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Early access to superannuation benefits

CHAIR —Welcome. Would you like to speak briefly to your submission.

Ms Smith —In preparing the submission, we put your questions on our site and sought direct feedback from our members. Because of the shortness of time, we received in the order of 16 specific commentaries from 16 specific funds. They were primarily industry funds and some local government funds and a limited number were corporate funds. Because of the lack of comprehensive information that was available from APRA, our field survey that is out and about now for both industry funds and corporate funds included questions about hardship claims and compassionate claims. Data is still coming in from the field, but our research centre has made some preliminary analysis as to the scope of claims that are there.

I suppose what I would like to say in introduction is that, coming from the analysis that we have done, we see that the primary objective to have firmly in mind is what the superannuation savings are for—that is, retirement income. From the analysis that we have done, there is a very real danger that that goal is being undermined because of the way that the hardship claims in particular are being administered.

The preliminary analysis that has been done by the ASFA research centre identifies a number of things. Firstly, there are very big differences between funds in the level of payouts and the way that those claims are being administered. Secondly, there has been an escalating number of overall claims in recent years. With the 1997 changes in claims, there had been an initial curtailment of claims, but in recent years that has been escalating, and in the last financial year, our estimate is that there were in the order of 83,000 claims and payouts of $350 million, with funds reporting that those payouts had been increasing in recent years.

The analysis as to the hardship claims in particular indicates that there is a very real potential for that to grow even to much higher levels if it becomes regarded as an automatic right or top up to social security. I think that highlights the need for education. It also highlights the need for clear messages and unambiguous messages about the policy about the role of superannuation. That will become more critical as the SG balances start to grow and they become a more important balance and amount of money for people, which they will start looking at in that inevitable balance that people have between immediate needs and future needs.

I think we also have to be mindful that the associated administrative costs and burden on trustees and funds are also increasing. Again, the preliminary estimates that we have made, given the level of payouts that are happening, show that the total administrative costs being borne by funds at the moment are probably in the order of $8 million to $12 million. We need to remember that these costs are being borne by all fund members. In addition to those costs, there are some associated costs that come about because of the increased number of member protected accounts that will be there in the system.

Our submission has also highlighted our concern about requiring trustees to fulfil a role that goes beyond their traditional skills and role. We believe it is a skill and role that should not be expected of them. They are being asked to review the financial circumstances and lifestyle of both the individual and the family of that individual. It is very intrusive and it is very time consuming. Indeed, those skills are more like those of a financial planner and debt consolidator; they are being asked to give financial planning advice and life skills which really go beyond what has been the expectation and, as I said, their skills.

The role and view of the SCT in recent cases where it rejected the idea of funds developing their own internal fund guidelines has also increased the difficulties for trustees and the demand for a subjective case-by-case approach. I think that will only exacerbate the differences between funds and places trustees in a very invidious role. We think that it is not the role of trustees to be involved in such subjective and discretionary tests. We made the analogy to the policy decision by the government on the divorce and super legislation which really had the potential to place trustees in a similar situation. In that policy decision, the government, rightly in ASFA's view, gave that external body—in that case the courts, and in some cases it was agreed settlements—the right to decide how the super asset was to be divided. The task of the trustee and the funds in that situation becomes one of implementation. So it separates out the assessment phase from the implementation phase.

We believe that, in this situation, that would be the right way to go and that we should really be moving back, not necessarily to APRA—or, in that case, it was the ISC—but to an external and centralised administration body. We think that that is required to achieve both a cost effective and consistent approach. If you look at the external bodies around, it could be APRA, or it could be Centrelink. We believe though that, if you were looking at those bodies, they would need additional resources and skills than is the case with the current situation. We believe that there needs to be more of a service provided—not just an automated handout—in terms of looking at the financial positioning of those people to help them with the life skills that are needed. We would see those people needing to understand what the primary objective of superannuation is so that it is a service in helping people and, equally importantly, needing to understand that the early release of super is the last resort that should be looked at. I think that gives you a short cook's tour of our submission. I am happy to answer any questions.

