Purpose of the Bill

The purpose of the Superannuation (Objective) Bill 2023 (the Bill) is to define the objective of superannuation in the following terms: ‘to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way’.[1]

When introducing the Bill in the Parliament, the Treasurer stated:

This simple and straightforward objective will serve as a guide for future governments, regulators, industry and the wider community.

The Bill will also:

• require Members of Parliament who introduce a Bill which proposes changes to the superannuation system to provide a statement of compatibility which explains how the Bill is compatible with the legislated objective of superannuation and
• require makers of regulations related to superannuation to publish a statement of compatibility which explains how the regulations are compatible with the legislated objective of superannuation.

Background

Australia’s retirement income system has traditionally been viewed as having three component parts or ‘pillars’ as they are known:

• the social security means-tested age pension
• compulsory superannuation contributions made under the superannuation guarantee regime and
• additional private savings.[2]

Each pillar interacts with and influences the others. For example, superannuation is counted in the assets test for the age pension for persons who have reached pension age, something that the former Treasurer and Prime Minister, Paul Keating, described as, at the time, establishing:

.. a working interface between the age pension and superannuation savings, with an asset taper withdrawal of certain sums of pension for every $1000 of assets… Who could object to that? This interface between the age pension and privately provided superannuation works efficiently and is fair.

In addition, income from superannuation is included in the income test for the age pension.

Intended role of superannuation in Australia’s retirement income system

The Superannuation Guarantee was introduced in 1992. The legislation did not include a statement about the objective, but at the time the then Treasurer said:

The levy will consolidate the reforms implemented since 1983, and will provide a coherent and equitable framework in which retirement incomes objectives can be progressed. It will ensure that by the beginning of the next century, virtually all employees will be accumulating substantial superannuation savings to help fund their retirement income.

This increased self-provision for retirement will permit a higher standard of living in retirement than if we continued to rely on the age pension alone. The increased self-provision will also enable future Commonwealth governments to improve the retirement conditions for those Australians who were unable to fund adequately their own retirement incomes.[3]

Despite not including an objective, section 62 of the Superannuation Industry (Supervision) Act 1993 establishes a ‘sole purpose test’ that, in essence, requires all activities undertaken by superannuation funds to be for the sole purpose of providing retirement benefits (income streams, lump sums) to their members (or to their dependants if any of their fund members die before retiring). The sole purpose test has often been referred to by people seeking to explain the reason for superannuation as indirectly pointing to the objective of the superannuation system.[4]

In this regard, the intended objective of superannuation at the time of its introduction must be considered in the context of the interconnections between the three pillars of the retirement income system and the intended policy outcomes, including increased self-provision for retirement.

Former Treasurer and Prime Minister, Paul Keating described the means-tested age pension as a ‘basic anti-destitution payment’ designed to alleviate poverty (p. 4), rather than provide income maintenance for its recipients, in the years prior to and at the time the compulsory superannuation was introduced. In terms of the age pension alleviating poverty, the 2020 Retirement Income Review found that the maximum rate of the age pension was above ‘absolute poverty benchmarks’ but noted this did not ‘indicate whether the age pension is keeping pace with community standards’.[5]

Whilst there were a range of factors that led to the introduction of compulsory superannuation, the above points to superannuation originally being intended to provide a retirement income beyond the ‘basic’ level of anti-destitution or poverty-alleviating income provided by the age pension, including by supplementing the pension or replacing it for individuals with substantial assets and other savings who were able to be self-sufficient in retirement.

Recent consideration of the objective of superannuation

In recent years, the objectives and purposes of the superannuation system has been examined on several occasions.

2014 Financial System Inquiry

The 2014 Financial System Inquiry led by David Murray recommended that the Government:

Seek broad political agreement for, and enshrine in legislation, the objectives of the superannuation system and report publicly on how policy proposals are consistent with achieving these objectives over the long term.[6]

Related to the above, the 2014 Financial System Inquiry also stated that ‘action can be taken’ by the Government to:

Set a clear objective for the superannuation system to provide income in retirement. [7]

In addition, the 2014 Financial System Inquiry also recommend a number of ‘subsidiary objectives’, including alleviating fiscal pressures on Government by reducing reliance upon the age pension.[8]

The Superannuation (Objective) Bill 2016

Following the recommendation by the 2014 Financial System Inquiry noted above,[9] the Turnbull Government introduced the Superannuation (Objective) Bill 2016 (2016 Bill). The 2016 Bill was referred to the Senate Economics Legislation Committee and lapsed in 2019.[10]

The Bills Digest for the 2016 Bill provides a comprehensive account of the history and rationale for legislating an objective of superannuation up to then.[11] In summary, the 2016 Bill would have:

• defined the ‘primary objective’ of the superannuation system as ‘to provide income in retirement to substitute or supplement the age pension’
• allowed ‘subsidiary objectives of the superannuation system’ to be prescribed in regulations and
• imposed requirements to prepare a statement of compatibility that assessed whether a Bill or regulations were compatible with the primary and subsidiary objectives of the superannuation system.

