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CHAPTER 4
We are aware that there is a need for early access on hardship
grounds. We are also aware that the present system is lacking in objectivity
and fairness.[1]
4.1 One of the Government's key measures to restrict early access to
superannuation was to create an objective test for severe financial hardship.
4.2 Formerly, the hardship test allowed individuals to access their superannuation
where the Insurance and Superannuation Commissioner determined in writing
that the individual was in severe financial hardship. If the Commissioner
so determined, persons were able to obtain access to preserved benefits
of a single lump sum. The lump sum could not be more than the amount determined
by the Commissioner. Persons were also able to obtain access to benefits
on compassionate grounds.
4.3 These former subjective tests for hardship have been replaced by
objective tests requiring applicants to satisfy specific conditions, and
a defined set of criteria for compassionate grounds. In the case of hardship,
the new test involves receipt of Commonwealth income support payments
for a minimum continuous period. The Government's changes also shift the
responsibility for assessing hardship applications from the Commissioner
to individual funds.
4.4 The Commissioner still decides applications on compassionate grounds,
but exercise of this discretion is now confined by a series of objective
criteria spelt out in the new regulations.
4.5 The changes to the provisions for granting access on severe hardship
and compassionate grounds were subject to a transitional arrangement.
Applications made before 1 July 1997 would be considered under the old
rules.
4.6 Given that the new regulations were gazetted on 26 June 1997, there
were effectively only a few days that individuals could make application
under the old rules, if they were in fact aware of the changes.
4.7 Of course, the changes had been announced in the May Budget statements,
but hardly in such a way that a significant number of people who could
be affected by the changes could reasonably be expected to have had notice
of them. In any event, the nature of claims under these provisions is
not something than can be planned in any real sense. Hardship just happens.
4.8 In its 4th Report, Super - Fiscal and Social Links, tabled
in December 1992, the Committee stated 'that the abolition of early access
to benefits in cases of hardship should be one of Australia's long term
retirement incomes goals'.[2] However,
the Committee could not unanimously agree on a timetable to implement
its abolition policy. Instead, the Committee recommended that the Insurance
and Superannuation Commission (ISC):
- work towards the abolition objective;
- promulgate a policy to ensure consistent treatment of applications;
and
- develop tighter hardship rules.[3]
4.9 In June 1994, the then government made regulations to tighten the
hardship test for early release of superannuation benefits. It amended
the test from 'financial hardship' to 'severe financial hardship'.[4]
Despite this stronger definition, it is generally accepted that the ISC
has been less than severe in assessing applications of early release on
the hardship ground in recent years.
4.10 The Committee agrees with the Government that more objective criteria
are appropriate for assessing early access on the grounds of hardship.
However, the Committee has some problems with the inflexibly of the new
provisions.
4.11 To qualify for early release now, a person has to be:
- aged less than 55 years and 39 weeks and satisfy the fund trustee
that the person has been receiving Commonwealth income support for 52
weeks continuously; or
- aged 55 years and 39 weeks and satisfy the funds trustee that
the person has been receiving such income support for a cumulative
period of 39 weeks after the person turned 55.[5]
4.12 Two case studies provided in evidence to the Committee outline
two aspects of the inflexible character of the new objective tests for
hardship, and of the defined compassionate grounds.
4.13 The first case is that of the Hutchinsons. This information was
provided in a submission from the Tasmanian Assistant Ombudsman to whom
the Hutchinsons had written.[6]
4.14 On 9 June 1997, Mr Gordon Hutchinson received severe spinal injuries
which totally incapacitated him for work. He was not covered by statutory
compensation or private disability insurance. As the Hutchinsons were
covered by private health insurance, Mr Hutchinson was hospitalised privately
for some six or seven weeks and requires physiotherapy for about a year,
costs which are not rebated under Medicare and only partly covered under
their top private medical insurance cover.
4.15 To satisfy the new compassionate grounds for meeting medical expenses,
there is a requirement that:
the treatment is not readily available to the person, or the
dependant, through the public health system.[7]
4.16 The Hutchinsons failed on that ground. It is something of a cruel
irony that it was the use of the private medical system itself which caused
the hardship. Mr Hutchinson is on the DSS sickness benefit while Mrs Hutchinson
receives the DSS parenting allowance and a State Domiciliary Allowance.