CHAIR —You say that it has got to be limited. On the other hand, you can see that there are situations for early release.

Ms Smith —Inevitably there will be situations, particularly when you are looking at some of the compassionate grounds—palliative care and those sorts of areas where there is no other resource. I think what has been happening, though, in some of the hardship cases is that it is now being viewed as just an automatic top-up to social security. Unfortunately, without proper counselling, probably all that is happening is delaying the next emergency for these people. In a lot of the reports that are coming in, it is becoming almost too routinised as a top-up.

CHAIR —Do you think it can raise the possibility, if it is too easy for people to opt out of a job, to go onto social security and then draw down their superannuation after six months?

Ms Smith —I do not know whether people would deliberately opt out, but certainly the view that `I will automatically use the superannuation as a right' is in danger of developing. I heard you ask a question about small communities before, but the hearsay of funds is that, yes, payouts have happened in small communities and then they get hundreds of claims of a similar order occurring. That has happened, I think, with some of the CDEP claims and particular community development claims.

Mr Hodge —In relation to that incidence that was mentioned by Tasplan, we have evidence of similar types of community claiming arrangements being in place in communities in Queensland.

CHAIR —Do you think there is a clear conflict of interest as far as do-it-yourself funds are concerned in terms of financial hardship in that the trustees there can virtually suggest that they should get the money a lot easier than perhaps in a large organisation?

Ms Smith —Inevitably, yes.

CHAIR —What I am saying is that we have got to be careful about having two standards, one for the do-it-yourself fund, where it would appear to be relatively easier to get the money than, say, from the REST type organisation. The discretion lies with the trustees, and obviously the trustees are not going to turn down their own applications.

Ms Smith —Yes, there may be some anomalies there at the margins, but I think what we have to look at here is the integrity of the system as best we can for the bulk of people. If there needs to be an adjustment in terms of the assessment and arrangements for do-it-yourself, I think we need to look at that as another step.

CHAIR —What do we do, though, in the case of a single parent living on the outskirts of town having to travel to town and the registration has not been paid, insurance has not been paid, the car needs some repairs, and the house needs some money spent on it because the kitchen is virtually uninhabitable? Do we just turn down those claims?

Mr Hodge —Is it an issue that we turn down the claims or is it an issue that there are deficiencies in other social support systems within the Australian community? That is a fundamental question we feel needs to be answered. Is this the type of thing which superannuation money has been put aside for, or is that the type of thing which the Australian society expects the government through other agencies to fund and assist?

Ms Smith —There are different approaches in different countries. Australia is one of the few countries that allow early release of funds for hardship claims.

CHAIR —What is that position, say, in the United Kingdom? Can people access it?

Ms Smith —What has developed in the UK is that for these sorts of emergency hardship cases there are, in fact, loans and other assistance in play. It is a part of the social security system so is not anticipated that the superannuation pensions are used for these types of loans.

Mr Hodge —In the United Kingdom they have a Department for Work and Pensions—and I suppose as a starting point the majority of funds in the United Kingdom are defined benefit funds—so in a lot of cases it is inappropriate and difficult to determine how you would do early release money. The Department for Work and Pensions—I have some papers here outlining what they do, which I will leave with the committee afterwards—have arrangements for interest free loans for matters such as where people have a short-term financial need, and the money is lent by the department with an understanding that, depending on the reason for which the loan is given, the money may or may not be repaid. It depends on whether it is a loan or a grant and, where it is required to be repaid prior to granting the loan of money, an arrangement is put into place as to how and when it will be repaid.

CHAIR —For the case that I outlined it would be very hard for a person to repay a loan, particularly if that person already has a substantial, say, $30,000 loan which they used to acquire a run-down house on the outskirts of town.

Ms Smith —I am not denying that. But what is the purpose of superannuation and do you want it drawn down for these types of purposes.

CHAIR —Basically, you want a tightening of the rules in terms of access and you want centralisation—is that it?