The 2020 Retirement Income Review

The 2020 Retirement Income Review revisited the idea of a legislated objective for the retirement income system (of which the supernation system is but one pillar) in a broader form, stating that:

The retirement income system needs a clear objective to:

• Anchor the policy direction of the system
• Ensure the community understands the role and purpose of the system
• Provide a framework for assessing the system’s performance.[12]

The 2020 Retirement Income Review proposed as a broad objective for the retirement income system (rather than just the superannuation system):

The retirement income system should deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way.[13]

The 2020 Retirement Income Review then expanded on this objective with 9 sub-elements, including that the retirement income system as a whole (including superannuation, the age pension and private savings):

• should ensure a minimum standard of living for retirees with limited financial means that is consistent with prevailing community standards
• facilitate people to reasonably maintain their standard of living in retirement and
• should target Government support to those in need.[14]

Recent policy positions

The Morrison Government’s policy of allowing individuals to make withdrawals from their superannuation accounts during the COVID-19 pandemic led to new calls for the legislation of an objective for superannuation.[15]

At the last election, the ALP policy on the National Reconstruction Fund stated:

Labor’s plan for a National Reconstruction Fund will allocate $15 billion to partner with the private sector, including superannuation funds to support investments which demonstrate they will grow the economy and increase employment.

In a speech last year, the Assistant Treasurer linked legislating an objective for superannuation with such investments. He said:

Australia is also facing big challenges that need investment. Energy. Housing. Having an objective of super will enable us to identify opportunities where the national interest and member interests align.[16]

Policy position of non-government parties/independents

The Opposition has not announced a position on the 2023 Bill. At the time of writing no comments on the Bill from non-government members of the Parliament could be identified.

As set out above, in 2016 the Turnbull Government introduced the Superannuation (Objective) Bill 2016. It proposed:

The primary objective of the superannuation system is to provide income in retirement to substitute or supplement the age pension.[17]

As noted earlier, the 2016 Bill would have allowed for subsidiary objectives of superannuation to be prescribed by regulations. It also proposed that Bills or regulations relating to superannuation be accompanied by statements of compatibility assessing whether they were compatible with the primary and subsidiary objectives of superannuation.[18]

The 2016 Bill was referred to the Senate Economics Legislation Committee for review. The report found that stakeholders were generally in favour of legislating an objective for superannuation, although there was some disagreement about the wording.[19] There was further disagreement about leaving the subsidiary objectives to regulation as stakeholders believed this could open the way to frequent changes which could undermine the purpose of legislating an objective for superannuation.[20]

In their dissenting report, ALP senators highlighted the lack of bipartisanship and said that there needed to be more consultation with stakeholders so that any proposal had consensus support as recommended by the Financial System Inquiry.[21]

The 2016 Bill lapsed at the end of the 45th Parliament.

Position of major interest groups

Major interest groups have had the opportunity to express their position on legislating the objective of superannuation, and the wording of such an objective, on numerous occasions over the past decade. Most recently this year in:

• Submissions on the February 2023 consultation paper.[22]

Previously, interested parties have commented in:

• Submissions on the Financial System Inquiry interim report[23]
• Submissions on the 2016 proposal to legislate an objective of superannuation[24] and
• Submissions to the Senate Standing Committee on Economics review of the 2016 Bill.[25]

Examples of stakeholder views on key elements of the Bill are provided below in the Key issues and provisions section of this digest.

Financial implications

According to the Bill’s Explanatory Memorandum there are no financial implications in relation to this Bill.[26]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[27]

Key issues and provisions

Is there a need to legislate the objective of superannuation?

