04 May Industry Super to tweak online calculators after controversy
Michael Roddan – Australian Financial Review – Monday 04 May 2020
Industry Super Australia will overhaul the assumptions underpinning modelling for its online comparison tools after facing heat from the Treasury and the corporate watchdog over claims it inflated the effect of the government’s early-release scheme in a warning to consumers.
The lobby group, which represents 15 union and employer-backed industry super funds with $412 billion under management, is expected to make changes as early as today to its online calculators estimating the effect of drawing down savings under the early-release plan and potentially a tool forecasting the expected increase in savings if the government proceeds with a rise in the superannuation guarantee from 9.5 per cent to 12 per cent.
Projections by Industry Super Australia (ISA) have come under sharp scrutiny amid a spat between the superannuation sector and the government after Prime Minister Scott Morrison allowed laid-off workers or those with reduced hours to access up to $20,000 in savings before the end of September.
The Treasury head of the retirement income policy division, Robert Jeremenko, wrote to Parliament last week to correct the record after he argued before a committee hearing that ISA was using “nominal” rather than “real” figures to overstate the impact of withdrawals under the government’s plan.
The Australian Securities and Investments Commission Money Smart website estimates that a 30-year-old worker would be $43,032 worse off at retirement if he or she unlocked $20,000 worth of savings, but ISA’s calculations found the same worker would lose $97,214 and warned that accessing savings should be a “last resort”.
“It remains true that the ISA figures are significantly higher than the figures produced by the ASIC calculator,” Mr Jeremenko said in his letter, which has been seen by The Australian Financial Review.
“It is important to ensure that Australians are not provided information that overstates the impact of early release of super on retirement balances,” he said.
Liberal senator James Paterson has since put pressure on ASIC to look into the issue, and Liberal MP Tim Wilson has asked ISA to explain the differences to the House of Representatives economics committee.
ISA said it was prompted to make the changes after ASIC tweaked its guidance for comparison tools on April 17. It said its modelling was comparable to that used by the Treasury and the Productivity Commission.
“The publication of the ISA earlyrelease modelling is aimed at ensuring that – prior to seeking access to their superannuation – industry super fund members make an informed and considered assessment of the potential, and in many cases severe, long-term impacts,” an ISA spokesman said.
Super Consumers Australia, part of advocacy group CHOICE, found that for a 30-year-old, the impact of withdrawing $20,000 would be $49,823 by retirement age, far closer to ASIC’s estimate.
According to disclosures on ISA’s website, the group uses different assumptions in its many comparison tools.
While ISA’s early-access model assumes annual inflation of 2.5 per cent, 1 per cent wages growth and high returns of 7 per cent per annum after fees, its earlier advertising making the case for a bigger 12 per cent contribution rate assumed inflation of 2 per cent plus a further 1 per cent increase in living costs, while nominal returns were sharply lower at 5.7 per cent a year.
Other providers of forecasting tools for the impact of the early release of super assume much lower return rates than ISA’s 7 per cent after fees, such as 6.2 per cent after fees for ASIC, 6.7 per cent after fees for the Grattan Institute, and 5.1 per cent after fees for Super Consumers’ Australia.
In 2019, ASIC recommended that super comparison tools use a 3.2 per cent inflation rate, which encompassed 1.2 per cent wages growth, or an explanation as to why this was not adopted. However, there is conjecture in the industry about using wages growth to discount future values of money.
Although ASIC’s Money Smart tool uses wages inflation to discount future values, ISA, the Grattan Institute and Super Consumers Australia prefer to use price inflation. But in its submission to the Treasury’s retirement income review, ISA’s chief modelling expert, Phil Gallagher, savaged the Grattan Institute for using consumer price inflation instead of wages growth as a deflator in its modelling.
He said CPI was “an approach rejected by the Institute of Actuaries, ASIC and at least 45 years of povertyline research”. “The MoneySmart calculator is using wage deflation. The Henry Tax Review presented both wage and CPI discounted results as did RIM (retirement income modelling) presentations on adequacy in 2011 and 2013.
Grattan has cited these studies as though they only present CPI deflation,” Mr Gallagher said in a submission titled “The case for Wage Deflation on longer-term retirement income”.
Grattan Institute director Brendan Coates said the main difference between comparison tools was whether future super balances at retirement were adjusted back to today’s dollars using either inflation only, or accounting for changes in community living standards, such as wages growth.
“The Money Smart calculator does the latter, whereas everyone else does the former. Returns also matter too, which would explain much of the difference between our, and Super Consumers’ Australia’s numbers and those of ISA,” Mr Coates said.
Ian Fryer, head of research at super consultancy Chant West, said the decision as to whether to use wages or consumer prices as a deflator was a matter of great debate, even within the Actuaries Institute: “There are arguments either way but I think there is a valid argument that when we talk about adjusting numbers for inflation, which is what we are doing here, most Aussies would assume we mean price inflation.”