Ms Smith —They are two separate questions. One is the rules themselves. We are saying that if we are to proceed on that path—in 1997 an attempt was made to tighten the rules—then clearly, in the reality and the experience of what is happening now, that has not been the case and the number of claims that are occurring is starting to expand. The government, I think, needs to make a decision as to whether it wants superannuation to be used for these types of purposes. If it does, we will not be meeting our initial objective for retirement income. If it wants to expand what the money is being used for, it may need to consider increasing the level of savings and contributions through superannuation to meet not only retirement income purposes but also some of these other life purposes that are happening.

Separate to those rules, the policy objective around superannuation is that the message needs to be clearer: that the purpose for this saving is retirement income. Because these hardship cases really are all social security claims—they are all people that have been on pensions or benefits for 26 weeks or more—clearly, the arrangements around that social security are not meeting quite common needs. So, again, the policy consideration needs to be on the level of either those pension benefits or some of the surrounding assistance that is there, like the UK arrangements, where they provide top-up loans.

The second question we are raising is about the administration. We are saying at the moment that the fact that decisions are having to be made by funds is creating anomalies and differences. It is creating holes in the systems where levels of fraud or repeated claims are happening. It is creating very high cost because of the decision making processes that funds have to go through and trustees have to go through where they do not really have the skills or the expertise and should not be expected to. So we say that, once we have sorted out the rules, it would still be more cost effective and more consistent to have a centralised administration dealing with the assessment phase of that and then have the funds implement the decisions.

CHAIR —Would people who are dying from known causes, such as cancer or motor neurone disease, who have only got a short expectation of life, be able to access their superannuation?

Ms Smith —In my view, yes. In some ways, I am advocating a tightening up of the hardship and the routine social security claims—if I can call them those—and more flexibility on compassionate grounds.

CHAIR —You are suggesting tightening the grounds so far as trustees are concerned. What about a central body looking at both areas—hardship and compassion?

Ms Smith —That is what we are advocating. All claims should be assessed at the centralised body.

CHAIR —At the same time we should tighten the financial hardship claims and provide more flexibility under compassionate grounds.

Ms Smith —Yes, but also provide a service for those people so it is not just a handout.

CHAIR —It is a service?

Ms Smith —A service in that a lot of people need assistance with their financial planning. It is a little bit like financial counsellors. They often have to track through the budgets of families, look at the ways they are managing, and help with debt consolidation. There is often a range of life skills that people are desperately needing, apart from just a $200 or a $500 handout.

Mr Hodge —That is the difference between giving people sufficient skills to allow them to get their life in order as well as, if necessary, maybe giving them some immediate financial assistance and merely giving them financial assistance, which gets over their immediate problem but sees them back again in 12 months time for their next annual claim. It is trying to draw a distinction. The question is: how do you handle and cope with that?

Senator ALLISON —Can I come back to the question of collection of data. You say there is no central collection, so we are pretty much in the dark as to what it means in the scheme of things. Can I just confirm that there is no obligation on trustees to inform APRA or any other body when payment is made?

Ms Smith —No.

Mr Hodge —There is a requirement on trustees to maintain records which show why claims were released and to justify that claims were released in accordance with the relevant provisions of the SIS legislation, but there is no further requirement to report that information to any authority.

Senator ALLISON —That would be a simple process to put in place, would it not?

Mr Hodge —Yes.

Senator ALLISON —Tasplan suggested that there was no policing of more than one single lump sum payment being made within a 12-month period. Who ought to be that watchdog? Who should police such things?

Ms Smith —It is not only Tasplan reporting that; a number of the other funds have reported that too. The problem comes with people with multiple accounts, and they have that same letter from Centrelink. If it were a centralised authority, you would not have those problems of multiple claims.

Senator ALLISON —Yes, I understand that point.

Ms Smith —If you have multiple claims then you really need to institute a policy that only the original letter from Centrelink will be provided—or some sort of link back, with authority given from Centrelink that a claim has not been previously made. Centrelink was the originator of that letter, so it needs to be the port of call.