The consultation paper on legislating the objective of superannuation states that having such an objective would ‘anchor any future superannuation policy settings to a meaningful base … [and] will enshrine the core goal of supporting delivery of retirement incomes in law. Haphazard or inconsistent changes in superannuation system policy undermine the community’s trust in the system and increase the costs to trustees, regulators and ultimately members.’[28]

The Law Council of Australia raised a number of concerns about legislating an objective of superannuation. The Council stated:

A legislative purpose will not constrain future Parliaments and therefore, only represents a political rather than a legal restraint on future reforms.[29]

The Council also raised a Constitutional power query about the Bill:

At the outset the Committee query whether consideration has been given to the question of whether or not there is a Constitutional power to legislate the objective of superannuation. The proposal makes it clear that the legislated objective would be directed at government and not at other industry participants (such as trustees). That being the case, it ought not be assumed that the usual sources of Constitutional power can be relied upon in this context – for example, it seems that legislating the objective of superannuation may not be a proper exercise of the corporations, taxation or pensions powers.[30]

Some stakeholders support the proposal to legislate an objective for superannuation, at least partly in response to some elements of the current system. Anglicare Australia states:

The objective recognises that superannuation is about providing income for a dignified retirement, not about wealth generation or accumulation of a nest egg to pass on after death.[31]

What does the proposed objective of superannuation mean?

Clause 5 of the Bill states that:

The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way. [emphasis added]

As was the case with the 2016 Bill, stakeholders have expressed concerns about almost every concept in bold highlighted above in clause 5, none of which are defined in the Bill itself.

The Government states that key concepts within the objective highlighted in bold above:

are not intended to be considered in isolation. Policy-makers will need to consider and make informed decisions on the trade-offs that may be required between the different concepts to ensure that superannuation policy delivers on the broader objective in a cohesive way.[32]

Whilst, as explored below, the Explanatory Memorandum provides guidance as to the meaning of the key terms in clause 5 of the Bill that underpin the objective, as noted by the High Court ‘the words of a Minister must not be substituted for the text of the law’.[33]

Objective v purpose

Mercer observes that the Financial System Inquiry and the Retirement Income Review recommended an ‘objective’ for superannuation. Mercer prefers ‘purpose’ to ‘objective’ as:

… purpose implies a reason for existence and has a broader perspective than objective which has a focus on an achievement which can be measured. We therefore believe that in the context of superannuation, a “purpose” is a much better and broader term than objective which may vary considerably between individuals.[34]

Preserve savings

The Government states that in relation to the meaning of ‘preserve savings’ in the objective in clause 5:

‘Preserve savings’ means superannuation savings should not be accessed for purposes outside of retirement income, apart from in exceptional circumstances. This recognises that superannuation exists first and foremost as a savings vehicle to provide income in retirement and is not a pool of individuals’ savings to meet other lifetime costs prior to retirement.[35]

Stakeholders were generally supportive of the objective to preserve savings. One submission to the review suggested that ‘build and preserve savings’ would better reflect the role of superannuation as spreading income over a lifetime.[36]

Income for retirement

The Government states that in relation to the meaning of ‘deliver income’ in the objective in clause 5:

‘Deliver income’ means superannuation savings should be drawn down to provide individuals with a source of income during their retirement. The ‘income’ delivered in retirement is derived from both contributions made to the member’s superannuation account and the investment return on those assets… The focus on delivering income in the objective makes it clear that superannuation is not for minimising tax on wealth accumulation or enabling retirees to leave tax-effective bequests. In this regard, the objective complements core trustee obligations under superannuation legislation: the best financial interests duty, the sole purpose test and retirement income covenant.[37]

Some stakeholders note that this objective only partly reflects the single purpose test in the Superannuation Industry (Supervision) Act 1993, which has the additional objective of providing death and permanent incapacity benefits.[38]

The ARC Centre of Excellence in Population Ageing Research (CEPAR) expressed concern about how the government’s desire to ‘leverage greater superannuation investment in areas where there is alignment between the best financial interests of members and national economic priorities’[39] could affect retirement income, commenting:

 It is not at all clear how these would be reconciled, or how the objective would assist in any adjudication. The idea of a “clean” pension which aims to deliver “effective and efficient and untainted retirement incomes which meet beneficiaries’ best interests” … is germane here. Compromising this through considerations of broader national interest is the thin edge of a wedge that could drive the political use or allocation of savings/capital within the system of government priorities. The objective of superannuation should exclude this possibility.[40]

Dignified

The Government states that in relation to the meaning of ‘dignified retirement’ in the objective in clause 5:

In the context of the objective of superannuation, ‘dignified’ denotes a standard of financial security and wellbeing in retirement which allows the person to participate economically and socially in their community. ‘Dignified’ does not mean the same level of income in retirement for all Australians and many Australians will rely on a combination of superannuation savings, government support and private savings to achieve a dignified retirement.