They have 'very little savings'.[8]
Accordingly, they had applied for the early release of $6 000 in superannuation
to help meet the anticipated shortfall of between $10 000 and $15 000
on medical costs over the next year.
4.17 In a second case examined in some detail by the Committee, Mr Gordon
Haywood was a person retrenched from employment who had taken his wife
and young family to a new country location to make a fresh start. They
had bought a cheaper house in order to be free of a mortgage. Mr Haywood
had commenced an accountancy course full-time in order to improve his
prospects for worthwhile future employment.
4.18 He had been in receipt of Austudy for over 12 months. While the
family was managing successfully on a frugal budget, they were suddenly
faced with an unforseen taxation bill. They had unsuccessfully sought
early release of superannuation to cover this bill which could not be
paid for out of any other source. The Haywoods were denied early release
of their superannuation as neither Austudy, nor the income received by
Mrs Haywood, satisfied the definition of Commonwealth income support under
the new rules on the early release of superannuation.
4.19 A person may be on long term Commonwealth income support for various
reasons, and may not be necessarily in hardship so as to warrant early
access to preserved superannuation benefits. This point was raised by
Mr Kit Hauptmann, a financial counsellor, who commented:
They [the superannuation fund] do not ask any questions about
what sort of hardship. My understanding at the moment is that if you
meet that criteria you will get it.[9]
4.20 An even stronger point is this. The inflexible nature of the income
support definition may itself invite further leakage from the superannuation
scheme, and encourage those in receipt of Commonwealth income support
to access their superannuation regardless of any hardship.
4.21 However, the Committee notes the statement of the ISC that the funds
themselves may impose additional requirements before early access is granted
(discussed in paragraph 4.32 below). Just how well this would work in
practice is unclear, given that individuals would have the reasonable
expectation of succeeding in a hardship claim on the basis of what the
SIS or parallel regulations provided.
4.22 Mr John Berrill, a superannuation lawyer, agreed that it was not
always the case that people in receipt of Commonwealth income support
for over 52 weeks were in financial hardship.
4.23 More importantly, he also pointed out that there are people not
in receipt of social security who are in financial hardship, yet will
fall outside the new defined compassionate grounds.[10]
As Mr Berrill said:
People have debt crises; there are people with substantial loans,
with hire purchase arrangements; there are people who are in mortgage
debt, where foreclosure is not imminent but renegotiations of loans
take place on unfavourable terms.[11]
4.24 The new conditions for release on "severe hardship" grounds
provide that the amount permitted to be released from an ADF is limited
to a single sum in each 12 month period. The minimum amount is $1 000
except where the person's benefits are less than that amount, and the
maximum is $15 000.[12]
4.25 Specific provisions under the heading of "compassionate ground"
have now been included in superannuation regulations, but not in the Small
Superannuation Accounts Amendment Bill 1997 on which the Committee is
separately reporting in Chapter 7. Previously, granting access on compassionate
grounds was part of the then discretion of the ISC, as supplementary to
the former severe financial hardship test.
4.26 The new compassionate grounds cover the following payments:
- to treat life threatening illnesses;
- for medical transport;
- to prevent foreclosure by a mortgagee, or the exercise of an express
or statutory power of sale over the family home;
- for home or vehicle modifications to accommodate the special needs
of a severely disabled member or dependant; and
- for palliative care, and funeral and burial expenses.[13]
4.27 Under the new regulations, there are substantive evidentiary requirements
before the Commissioner can be satisfied that early release can be made
on one of these compassionate grounds. For example, the following are
the requirements in relation to medical treatment and foreclosure: (3)
The Commissioner cannot be satisfied that money is required for medical
treatment unless 2 registered medical practitioners (at least one of whom
must be a specialist) certify that:
(a) the medical treatment is necessary to:
(i) treat a life threatening illness or injury; or
(ii) alleviate acute, or chronic, pain; or
(iii) alleviate an acute, or chronic, mental disturbance; and
(b) the treatment is not readily available to the person, or the dependant,
through the public health system.
...
