Hazel Bateman University of New South Wales h.bateman@unsw.au Geoff Kingston

1. Melbourne Money and Finance Conference 1+2 July 2013Restoring a level playing field for defined benefits superannuation Hazel Bateman University of New South Wales h.bateman@unsw.edu.au Geoff Kingston Macquarie University geoff.kingston@mq.edu.au

2. Introduction & summary • Late 1980s onwards: DB plans declined worldwide. • 1982: 82% of super fund members were in DB plans. • June 2012: DB balances in Australia stood at just 21% of total. • DB plans won’t recover their previous dominance--can only be offered by large & stable enterprises. • Compulsory super means most plans need to be DC. • However, several policy measures unduly weakened DB plans in Australia.

3. DB advantages: employers & employees • Long stayers enjoy better vesting & often also enjoy ‘back-loading’ (better IRR of benefits accrual) • Loyal and farsighted people more likely to self-select for job vacancies. • Benefits linked to final salary − motivate striving for promotion.. • Motivate timely retirements. • Risk-averse employees may accept lower salaries.

4. DB advantages: taxpayers • Current policy: encourages ‘double dipping’: lump sum benefits get tax concessions, can then be used for (e.g.) home extensions by Age Pension claimants. • Harmer: “Age Pension applications in December 2008 were around 50 per cent higher than the number recorded in October of the same year.” • Henry: sanguine about double dipping. Concerned with tax expenditures & replacement rates (e.g. SG top-ups of the Age Pension), not Pension costs.

5. DB in decline: the usual list of suspects • Increased job mobility • More women in the paid workforce (entailing less family attachment to particular employers). • Fewer workers in unions. • Lower interest rates (lift DB liabilities, especially for plans offering pensions). • Increased longevity.

6. DB in decline: regulatory changes • Mid 1980s: emergence of fund surpluses—led to limits on permissible overfunding. • 1988: 15% taxes on employer contribs, & earnings. • DB plans: short-term incidence of front-end taxes falls largely on sponsors. • Mid 1990s: new ‘stakeholder’ perspective: surpluses jointly owned by sponsors & beneficiaries. • Trend towards mark-to-market accounting principles • More volatility in earnings statements—managers & shareholders prefer smooth earnings.

7. Options analysis of ‘stakeholder’ DB

8. Restoring a level playing field • Follow the USA & Canada & allow accounts taxed either at the back end or the front end. • New back-end-taxed accounts to co-exist alongside the familiar front-end-taxed accounts. Features: • Reserved for lifetime income streams. • Subject to contrib limits (like existing accounts). • Contrib limits to start low--protect the budget short term. • Gradually encourage DB sponsors to overfund, & mitigate credit risks..

9. Restoring a level playing field (ctd) • Restore some cross-subsidisation of DB plans by short stayers. E.g. SG-standard vesting of employer contribs for employees < 10 years service. • Roll back mid-1990s measures to cap surpluses. • Amend the SIS Act to restore ownership of surpluses to enterprise owners.