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Share Market Outlook - Dec 1998

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Soverign Risk

This legislative or sovereign risk has suddenly increased in relation to superannuation. It seems increasingly clear that the Howard Government does not have the same level of commitment to superannuation as did the Keating Government. There's nothing unusual about new governments having different priorities - that's why we change them from time to time. But superannuation investors need to be a little wary.

The Government has been running into a few problems in the area lately and the rumours are thick that further changes will be announced in the May Federal budget. In August last year, in what appeared to be a rushed decision, the Government introduced a surcharge on tax deductible superannuation contributions to superannuation for those people with taxable incomes in excess of $70,000.

The superannuation funds complained that the new tax would be very expensive and

cumbersome to collect. Accounting bodies said they would be advising their higher paid clients to look at alternative investments such as negative gearing and direct share market investments. Others said they would look at ways to lower taxable income below $70,000 through such devices as fringe benefits.

In addition, the surcharge has been declared as probably unconstitutional by some lawyers, and most state governments have said they would refuse to cooperate with the Feds on this one. If so, this means that state public servants would escape the tax.

At the Easter break the surcharge legislation was still locked up in the Senate even though the measures were supposed to have become operative from last August. The Senate has also delayed passage of the Retirement Savings Account (RSA) legislation that was designed to give banks and other institutions a direct entry into the lucrative superannuation industry.

Finally the Federal Treasurer has indicated that the Government would officially drop the $4.5 billion co-contribution scheme announced by the Keating Government in 1995. This scheme grew out of the L-A-W tax cuts promised by the Keating Government at the 1993 election. Instead of the tax cuts the Labour Government later promised it would contribute an amount equal to three per cent of each employee's wage if it was matched by a similar contribution by the employee. If it had gone ahead it would have meant the average employee would have an amount equal to 15 per cent of salary going into superannuation.

Had the contributions been made over an entire working life they would have been enough to provide a retirement income independent of the age pension. This scheme may be replaced with something else - perhaps a medium term tax favoured savings account although nothing is certain given the Government's determination to reduce the budget deficit.

But this may not be the end of it. It was only last year that rumours were circulating that the retirement age (the age at which you could access superannuation) was to be increased from 55 to 60. There were also rumours that the Government was looking at a way of restricting the ability of retirees to take their super as a lump sum. Pensions and annuities were to be promoted as an alternative. All these upheavals are causing great concern within the superannuation industry which claims it is not being consulted before changes are announced.

They are presumably also causing concern for those people who make the contributions. The uncertainty makes it difficult to plan long term - which is what superannuation is all about. The prudent thing to do is probably be careful until a coherent superannuation policy has been developed - preferably with bi-partisan support.

Investors need to know the ground rules and that there will not be changes on an ad hoc basis. In the meantime it may be wise to ensure that you have investments outside the superannuation system.