Daryl Dixon's new eBook - Exploring the issues and options facing UniSuper Defined Benefit fund members.An Uncertain Future

With your help to spread the word, I believe it’s possible to encourage and even force governments and their bureaucrats to focus and act on key policy issues that can enhance and improve the situation of all, but particularly younger Australians facing an uncertain future.

My generation was fortunate to have access, at reasonable cost, to an excellent education system; an abundance of employment opportunities and affordable housing.  Today for a variety of reasons, the education system is more costly, job opportunities are more constrained and housing is a huge cost item for many households.

Addressing these and many other problems has been made more difficult for governments by short sighted and even self-serving decisions that avoid addressing longer term issues.  For example, during the 1980s the Social Welfare Policy Secretariat highlighted the problems and proposed options to address government funding challenges presented by our ageing population.

Far from addressing these issues, the government’s response – encouraged by a federal Treasury focussed solely on short term issues – was to abolish the organisation.  Amongst the shocking debt chalked up under these blinkered policies were the totally unfunded politicians’, federal judges’, defence force and public service indexed pension retirement benefits, which have been officially estimated, using flawed accounting methodology, at around $243 billion.

Based on the Shepherd Commission’s estimate of a saving of $150 billion over the next 35 years – by closing down entry to the military super scheme from 2016 – I estimate the total unfunded future liability to be approximately $469 billion after completely using up the $100 billion Future Fund.

This topic, with its depressing implications for those taxpayers who will have to pay the resulting tax bills, will be explored further on this site in the future.

Further superannuation industry warnings of the adverse impact of allowing members to access their super to help achieve home ownership show how little the industry cares about their members. For them, the priority is to control other people’s money and future while maximising the funds under management and maintaining their comfortable situation.

Far from being unaffordable as some critics are arguing, allowing access to super to help fund ownership via mortgage offset accounts is a low cost way to help Australians achieve home ownership and is well worth detailed consideration.

“Allowing access to super to help fund ownership via mortgage offset accounts well worth detailed consideration.”

Daryl Dixon

How a super mortgage offset account would work

Compulsory super and unlimited negative gearing tax deductions are combining to put home ownership out of reach for many Australians. Far from being unaffordable as some critics are arguing, allowing access to super to help fund ownership via mortgage offset accounts is a low cost way to help Australians achieve home ownership.

1.     What is a mortgage offset account?

Most Australians are familiar with mortgage offset accounts which operate by mortgage holders depositing money into a separate bank account linked to their mortgage.  No interest is paid on this account.  Instead, the lender charges interest only on the outstanding loan amount less the current balance in the offset account.

This allows the borrower to reduce debt servicing costs while still providing access to the money in the offset account.

Using the mortgage offset account provides the same advantage as reducing the level of debt with the added advantage of having access to the offset account if the money is subsequently needed.

2.     What changes are needed to allow super funds to open mortgage accounts?

The government would have to approve this as an investment option for super funds and set the relevant parameters.

Currently, ATO ruling  TR 93/6 of 1993 allows only the holders of the mortgage to set up a mortgage offset account.  This ruling would have to be altered to allow super funds to establish an account for one or both parties who have taken out the mortgage.

The money would not leave the super fund.  The fund would receive no income from this investment.  Instead, the mortgage holders would have a lower ongoing interest charge on their mortgage allowing it to be paid off more quickly than would otherwise be possible.

The mortgage holders would not be able to withdraw the super fund money in the mortgage offset account.

3.     What would the costs of operating the mortgage offset account?

These costs would be the subject of negotiation and government decisions.  In any costings I have assumed that the financial institution holding the mortgage offset account would pay the super fund 0.25 per cent per annum of the account balance to cover the costs of the fund.  This means if the mortgage interest rate is 5 per cent, the interest credited against the mortgage cost would be 4.75 per cent of the offset account balance and the institution would pay 0.25 per cent to the super fund for establishing the account.

