Take Small Business People out of the Inefficient Superannuation Collection System
COSBOA believes that the involvement of small business people in the superannuation system has created inefficiencies within the superannuation industry and has impacted negatively on the earnings of the funds.
It is also an unreasonable task to impose on small business people who are not skilled in superannuation and are the only people in the superannuation system who are not paid for their contribution which is the collection and distribution of funds.
The current superannuation system was set up in the early 1990s as a means to the self funding of retirement for the growing and ageing workforce. When the Super Guarantee was set up the number and nature of small business was different. The demand placed on small business people in the initial stages was less onerous as super choice was not in place. There was no GST and no Paid Parental Leave to impact on the time available for managing new compliance and red tape. As the system has evolved and the number of small businesses has increased the demands and costs to the small business sector and the economy has grown. In 2010 some 20,000 small business people were fined for failure to complete tasks to do with super collection and that number would have been substantially more except for the lack of resources available to the ATO in identifying the difference between mistakes and deliberate non compliance.
The recent initiative through the government’s ‘Stronger Super’ aims to decrease costs for superfunds, streamline process, ensure compliance and engage workers. The overall aim will not decrease costs for employers and may not reduce costs for superfunds given the potential requirement for more frequent contact with fund members and employers. The current approach will increase costs in time and money for individuals who are also employers and also increase a non compliance.
The Superannuation Industry is run by the private sector for its various members and is funded from the members’ contributions. We find it difficult to understand a regime where a small business person is asked to do the work of the private sector for no financial return and will be fined by the government if they get it wrong. We believe that private sector behaviours should be reflected in the whole process. We believe that an individual in business is being asked to do the same activity as a paymaster from a big business, which is not normally possible.
The inclusion of default funds in awards also adds a different complexity and asks a small business person to have a level of understanding of process and of the superannuation industry that is not reasonable to expect.
We offer a constructive solution that provides minimum savings of potentially $2 billion per year for the funds. Employer involvement in Superannuation advice
Currently an employee can nominate their fund. The employer has no choice but to be involved with that fund. In the business context the fund is just another supplier of a service. The fund may be inefficient in its communications and its record keeping and may cause extra work for an employer, time that would be better spent on the business or with their families. But a small business owner has no choice but to work with an inefficient supplier. If the employee does not nominate a fund then an employer must pick a superannuation default fund or must use the one provided in whatever award or Enterprise Agreement. That fund will also likely be inefficient.
The process also, in effect, makes one person, the small business employer, responsible for financial advice to another person or persons (the employee). This is not a reasonable request to make of people who are not trained in the financial industry.
Many, if not most, of the superannuation funds are inefficient in their record keeping and in their interaction with employers. The forms that are sent to employers are designed for paymasters and people with the time and understanding to complete the forms.
When a super fund loses information on a member they will often contact the current, or last, employer seeking information such as date of birth, address or member number. The funds know that we must work with them or there is a chance we will be fined (and many funds use a threat of contacting the ATO if information isn’t supplied).
Due to the placement of a fund in an industrial award or instrument there is no motivation for a fund to be efficient in dealings with employers. We are forced to use inefficient suppliers and cannot change to a different more employer friendly fund as the choice of fund is not one that we can make. We also have no room for complaint as these organisations are outside the public service and there is no capacity for APRA or ASIC to demand they become more efficient. Remove employers from the collection process
We propose to resolve all the problems by including superannuation in a person’s gross pay and in the PAYG payment to the ATO.
Projected savings for funds under the COSBOA proposal. If superannuation is included in the PAYG process then the members of funds will receive a higher return on their investments. The potential savings for members of superfunds is over $1.8 billion per year.
The calculations for these savings are based on the fact that superannuation funds have to manage their contacts with employers and the interaction between their members and employers.
We have estimated an annual administrative cost for funds of $800 per employer and $200 per employee/member. This cost has been estimated by COSBOA as we cannot identify any fund that discloses a detailed cost breakdown of expenditure or costs. We believe our costs to be conservative.
The activity that justifies the $800 per year for administration involved with employers involves what is required by a fund to manage the contact and processes involved with the employer. This involves:
- Electronic communications with the employer
- Mail contact with the employer
- Maintaining a help line
- Printing of paperwork and reports required for internal reports
- Printing of paperwork required for employers
- Assessment of reports by experts and management
- Updating information on new and old employers into the system
- Matching employers with old and new fund members
- Ledger entries
- Receiving and processing cheques
- Receiving and processing EFT payments
- Maintaining up to date records
- Identifying errant employers
- Contacting errant employers
- Employing debt collection agencies as needed
- And the list goes on
The activity that justifies the $200 per year for administration of the interaction between the employee/member and employer involves what extra activity is required by a fund to administer and manage the contact and processes involved with an employer. This involves:
- Matching the member with an employer
- Movement of funds from an employer payment to the members account on a monthly or quarterly basis
- Changing details of the employer as the member changes jobs
- Informing the member of any payments made by the employer or any activity
- Maintaining the record and data base with correct information
- Cost of mail activity which includes stationary, stamps, use of mail house or internal employees
- If electronic contacts are made there is a cost of data base management, managing “returned email address unknown, managing “out of office replies” and ensuring the information still reaches the member.