As a subjective concept, ‘dignified’ allows individuals to apply their own values and judgements about what a dignified retirement is to them. Accordingly, community expectations of a dignified retirement may change over time which should be reflected in policy-makers’ assessment of this concept… The inclusion of dignified in the objective indicates there is a certain standard of living in retirement in which the superannuation system should strive to deliver for Australians, alongside Government support.[41] [emphasis added]

The consultation paper describes this as a ‘qualitative measure that will require interpretation.’[42] Andrew Podger, John Piggott and Robert Breunig suggest a need to clarify that dignified retirement

… focuses on both financial security … and adequacy, in conjunction with the age pension providing not only protection from poverty but also the maintenance of living standards at and through retirement.[43]

HESTA advocates further defining ‘dignified retirement’ as a standard of living which ‘supports a person’s ability to economically and socially participate in the community’.[44]

In that regard, given that currently the age pension is intended to operate as a basic anti-destitution payment by alleviating poverty, this would appear to suggest that the superannuation system will be the primary vehicle for ‘bridging the gap’ between retirement income near the poverty line, and that required for a ‘dignified’ retirement (unless the age pension is re-cast as something other than a basic anti-destitution payment).

Government support

The Government states that in relation to the meaning of ‘government support’ in the objective in clause 5:

… many Australians will continue to rely on government support to substitute or complement their superannuation and private savings to achieve a dignified retirement. Government support is provided by all levels of government and may include the Age Pension, Commonwealth Rent Assistance, and the Home Equity Access Scheme. While many Australians rely on government support to achieve a dignified retirement, it is noted that not every Australian will draw upon government support.

The inclusion of Government support in the objective reflects the crucial link between superannuation policy and government support. Policy-makers need to consider this interaction in making policy decisions relating to the superannuation.[45] [emphasis added]

Stakeholders are generally in favour of including ‘alongside government support’ in the objective of superannuation. Some superannuation funds note that this is particularly important for their members.[46] National Seniors Australia does not support the mention of ‘government support’ in the objective as it views government support as existing outside the superannuation system.[47]

Equitable

The Government states that in relation to the meaning of ‘equitable’ in the objective in clause 5:

While equity is a subjective concept, in this context it captures the importance of a system that delivers similar outcomes to people in similar situations and targets support in the superannuation system to those most in need. It does not mean that every policy change to superannuation must be aimed at affecting the equity of the system. However, policy-makers should give appropriate consideration to the system-wide impacts on equity of proposed changes.

‘Equitable’ does not mean that all individuals will receive the same benefit from the system, nor can superannuation address every perceived inequity. Differences in demographic factors and structural inequities can flow through to outcomes in the superannuation system. This includes intergenerational inequity and outcomes for different groups including women, First Nations Australians, vulnerable members and low-income earners.

In this context, it also acknowledges the important role of policy action outside the superannuation system to address underlying factors that can flow through to superannuation outcomes.[48] [emphasis added]

COTA questioned how the definition of equitable, that the ‘system should provide similar outcomes to people in similar circumstances’ would apply to the gender gap.[49] Australian Super also mentioned this and other groups which in general have lower superannuation balances such as First Nations people and those on lower incomes (including young people).[50]

Sustainable

The Government states that in relation to the meaning of ‘sustainable’ in the objective in clause 5:

‘Sustainable’ signifies that the superannuation system should be robust to demographic and economic change and cost-effective in achieving its objective.

It is about ensuring superannuation policy meets community needs and expectations, and responds appropriately to external factors that impact retirement incomes. For example, policy-makers will need to consider how superannuation evolves over the long term to reflect the changing needs of Australians due to increasing life expectancies and an ageing population.

Sustainability also reflects the Australian economy’s capacity to support the system and the need for it to be fiscally sustainable for the Commonwealth Government from both a budgetary cost from tax expenditures and government contributions.

Superannuation plays an important role in enabling Australians to save for their retirement, reducing reliance on the Age Pension. Tax concessions have a role in incentivising Australians to save for retirement but come at a significant and growing cost to the revenue required to fund services. Policy-makers will need to weigh up these types of factors when assessing future superannuation policies against the objective of superannuation.[51] [emphasis added]

The Law Council of Australia characterises ‘sustainable’ as contentious.