4.     What would be the benefit to the mortgage holder?

If the offset account balance is say $50,000, against a $400,000 mortgage with an interest rate 5 per cent per annum, the interest expense would be reduced by 4.75 per cent of $50,000, or $2,375 in the first year. This is equivalent to an increase in the mortgagee’s after-tax income of $2,375.

Saving this additional amount would allow the mortgage to be paid off more quickly. For example, assuming repayments remain constant and the savings are applied to repay the principal, the compounding effect of interest results in total interest savings of approximately $130,000, and allows the loan to be repaid 5 years earlier.

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5.     How does this benefit compare with that of being allowed to withdraw $50,000 from the super fund to apply to a house purchase?

The benefit of applying $50,000 directly to reduce the size of the mortgage is only 0.25 per cent of $50,000 or $125 a year more than the annual benefit of ensuring that the money is used only to reduce mortgage costs and cannot be lost should the property be sold or if the house purchaser faces financial difficulty.  The $50,000 would still belong to the super fund account.

6.     Will financial institutions or super funds be willing to offer their borrowers or members the ability to establish these accounts?

Not all financial institutions or super funds may be prepared to enter into these arrangements but competition will ensure that most super funds and lenders would do so.

There are substantial benefits to the lenders to have clients with super fund mortgage offset accounts against their loans. These include reduced lending risks because of increased borrower servicing capacity and the security of offset accounts being held in the superannuation environment where it is inaccessible until retirement.

Additionally, super funds will benefit from members being greater incentivised to contribute to super given it would provide a tax effective mechanism for reducing mortgage interest.

7.     Will investing in a mortgage offset account reduce the total wealth accumulated by the investor?

It is not possible to give a definitive answer.  If people think that they can accumulate more money because the super fund return will be higher than the return on the mortgage offset account, they are under  no pressure to establish a mortgage offset account.

They can, moreover, close the offset account at any time and invest elsewhere in the super fund.

The return from the mortgage offset account will most likely be higher than that of cash and safe fixed interest investments in the super fund.

The big advantage of the offset account is the ability to repay the mortgage more quickly.  The funds previously devoted to the mortgage can then be used to boost superannuation or other personal assets.

8.     What other points are relevant?

Allowing super funds to invest in a mortgage offset account would encourage people to build up more superannuation at least until their account balance exceeds the amount permitted to be invested in a mortgage offset account.

Instead of being tied up untouchable until at least age 60, compulsory super contributions would be available to help Australians achieve home ownership instead of as currently is the case reducing their capacity to service a home loan.

Technical note

The tax ruling  TR 93/6

Contains the following point

(vii) In a dual account arrangement, what happens if a second person’s deposit account is linked to the loan account offset arrangement of another person?

19. A loan account offset arrangement which seeks to link the deposit account of customer B (who is not a party to the loan) with the loan account offset arrangement of customer A is not acceptable. For example, a loan account offset which links a parent’s deposit account with a daughter’s loan account is not acceptable. On the other hand a loan account offset which links a husband and wife’s mortgage account with the wife’s deposit account is acceptable.

The ATO notes that a spouse’s deposit account can offset a joint loan account. There’s still a different name on the account than on the mortgage but it is basically the same person’s funds. Given that the owners of the super accounts deposited in a mortgage are the mortgage holders, there would appear to be no reason why a superannuation offset account can not be linked to a personal mortgage.

Read more of my articles about superannuation mortgage offset accounts

  1. Treasurers idea of using super to achieve home ownership deserves consideration
  2. Self serving super industry not helping first home buyers
  3. Is early access to Super on the horizon?
  4. Maybe it’s time to switch into reverse

Visit my blog for more on super mortgage offset accounts.

“I have become concerned that the UniSuper Defined Benefit (DBD) fund is putting the retirement benefits of all its members at risk.”

Daryl Dixon

iStock_000016628625_SmallThe UniSuper Defined Benefit Fund

Count yourself lucky if you are not a university sector employee forced under union agreed enterprise bargaining agreements to receive your employer super into a UniSuper Fund.  Even more concerning, and unfair to the large number people who don’t take an active interest in their superannuation, all of the universities use the Defined Benefit Division (DBD) Fund as their default fund for all new full time employees.