There are at least 1m employers. The costs per year to superfunds of their dealing with employers would be $800m per annum.
There are at least 12 million employed people in Australia who also are members of funds and many of these people have accounts in three of four different funds . There are at least 18 million fund accounts. The costs per year to superfunds of their dealing with employees is $3.6 billion per annum.
Therefore the minimum cost of administration is $4.4 billion per year.
Under our proposal the only cost for superfunds will then be any extra costs to government for using the PAYG system to move superfunds. This has been costed by the Australian Taxation Office at $114m per year.
There will also be an administration cost of contacting the clearing House/ATO for the superfunds. Given that each fund will have one point of contact to maintain that cost will be low, let’s say it might be $100 per member. This is based on:
Contacts with the ATOManaging information on funds received from the tax office.
All other activity would be at the funds discretion and not a part of the role in managing funds and communicating progress. This is a total cost of Costs and savings
Costs under the COSBOA proposal
- Current costs to funds $Billion
- Cost of dealing with employers 0.800
- Cost of maintaining records on employer/member interaction 3.600
- Total current costs 4.400
- Costs for the Government (to be funded by the superfunds) 0.114
- Costs to funds of dealing with the clearing house 1.800
- Total projected costs 1.314
- Net savings for funds per year $2.486B
This does not include the efficiency dividend for small business people who will not be forced to be part of the superannuation collection process. We conservatively consider that saving would also be in the vicinity of $800 per year which results in a further saving off over $800m. Remove us from the system or pay us for our work
The current system is complicated and inefficient due to the continued involvement of employers in the process and, in particular, the inefficiency of the industry funds. The industry funds will remain inefficient as long as we have no choice in which fund we use.
It should also be noted that, in the main, the retail funds are much easier to deal with and their payment processes, communications and information management reflects their better understanding of the business world.
The other solution is that the small business employer gets paid for collecting and distributing funds. This is extra work they will either do after hours or pay someone else to on their behalf. We should be paid for our work, the same as everyone else in the system. Efficiency will create opportunity
It should also be noted that under our proposal that there are other issues and benefits:
There will be a general increase in efficiency in the economy, as well as in the management of superannuation funds. This increase in efficiency will come mainly from saved time and expense for employers and for superannuation funds.
There will be a decrease in non compliance by employers (there will be zero non compliance as they will not be involved in the system.) In 2010 some 20,000 small business people were fined for not completing the process according to law.
There will be improved, streamlined communications and processes for super funds who will deal only with the ATO not with many employers.
This approach creates savings for the user (taxpayer), superannuation funds and employers.
Taxpayers outside the tax system are more likely to be re-engaged as the ATO will need information to be able to forward payments to their fund of choice. The need to engage with the ATO would be more compelling for these people as 8.25% of earnings would normally be a substantial amount of unclaimed funds.
The superfunds and employers would have the capacity to better plan and manage cash flow.
Employees would be aware of the full income they are receiving from their employers as their gross wages would now include the super component.
The employee would also be more engaged at least once a year in deciding what happens to their superannuation funds. When a person fills out their tax return they will understand exactly how much money they contribute to superannuation and this will provide greater interest in how the funds are performing.
The employee would no longer be worried about whether the employer has remitted their funds. The employer would no longer be stressed about whether he or she has got it right.
The unions could save time and money as they no longer have to monitor employers role in superannuation and can concentrate on safety, pay and other workplace issues.
In the case of bankruptcies and business failure the ATO normally has first call on any ‘money due’ and the demands of employees have a much lower priority. In this proposal the super guarantee component would have the same priority as the ATO, giving some surety in super payments.
There are no extra costs for employers, only savings and an ability to concentrate on business issues rather than the financial affairs of its employees.
Employers would have some increased costs. The current situation where any earnings under $450 a month do not accrue super contributions will be dropped and overtime will obviously be included in the overall income and the super component. The issue of extra costs to some employers can be resolved during the change over from the current system to the new system and this can occur at the same time that the SG contribution is increased from 9% to a higher rate. There will be no losses or change for employees. The only difference would be the need to provide information on superannuation funds to the ATO rather than to each employer. Superfund management activities would become more streamlined and less complicated.