Senator ALLISON —If Centrelink received the information from trustees about payments made, would it be a reasonable expectation that they play a central role? I assume that you are suggesting a central role for a whole range of things. If we were to recommend minimal changes but pick up on that, would it be reasonable to say to Centrelink: `We want you to keep the records and be aware if there are two payments made by different funds'?

Ms Smith —You would have to ask Centrelink two questions: whether they would record that in a centralised way, and how easy it would be for funds to confirm that without ending up on a merry-go-round in trying to get that information from Centrelink.

Mr Hodge —Another associated issue is whether you would do the monitoring at the point where a person makes a request to Centrelink for a letter—I think they call it a Q230 letter—to go to a fund requesting money or whether you only do the recording once the money has been released. There are problems with doing the latter, because you could have several claims going through at the one time.

Senator ALLISON —You were here for the discussion with Tasplan on the question of how full an assessment trustees themselves decide to conduct. What is your experience with your members? Did your survey go to this question? Is there a fairly minimal approach to an assessment undertaken where it appears, on the documentation presented, to be compliant? Is that what most trustees do in most funds?

Ms Smith —We received some commentary on this. There is a variance. A number of funds have put in place a system where, if the claims are up to a certain amount, it becomes pretty automatic. That is done on a cost—

Senator ALLISON —What amount would that be?

Ms Smith —I think that some funds were nominating $2,000.

Mr Hodge —I think it was around the $2,000 mark.

Ms Smith —Then, above that, many seemed to be going on a one-to-one assessment. But this was where they were saying that they had difficulties—in understanding an individual's financial circumstances plus being asked to look at the family circumstances. They were also having difficulties because of the way people constructed it: some paid off their debts; others didn't. Understanding that was, they said, very difficult, very intrusive and very time consuming for them.

Some have constructed internal guidelines. The case for the SCT, for example, had constructed internal guidelines—they said that home renovations would not be a cause for a claim. But that was the very case where the SCT said, `No, you can't have internal guidelines.' So, in a sense, what seemed to be coming through in some of the commentary from funds was that with this it was a no-win situation for them. Some were saying, `We're going to continue with one to one.' Others were increasingly going for the automated payout approach.

Mr Hodge —They were doing that in the interests of all their other members, because it is those members who bear the cost.

Senator ALLISON —I understand. Does the setting of an arbitrary level—$2,000 or whatever it is—become known to people and we suddenly see a lot of claims coming in for $2,000?

Ms Smith —It would become known in the community, yes—by word of mouth.

Senator ALLISON —And would financial planners be part of that community word of mouth system?

Ms Smith —Presumably. Certainly, with the CDEP program in Queensland that fund reported a move from, I think, one claim to 400 claims in the space of three months.

Mr Hodge —That was from a single community.

Senator ALLISON —How do you define this community we have been talking about?

Mr Hodge —In that instance we are talking about a local area. Within that community—an isolated, residential location with a whole range of people—most of the people are on some type of benefit and most of them are employed on CDEP or CDEP related schemes.

Senator ALLISON —And they will talk over morning tea?

Ms Smith —They talk, yes.

Senator ALLISON —What about the question—and this has been raised in a number of submissions—of rent versus mortgage payments for release of funds? Do you see a distinction or do you agree with the rationale that owning a home is related to one's retirement security and so that has some justification, whereas rent does not? Do you agree with that or does that remain an anomaly?

Ms Smith —This is on compassionate grounds?

Senator ALLISON —Yes.

Ms Smith —The general tenor of the commentary we got was that people did not see the distinction in quite those terms between owning a house and renting. It was more a matter of having a roof over your head. So the commentary we were getting was that that distinction should not be there.

CHAIR —It has been claimed by some of the witnesses that, for example, the rule imposing a single lump sum payment in any 12-month period is not policed, especially if the person is a member of more than one superannuation fund. How widespread is that criticism?

Ms Smith —From the commentary we were getting, we believe quite widespread. It was being raised as a concern by a number of funds that there was no way of policing that. Concerns were also being raised in a choice of fund environment whether the ease, with certain funds, of having access to the money in the future might in fact become a selling point, which would not be a necessarily desirable selling point for the superannuation system.