This is because the word, which once might have plainly referred to the pursuits not coming at a cost that exceeds what can be affordably carried on indefinitely, now has an environmental connotation too. Indeed, the presence of that word gives rise to a question whether it is being proposed that part of the purpose of superannuation is to finance a transition to an economy with reduced or net zero carbon emissions. If so, that is likely to be contentious amongst some stakeholders, especially if there was an intention to rely on this aspect of the objective to make it compulsory for trustees to invest in green investments (or to prohibit certain categories of investment).[52]

The Explanatory Memorandum mentions the need for fiscal sustainability and then states:

The inclusion of ‘sustainable’ in the objective does not change how superannuation funds invest, or what they can invest in. Trustees must continue to comply with existing legal obligations when formulating investment strategies, particularly acting in the best financial interests of members.[53]

Statements of compatibility – Bills relating to superannuation

Clause 6 of the Bill requires that a Member of Parliament who introduces a Bill which proposes changes to the superannuation system to provide a statement of compatibility which provides an assessment of whether the Bill is compatible with the legislated objective of superannuation.

The Explanatory Memorandum states that:

The statement of compatibility with the objective of superannuation should include consideration of the proposed policy against the key concepts within the objective and a determination on compatibility with the objective as a whole, based on these assessments. There may be times when there are trade-offs between the key concepts within the objective.[54]

Subclause 6(4) sets out a number of exceptions to the requirement to provide a statement of compatibility. A statement is not required to the extent that the Bill:

• deals with a matter other than superannuation
• deals with a matter that relates to superannuation but is a of a minor or technical nature
• deals with an excepted matter or
• amends or repeals an Act or a provision of an Act that is prescribed in the regulations.[55]

The Explanatory Memorandum states that whether a Bill requires a statement of compatibility is ultimately a decision for the member of Parliament.[56]

Statements of compatibility – regulations relating to superannuation

Clause 7 of the Bill largely mirrors clause 6, with the requirement falling on the rule maker of relevant regulations, rather than a member of Parliament introducing a Bill.

Act does not create enforceable rights or duties

Clause 8 of the Bill states that the absence of a statement of compatibility does not affect the validity, operation or enforcement of an Act or any regulations. It also states that a statement of compatibility is not binding on any court or tribunal. The Explanatory Memorandum clarifies:

These clauses do not limit the availability of judicial review under section 75(v) of the Constitution and section 39B of the Judiciary Act 1903 where a failure to meet procedural requirements would amount to a jurisdictional error.^[57]

The Explanatory Memorandum further states that enshrining the objective in legislation ‘is not intended to create any rights or obligations for participants in the superannuation industry (for example, it is not to be considered in assessing the conduct or liability of a trustee of a superannuation fund)’ (p. 13).The Institute of Financial Professionals Australia made this comment about the effect of this item:

In the end, if the objective is legislated, there will be an obligation to prepare and lodge a statement of compatibility but it will not be binding on anyone, it will provide no rights and will have no consequences for failure to comply with that obligation. In other words, the legislation will be ineffective for everything due to its lack of enforceability.[58]

The requirement for a ‘statement of compatibility’ to accompany legislation and legislative instruments was first introduced by the Human Rights (Parliamentary Scrutiny) Act 2011. This Act requires statements of compatibility to be prepared for all Bills and disallowable legislative instruments, which include an assessment of the Bill or instrument’s compatibility with human rights.[59] This requirement is in similar terms to the requirements proposed by the Bill. Like the Bill, the Human Rights (Parliamentary Scrutiny) Act provides that a statement of compatibility is not binding on any court or tribunal and that a failure to comply with the requirement to prepare a statement does not affect the validity, operation or enforcement of the relevant Act or instrument or any other provision of a law of the Commonwealth. Importantly, the Human Rights (Parliamentary Scrutiny) Act establishes the Parliamentary Joint Committee on Human Rights (PJCHR), which has functions that include examining Bills and disallowable legislative instruments for compatibility with human rights and reporting to Parliament on that issue.[60] The work of the PJCHR is an integral element of the human rights scrutiny scheme.[61] The Bill does not task a committee with review of statements of compatibility with the objective of superannuation.

In its submission to the consultation on legislating the objective of superannuation, AIST recommended strengthening the accountability and assessment framework. AIST made several suggestions as to how this could be achieved, writing ‘this could be the expanded task of an existing parliamentary committee, or a parliamentary committee created for this process’ (p. 7).

Commenting on accountability in its submission, Mercer stated:

… it needs to be recognised that a high-level objective is exactly that, and that it will therefore have limited value in assessing or reviewing policy proposals.[62]

Concluding comments

The call for an objective for superannuation in the Financial Services Inquiry was partly a result of frustration with the many changes that have been made to superannuation legislation. As various parties have noted, legislating an objective for superannuation cannot constrain future governments. Ultimately, faith in the superannuation system will depend on how well superannuation, alongside government support, is perceived to deliver income for retirement.