(5) The Commissioner cannot be satisfied that money is required on
the ground mentioned in paragraph (1) (b) [foreclosure or exercise
of mortgagee power of sale] unless the person gives to the Commissioner
a written statement from the mortgagee that:
(a) payment of an amount is overdue; and
(b) if the person fails to pay the amount, the mortgagee will:
(i) foreclose the mortgage on the person's principal place of residence;
or
(ii) exercise its ... power of sale over the person's principal place
of residence.[14]
4.28 Release of benefits on compassionate grounds is, of course, also
subject to the rules of the individual fund, which may or may not release
benefits on compassionate grounds.
4.29 The Committee notes that the cashing restriction for release on
a "compassionate ground" limits the amount payable to:
a single lump sum not exceeding an amount determined by the Commissioner
that is reasonably required in the circumstances taking into account
the person's financial capacity.[15]
4.30 However, in relation to payments to prevent foreclosure or exercise
of a power of sale over the family home, the amount that can be released
is limited, and:
cannot exceed an amount equivalent to 3 months repayments and
12 months interest on the outstanding balance of the loan in any twelve
month period.[16]
4.31 In relation the release of benefits to prevent foreclosure, the
Committee notes the comparison made by Ms Noelle Kelleher of Ernst and
Young to the situation of someone renting:
But, if you are a tenant, you are renting and you are facing
eviction, there are really no grounds in there at all for the ISC to
release your benefits to you. In some respects, I would have thought
that that individual was probably in a worse-off position than someone
who has a home.[17]
4.32 There is no discretion for the ISC to grant early release of superannuation
benefits in relation to compassion or hardship other than according to
fixed criteria outlined above. The appeal situation differs between hardship
and compassionate grounds as follows.
4.33 In addition to the objective test for hardship, individual funds
can 'either apply an additional objective test, if they wish, by way of
amendment to their governing rules, or to provide for a subjective test'.[18]
This leaves them open to appeal, as the ISC explained:
It is not something that most of them have been anxious to do,
because as soon as you introduce a subjective test you expose that to
challenge. You expose the trustee to potential complaints to the Superannuation
Complaints Tribunal, and that is not something that most of them relish.[19]
4.34 The ISC advised that, while there are no formal rights of appeal
on the compassionate grounds, the ISC itself will be 'maintaining the
arrangements which have existed to this point; that is, that there will
be an internal ISC review if a person complains'. They added:
My understanding is that there have already been a couple of
requests for reconsideration of a knock back on a request on compassionate
grounds. That revisiting is done in an area on the ISC quite separate
from the area which is making the primary decisions.[20]
4.35 The Committee notes that any further appeal is to the Federal Court.[21]
4.36 Ms Robin Hopcroft, the Tasmanian Assistant Ombudsman, argued for
a discretion rather than an appeal, 'because if they went on an appeal
and review and the review body applied exactly the same tests, they would
find that they would be excluded by the regulations'.[22]
With special reference to the case of the Hutchinsons discussed above
at paragraphs 4.13 to 4.16, Ms Hopcroft said:
It would really have to be a discretion so that their circumstances
can be assessed, because, when they took out that private medical insurance
precisely to guard against the type of accident that subsequently happened
and that caused their financial hardship and led to their application
of compassionate grounds, they had no idea that their private medical
insurance would act as a disentitler to being able to access superannuation
on compassionate grounds.[23]
4.37 The ISC provided figures on the number of applications for early
release on financial hardship grounds in recent years.[24]
Also, for the last four years the breakup of the results of the applications
are provided in the following table.[25]
Table 4.1
Year
|
Number
|
Full Release Percentage
|
Part Release Percentage
|
Refused Percentage
|
1988-89
|
3 108
|
|
|
|
1989-90
|
4 692
|
|
|
|
1990-91
|
11 618
|
|
|
|
1991-92
|
25 815
|
|
|
|
1992-93
|
32 922
|
|
|
|
1993-94
|
36 184
|
72
|
12
|
16
|
1994-95
|
39 480
|
82
|
9
|
9
|
1995-96
|
55 199
|
83.6
|
9.5
|
6.9
|
1996-97
|
78 648
|
87
|
7.5
|
5.5
|
4.38 As can be seen by these figures, the number of applications doubled
over the two years from 1994-95 to 1996-97.
