Members of accumulation plans have seen the impact of poor investment markets directly on their benefit statements. This, with forecasts of lower future returns, has led many to conclude they need to increase their savings to achieve adequate retirement savings.
Defined benefit (DB) funds are more complicated. The decline in asset values has not affected the calculation of salary related benefits. It has reduced the amount of money in the fund available to finance and secure benefits. The sponsoring employer faces the need to increase future contributions to make good the shortfall.
But even this is an over simplification. Many Australian DB funds now provide less than 100 per cent cover for vested (resignation) members. They are in an Unsatisfactory Financial Position (UFP). Clearly, this is not good, but it isn’t reason to panic.
A shortfall only impacts on members if the fund is wound up or the employer goes bust while the shortfall exists. For the vast majority, this is unlikely, but it is an indictment of many professional advisors that sponsoring employers and trustees did not have plans in place to cope with the current situation. Make no mistake, the position that super funds around the world are currently in was entirely predictable, even inevitable.
We must now seek to properly secure member benefits while recognising the financial forces (both positive and negative) that will impact on the future accumulation of assets. And there are many options available.
This brings me to the subject of our Good Samaritans. Many companies are prepared to make significant extra short-term contributions into their super funds to fully cover vested benefits. Some would contribute further to build up a safety margin.
In some situations, this is an overreaction to circumstances that have not been planned for, or to “suggestions” from regulators. In others, a significant capital injection is justified, desirable, and necessary.
Would anyone, let alone the Government, discourage employers from making these extra contributions? The answer is yes.
First, employers are wary of putting extra money into super because if markets rebound and surplus builds up, then it is next to impossible to get it out. The legislation does make it theoretically possible to repatriate a surplus but it does not facilitate it. Moreover, the industrial reality is such that you cannot get it all back anyway. What’s more, any repayment to an employer is not deductible to the fund so, at best, only 85 per cent can be reclaimed.
Secondly, there are now limits on the amount of company contributions that can be paid in a year and be tax deductible. There is no discretion to relax this limit — even if vested benefits are less than fully covered.
Of course, the Government can argue that to relax these rules would open the floodgates to abuse. Nonsense. You do not have to be Einstein to be able to frame regulatory safeguards that would at one and the same time:
n remove these disincentives to the many “Good Samaritans” that exist within corporate Australia; yet
n ensure that the interests of the Federal revenue are protected from abuse; and
n do everything possible to ensure that the accrued entitlements of members are fully safeguarded.
So, we do discourage Good Samaritans. Why?
— Wayne Walker is managing director of Rice WalkerActuaries.