CHAIR —Who should have the responsibility for this follow-up? I am referring to the $10,000.

Ms Smith —In answer to Senator Allison we were indicating that we thought that Centrelink really is the body that has the critical information. We are looking here just at the hardship cases and the monitoring of the 26 weeks and whether one claim has been made on that. If it was on compassionate grounds, it would need to be the centralised body. That was one of the reasons, the more we looked at these issues, the more we kept coming back to the sense of having a centralised administration to deal with the assessment and the monitoring. It is not an easy issue, but the more we started peeling the onion, if you like, it just kept making more and more sense to us for that to be the case.

Mr Hodge —It was interesting to note, in the comments we got back from our members, that virtually all of them said that the monitoring of whether in fact there was more than one payment in a year was a real issue for them, and that even included funds which, as part of their procedures, required members making a claim under financial hardship to sign a statutory declaration that they had not made a similar claim with another fund. Those funds still expressed concern with the problem that there was no effective monitoring of that particular rule.

CHAIR —One of the other criticisms is that it is provided by Centrelink and applications to superannuation funds are not followed up. While it is the responsibility of the claimant to notify Centrelink of a successful application, do you think the Centrelink forms need to be revised?

Ms Smith —Probably forms and processes, I think. Even if the form is revised, is there a recording and a process that funds can follow to verify that claims have not been made at another point?

CHAIR —It has been alleged that some applicants may still be employed, yet they qualify as a claimant for support, if the support payment meets the 26-week requirement. How can that be?

Mr Hodge —A particular case which was pointed out to us revolves around CDEP payments. A lot of CDEP payments go into Aboriginal communities, and there are two ways they are used. It may be that the benefit recipient's sole income is a CDEP payment, or it may be that the CDEP payment is paid to a community to assist a basic level of employment remuneration. The community itself then tops up an individual's wage with a supplementary payment. For Centrelink purposes, the individual is still receiving the CDEP payment but, because of the top up, it is possible that they are not on what you would call a subsistence welfare benefit payment. They are receiving more, but they meet the fundamental requirement of having been on the requisite payment for the requisite period of time.

CHAIR —In terms of tightening the rules though, how do you face situations where people are destitute or where families are in receipt of regular food parcels but they have got thousands of dollars in their superannuation? Do you think there should be other social security measures to pick these people up, rather than having them access their super?

Mr Hodge —No, I think our fundamental position is that there should be a central authority which is staffed by people with the skills that the trustees do not have, to assess these claims and sit down and work out what it is that these people need. In some of these cases, you will find that what they need is the assistance that can only be provided by releasing money from superannuation funds. In other instances, you will find that there are other mechanisms which can be adopted to assist these people.

The real issue is that superannuation fund staff, particularly their trustees, who are required to make the decision to release the benefit—ultimately, it is their decision—do not have the skills or the time. In a lot of instances, they do not have the requisite information or access to the requisite information needed to adequately make this assessment. So it would make sense to set up an organisation—or a group of people within an existing organisation—staffed with people with the appropriate skills to look at these cases properly. Then what you would end up with is a more consistent approach to the processing of all these claims. We are certainly not saying that no financial hardship claims should be processed at all. I do not think that is a realistic position. As with compassionate grounds, there are some cases where on the face of it you could not reasonably refuse the request. The question is how to properly assess those cases.

CHAIR —But, if your deed provides that you cannot give that access, then you cannot give that access.

Mr Hodge —Except that, if you had a centralised agency which was doing it and the SIS rules were amended so that they would override all funded deeds, then that would be possible. But it should be borne in mind that, if you overrode all fund deeds, then you would come to the issue that they have come to in the UK, which is the issue of how you release part of a benefit from a defined benefit scheme.

CHAIR —So basically you are suggesting a centralised operation. Who should that be—Centrelink, APRA or somebody else?