4.39 The total amount paid out in 1996-97 was $254 million or 0.09 per
cent of total superannuation assets, compared to 1995-96 where the amount
paid out was $249 million which represented 0.07 per cent of superannuation
assets.[26] The corresponding
figures for 1993-94 and 1994-95 were $203 million (or 0.04 per cent) and
$223 million (or 0.05 per cent) respectively.[27]
4.40 The Committee accepts these figures as ample evidence that changes
needed to be made to the policy of early release for hardship.
4.41 An area of concern to the Committee was the indication in some
of the evidence that individuals in financial difficulty may be encouraged
to access their superannuation as almost a first option. Mr Hauptmann
(a financial counsellor) described the process as follows:
Part of our investigation into their financial situation is to
ask if they have been working. If people say, 'Yes ... ,' I say to them,
'Have you been working in the past 10 years?' If they say yes, I say,
'There could be superannuation that we can access to relieve this diabolical
situation.' It is mainly a tool that is coming to me as a practitioner,
and a lot of my colleagues would do the same.[28]
4.42 Mr Hauptmann cited past cases he had been involved with, where early
access to superannuation had enabled people to manage their way out of
very difficult circumstances, and where, to some extent at least, the
new rules would prevent access.
4.43 While in no way seeking to prevent those in genuine financial hardship
from being assisted to recover from their difficulties, the Committee
considers there does need to be strict limits on the use of superannuation
for this purpose. The Committee appreciated the frank and helpful evidence
on this issue from those associated with welfare groups.
4.44 Of course, some evidence conflicted with the Committee's view. For
example, Mr Peter Davidson, from the Australian Council of Social Service,
said:
To provide a bit of context, we have argued consistently, including
before this committee, that superannuation should be broadened to cover
other long-term saving needs ... [29]
4.45 Mr Davidson did not regard early release of superannuation on hardship
grounds 'as a backdoor route towards achieving those ends', and accepted
'that the rules need to be reasonably tight'.[30]
He said:
We would support the use of the standard social security income
and assets test as a hurdle which people must cross before they can
attain early access on these grounds.[31]
4.46 The Committee cannot agree, as it sees the relationship of universal
superannuation to the social security system in Australia in terms of
superannuation alleviating the burden on the age pension. As a fundamental
matter of principle, superannuation has no role in supporting or underpinning
the social security system.
4.47 Australia's superannuation system provides for compulsory and other
contributions to be made to individuals' accounts which grow and are held
for the benefit of those individuals' retirement, or on attaining preservation
age. That is the policy behind the granting of concessional taxation to
superannuation savings.
4.48 In Super - Fiscal and Social Links, the Committee noted 'that
the principal purpose of superannuation is to provide for retirement and
thereby alleviate possible future hardship' . The report said of superannuation:
It should not be regarded as a fund available for stand-by relief
during the period of a normal working life. In those circumstances,
the Committee believes that social security is the proper channel through
which emergency relief is available, rather than through a loss of future
superannuation benefits.[32]
4.49 It is, of course, open to the Government to establish some other
kind of public or compulsory savings regime specifically aimed to assist
individuals in times of severe financial difficulty.
4.50 The Association of Superannuation Funds of Australia (ASFA) has
provided the Committee with guidelines about how the release of benefits
on hardship grounds could combine both objective and subjective tests.
The text of that advice reads as follows: 1) Prior to age 55, persons
must have been in receipt of Commonwealth Income support payments continually
for three months at the date of application and must have evidence of
this.
In satisfying the objective test, trustees can be reasonably satisfied
that the person is suffering financial hardship.
Trustees would then assess the individual's circumstances to determine
whether additional funds (over and above the social security benefit)
were necessary. The release of any benefits would be at the discretion
of the trustees and it would be possible (either via regulation or via
the governing rules) to limit payments to meet accounts which must be
paid by trustees from the individual's account. This would avoid benefits
being received directly by the individual.
2) For persons aged 55 or more, the objective test would be a statement
by the appropriate Government department or agency that the person satisfies
the criteria for a support payment (the person may not be eligible because
their superannuation benefits may preclude them from receipt of the payment).
The trustees would apply the subjective test as above with payment
limited to the discretion of the trustees and to the accounts presented
to trustees.[33]
4.51 The Committee appreciates this contribution by ASFA, but has some
problems with the directing of payments in the way suggested.