Unless new employees opt to switch to the alternative Accumulation or Defined Contribution Fund within 24 months, they have no chance to exit the fund until they change employment.  This situation might be justifiable if the DBD was a normal defined benefit fund where the employer guarantees the payment of the benefit.

The trustees have already decided to reduce the benefits payable in respect of those benefits accruing on membership after 1 January 2015 without giving all members the option to switch to the accumulation fund before that date.

Further, the DBD, unlike any other Australian defined benefit fund I have examined, provides much larger benefits per year of service to members exiting at a late age.  A 65 year old, for example, exiting the fund receives 27% more per year of service than anyone exiting before age 40.

The UniSuper area of this site demonstrates what a poor deal younger university employees receive from this fund unless they have a high rate of annual salary growth.  I’m also concerned about the lack of any protection for the 7,000 odd pensioners receiving non-commutable lifetime pensions.

Three major changes are needed to address these inequities:

1. Changing the current arrangement that makes the DBD the default fund for all new full time employees. The Accumulation fund should be the default fund and if the decision is not taken to close off new entry to the DBD, new employees could be allowed to sign up for the DBD within 24 months of joining University employment. This change would make sure that they know what they are doing.

2. As Brian Halstead argues convincingly on this site, all current DBD members should be given the option to exit the DBD and join the Accumulation fund before the 1 January 2015 changes have any significant impact on their benefits.

3. Because the DBD is the only operating defined benefit fund without an employer guarantee of the payment of benefits, APRA should require the DBD to hold contingency reserves similar to other lifetime annuity providers such as Challenger are required to do to help ensure that the promised indexed pensions can be paid for as long as the member and their surviving spouse are alive

“There has been a significant reduction in benefits with information about structure & risks not been adequately provided to UniSuper members. ”

Brian Halstead

Report on UniSuper Defined Benefit Division (DBD)

Compiled by Brian Halstead

Having read Daryl Dixon’s book An Uncertain Future, I set out do some research and calculations which would enable me to understand the DBD and to report to those interested on the structure of the fund, the risks and the information that should be supplied regularly to members.

This report concludes there has been a significant reduction in benefits and information about structure and risks has not been adequately provided to enable members to make informed decisions. Therefore all existing members should be given an opportunity to change out of DBD before the benefits are reduced on 1 January 2015.

This would have no impact on other members as the fund is 100% vested and UniSuper have stated on a number of occasions that younger members are not required to remain in the fund to subsidise older members.

 This report is in four parts:

Download the report in a PDF here

Download the Actuarial Investigation of UniSuper PDF here

 

“Two categories of UniSuper members face the biggest risks.”

Daryl Dixon

Members Retirement Benefits at Risk

Daryl argues that the DBD fund, the default super fund for all new full time university employees is putting members retirements benefits at risk by failing to provide a guarantee to pay promised benefits. He also shows how the UniSuper DBD favours older employees.

The DBD was designed in the early 1980s, with benefits enhanced in the 1990s when fund earnings rates were high. Even though the DBD has earned a compound rate of return of 8.7% annually over the past 10 years, trustees have just announced their intention to make a significant reduction in the accrual of benefits in respect of membership after 1 January 2015.

Two categories of members face the biggest risks. The first consists of younger and middleaged members still contributing to the fund who anticipate remaining in university employment for a considerable period of time. More than 6,000 people are in the second category. They are former university employees who opted to take a lifetime noncommutable indexed pension with part or all of their retirement benefit. These members have no guarantee that the money needed to fund all the benefits promised to them and their surviving spouse will be there for as long as they live.

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“This could be detrimental to new,  especially younger,  members who do not take a keen interest in their superannuation entitlements”

Daryl Dixon

Visit the Uncertain Future blog for more and to ask me your questions.

Visit the Uncertain Future blog for more and ask me your questions