Ms Smith —The most obvious candidates would appear to be either Centrelink or APRA, but they need a different set of skills so that there is also a service being provided. We are saying that there should be a tightening up of when superannuation is paid out because we do not want a situation where social security payments are just routinely topped up with whatever superannuation is available.

CHAIR —But you have not answered my question. Should APRA or Centrelink be the provider?

Ms Smith —Either of those, with additional resources and additional staff with the right skills.

Mr Hodge —It is an interesting question. Fundamentally, Centrelink perform a day-to-day social security arrangement and their focus is on day-to-day living needs. So they would probably be in a position to appropriately assess the circumstances of these individuals. But APRA is tasked with regulation of the Australian retirement income system, and the money is paid into superannuation. The successive rule changes over recent years have impressed that this money is to be preserved until retirement. So APRA would be better placed to review any case with a balance towards a preservation until retirement incomes focus. So it is an interesting question as to where you place it because both organisations would bring their own individual skills and approaches to it. The danger is that, in placing it in one or the other, you could end up having the balance wrong as to the approach which the government thought was the best, most appropriate approach and in line with overall income retirement policy.

CHAIR —We have to make some sort of recommendation, and we are seeking your support.

Ms Smith —As has been outlined, there are pluses and minus with either. I think either agency could work, if we are conscious that what we want is a unit which is specialised, understanding the objectives of superannuation and providing not just handouts but also a service to individuals.

CHAIR —So additional resources would have to be given to one of these two departments because obviously their responsibilities would be increased.

Ms Smith —I think we have to deal with that. And, in answer to your next question—

Mr Hodge —Who will pay for it?

Ms Smith —I guess we would make a couple of comments. When the ISC changed its rules, the levy that was imposed on superannuation funds at that time was not decreased. So one can wonder what happened to those resources at that time. The other thing I would note is that most of these cases are social security cases, and there is an argument that really what we are doing is dealing with the assessment and running of social security in the fairest possible way. So we could mount an argument that our role is the implementation of the decisions. There will still be costs associated for funds in the direct implementation with the assessment being done by another agency but, that said, I think we are practical enough to understand that, if we want this done properly, there may need to be some joint funding arrangement.

Senator ALLISON —As to the question of funds themselves deciding whether they will allow early access on financial grounds, do you think it should be uniform across the sector? Should it be up to trustees themselves to make this decision?

Ms Smith —It is a bit like the divorce and superannuation arrangements—the trustee has to implement it. For example, for the ones on compassionate grounds, if APRA makes the decision the funds release the money. For example, REST, which does not deal with hardship cases, does release money on compassionate grounds. As Robert indicated earlier, there are some very real practical difficulties associated with that across-the-board approach in relation to some of the defined benefits schemes.

Senator ALLISON —Leaving aside defined benefits, in your survey of funds did you ask whether or not they paid out on the basis of financial hardship?

Ms Smith —Yes.

Senator ALLISON —Do you have a sense of how many do and how many don't?

Ms Smith —Yes. There is a table on page 9 of our report relating to a survey of industry funds. That gives you a bit of a picture that we have built up as to the payout situations.

Senator ALLISON —Does that indicate that only one fund does not pay out on the basis of hardship?

Mr Hodge —It would indicate there is one major fund which does not, and it could very well be that that would be one of only a few industry funds which do not pay out on the basis of financial hardship. Interestingly, it is not so much a decision for the trustees; it is a matter of whether that rule was built into the trust deed of the fund. My understanding is that in the REST case it is a rule of their trust deed that they do not release on hardship grounds.

Senator ALLISON —The trust deed can be varied, presumably?

Mr Hodge —Yes, but you would find that the rule was probably there from its inception. I do not think you would find a trend these days towards funds changing their trust deed to prevent it. There was a consistent message coming through from respondents to our request for information that they believed that the rule should be consistent across the industry. ASFA has always said that consistency across the industry is one of the greatest challenges for the industry because members need to understand that rules will be applied consistently.

Senator ALLISON —So if the committee chooses not to recommend a centralised body to do this, you would not be opposed to our recommending a consistent approach that all super funds would be obliged to comply with?