4.52 A three month receipt of income support period is a sensible proposal.
Also, the Committee is mindful of the need to attach a subjective test,
if for no other reason than to avoid the situation of automatic early
access to superannuation following a period on income support.
4.53 The Committee considers the former system for the making and assessment
of hardship claims for early release of superannuation was leading to
an unacceptably high level of leakage in the superannuation system.
4.54 Perhaps more important though was the implied message, that:
- early access to superannuation was easy to obtain; and
- accrued superannuation entitlements could be a "first port of
call" when in any financial difficulty.
4.55 This situation was unhealthy if the integrity of superannuation
as part of a retirement incomes policy was to be upheld.
4.56 However, the Committee considers the detail in the changes made
by the Government to the hardship and compassionate grounds provisions
may have "thrown the baby out with the bath water". While the
concept of individual hardship is often difficult to reconcile with the
need to preserve superannuation for retirement, the Committee considers
the Government may have over-reacted to the understandable problems of
the ISC in administering the former provisions.
4.57 The Committee considers that the new objective grounds for hardship
may have not been fully researched. Restricting the definition of income
support to certain Commonwealth payments seems unduly restrictive, while
the lack of additional criteria beyond a period in receipt of payments
may actually encourage the early access of superannuation.
4.58 Other forms of income support would seem equally relevant for purposes
of this objective test. Also, the Committee considers the period in receipt
of such income needs to be reduced to three months, and a subjective test
needs to be attached.
4.59 In a climate of high unemployment, high redundancy rates and community
wide job insecurity, workers who are retrenched or are made redundant
should be able to access their superannuation, if in severe financial
difficulty, after a reasonable waiting period.
4.60 Some form of official guidance to superannuation funds in applying
an additional subjective test seems appropriate. A total inability to
meet essential and immediate living expenses would seem a reasonable subjective
criteria.
4.61 In the compassionate grounds area, the Committee is inclined to
view the new objective criteria as having more the character of defined
desperation than compassion. To attempt to strictly define such grounds,
although no doubt based on the ISC's experience under the former tests
for hardship, is a conceptually flawed exercise. In the Committee's view,
the concept of "compassionate ground" necessarily implies a
sympathetic discretion, albeit to be exercised only in rare circumstances.
4.62 Labor Senators conclude that a reasonable waiting period in continuous
receipt of income support needed to satisfy the objective test for severe
financial hardship should be twelve weeks.
[1] Evidence, Mr Davidson, p. 124.
[2] Super - Fiscal and Social
Links, December 1992, p. 29.
[3] ibid - also noted in the Committee's
7th Report, Super Inquiry Overview, at p. 24.
[4] Part 1 of Schedule 1, Superannuation
Industry (Supervision) Regulations, amended by SR No 189 of 1994.
[5] New subregulation 6.01 (5)
of the Superannuation Industry (Supervision) Regulations.
[6] Submission 15, Office
of the Tasmanian Ombudsman, p. 3.
[7] See new subregulation 6.19A
(3)(b) of the Superannuation Industry (Supervision) Regulations.
[8] Evidence, Mrs Hutchinson,
p. 22.
[9] Evidence, p. 26.
[10] Evidence, p. 28.
[11] Evidence, p. 29.
[12] Item 105 of Schedule 1 of
SIS Regulations.
[13] Regulation 6.19A(1) of SIS.
[14] Regulation 6.19A(3) and
(5) of SIS.
[15] Explanatory Statement,
Statutory Rules 1997, No. 152.
[16] ibid
[17] Evidence, p. 64.
[18] Evidence, p. 179.
[19] Evidence, p. 179.
[20] Evidence, p. 181.
[21] Evidence, p 181.
[22] Evidence, p. 23.
[23] Evidence, p. 23.
[24] Evidence, p. 176.
[25] Additional details provided
later by the ISC.
[26] Evidence, pp. 177-8.
[27] Answers to Questions taken
on Notice, Treasury Advice of 2 September 1997, p. 6.
[28] Evidence, p. 30.
[29] Evidence, p. 125.
[30] Evidence, p. 125.
[31] Evidence, p. 125.
[32] Super - Fiscal and Social
Links, p. 28.
[33] Information provided by
fax on 2 September 1997.
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