claim, pointing to the assumptions underpinning its modelling.

ISA predicted workers would suffer far more from drawing down on their savings than the Australian Securities and Investments Commission, the Grattan Institute and the Superannuation Consumers Centre.

A Treasury spokeswoman said the ISA figures “are significantly higher than the figures produced by the ASIC calculator”.

“The ISA needs to explain this and ensure that people are not provided information that overstates the impact of early release of super on retirement balances,” Treasury said.

Appearing before a parliamentary inquiry into the government’s COVID-19 response, Treasury head of retirement income policy division Robert Jeremenko said ISA’s modelling – which argued accessing super should be “a last resort” – went against guidance issued by ASIC because it used nominal figures, rather than real dollars that are discounted by inflation, to analyse the expected hit to future savings.

Liberal senator James Paterson had asked why ASIC’s MoneySmart website estimated a 30-year-old worker would be $43,032 worse off at retirement if they unlocked $20,000 worth of savings, whereas ISA’s calculations found the same worker would lose $97,214.

“The numbers used are very different from the ASIC MoneySmart calculator numbers for the same scenarios,” Mr Jeremenko told the parliamentary committee.

Mr Jeremenko said using nominal figures was “inconsistent with what ASIC has told super funds, what ASIC has told anyone who is making public statements about on retirement balances of various withdrawals from super”.

But a disclosure on ISA’s early release calculator noted the forecasts were based on “today’s dollars”, another name for “real” dollars, in which inflation is used to adjust for the future value of money.

ISA promptly wrote to Treasury asking Mr Jeremenko to correct the record. It explained that it deflates figures using Reserve Bank inflation forecasts and that its approach was consistent with the process formerly used by Treasury.

“The Treasury official’s characterisation of our modelling as not being expressed in ‘today’s dollars’ at the COVID-19 Senate Committee is incorrect, we have written to Treasury requesting that they correct the record,” said ISA deputy chief executive officer Matt Linden.

As revealed by The Australian Financial Review, Treasurer Josh Frydenberg recently wrote to ASIC chairman James Shipton asking him to take a particular interest in the information provided to members lodging early-access claims under the government’s coronavirus response package.

“It is critical that any balanced representation made by funds or their representatives must be based on assumptions that are realistic, a proper assessment of historical data and clearly disclosed,” Mr Frydenberg wrote.

ISA predicts that a 25-year-old taking out $20,000 could lose $120,511 in future savings, while a 50-year-old could suffer a $41,165 hit. That is far higher than ASIC’s expectations of a $47,699 hit for a 25-year-old and a $28,506 shortfall for a 50-year-old withdrawing the same amount.

The assumptions for ASIC’s calculator are based on Treasury’s long-term retirement income models, known as MARIA, whereas ISA takes its account balance assumptions from the Australian Taxation Office sample files.

While ISA uses a 2.5 per cent inflation rate to discount future values, ASIC uses a more conservative 4 per cent deflator. ASIC also uses a lower implied 6.2 per cent investment return, compared with ISA’s 7 per cent annual return.

Senator Paterson said ISA was seeking to “dramatically” inflate the impact of taking money out of super and said he would follow up with ASIC.

“I will be calling on ASIC to investigate what appears to be a serious and deliberate attempt to mislead super fund members about the consequences of taking up the government’s early super access scheme,” Mr Paterson said after the committee hearing.

ASIC declined to comment.

“The Industry Super Australia figures do appear larger than the estimates compiled by others, including Grattan as well as those produced by Super Consumers Australia,” Grattan Institute program director Brendan Coates said.

“For instance, we estimate that a 35-year-old who takes the full $20,000 allowed from their super can expect their super balance at retirement to fall by around $58,000, compared to $78,000 for ISA,” he said.

Mr Coates said that hits to retirement balances would also be softened by increases in the amount of age pension people with lower assets would receive.

Mr Jeremenko said nominal figures gave “a larger hit to retirement balances”.

“Those who are using that are the only ones that can answer why they are doing that,” he said.

“The general and well-respected methodology for predicting the time value of money is to take into account an inflation adjustment, so a CPI adjustment and a rising cost of community living standards adjustment.

“To do that using real numbers, as in today’s dollars, is an appropriate way to give an indication of the time value of money,” he said.

Also appearing before parliament, Ms Wilkinson disclosed that 762,000 Australians have applied for early release of some super cash, and 757,000 applications have been approved for $6.3 billion in payments, although these numbers have since been eclipsed.

People made redundant and sole traders who have experienced a drop in turnover of 20 per cent or more can apply to access $10,000 from their super this financial year, plus another $10,000 next year.

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