Ms Smith —How would—

Senator ALLISON —Leaving aside defined benefits.

Ms Smith —The practicality is: how is that achieved? In developing our position, people said that there must be an objective test. You ask yourself: what is that objective test? At the moment it is the first layer of social security—that they have been on benefits for 26 weeks. If that is the only test, you would see probably a doubling or quadrupling of the number of claims that are made. It then becomes a subjective lifestyle test. If that is being administered by individual trustees and funds around the country, you are not getting consistency.

Senator ALLISON —Assuming that the rules are the same for all funds, I am trying to tease out whether there is a class or size of fund where this would be very difficult or whether we can characterise in any way those that do not pay out on hardship grounds—whether it is for historic reasons, for example. I am trying to get a grasp on why some do and some don't. If we were to be consistent, what difficulties would that cause, leaving aside changes to the criteria and the like?

Mr Hodge —It is interesting because when we talk to people in the industry, there is a sense of trying to strike a balance. There are those in the industry who feel that the benefits should be preserved until retirement. That is their starting point—they believe in total preservation. They recognise that there are certain cases which justify and warrant early release. They move from there to saying that, if we are going to have early release, everyone should be doing early release. Where a fund has made a decision not to release under hardship provisions, it is because, in balancing up all these cases, they have said they believe that financial hardship is not sufficient reason to take the money out early. On balance, they are in favour of preservation, yet they will still release on compassionate grounds.

Senator ALLISON —I understand that, but when we have got a law that puts in place procedures for doing something, it seems to me to be extraordinary that it is not mandated—that funds themselves can make up their mind whether they comply with it.

Mr Hodge —That is correct. If we took a straw poll of members as to where they stood on whether the decision to not release on hardship grounds should rest with the trustees or whether everyone should be doing it I think they would come out in favour of everyone doing it.

Ms Smith —Yes, but to go back, you say it is extraordinary that it has not been mandated. But how do you mandate it when you are dealing with a subjective test about hardship and lifestyle?

Mr Hodge —It is probably the reason why the subjective test for compassionate grounds has been given to the centralised body, the regulator.

Ms Smith —What has been coming through here, even though the objective of the ISC in 1997 was supposedly, they said, to have an objective test which restricted the number of claims, it has become clear—and the experience is—that it is not an objective test at all. There are very big differences. And now the overlay of the SCT and the way that it is interpreting attempts by funds to have internal guidelines and the like to make it more consistent—even if it is within the one fund to make it more consistent—has been overridden. So it is pushing it to an even more case-by-case subjective assessment.

CHAIR —When money is paid out, it is generally subject to tax. Would you like to comment on that.

Mr Hodge —It seems a bit strange that you grant early release on compassionate grounds or on the grounds of financial hardship, and then you immediately take 20.5 per cent of that payment and give it to the government. It is very difficult to balance those. If the tests were centralised, stricter and better applied, and people applying for the release had the opportunity to be given additional assistance, such as training in life skills and financial advice, then in those cases where the money had to be released because natural justice, or whatever, was warranted—said that it was appropriate in those cases—then you would also deem it to be appropriate to release the money without taxing it. If you follow through the logic, the issue is that you have to get to a situation where there are extraordinary grounds under which money is released. You could draw a parallel with invalidity benefits. When people claim invalidity and have the money released early from funds, in most circumstances that money is released tax free.

CHAIR —That leads to my next question.

Ms Smith —I guess where I am begging to differ is that, in the way that the applications are being made now and with the claims becoming more routine, I think we do need a message about the purpose of superannuation. Tax incentives have been given for the money to be put aside for retirement. In the US situation, for example, their strategy has been to allow easier, no questions asked draw-down prior to retirement, but there are punitive tax arrangements in place which impose penalties for doing that. I have some difficulties if we start expanding on hardship grounds. We will really be putting the wrong signals out if we are saying to people that not only can they claim social security but they may also draw down their superannuation, and we will not apply any tax penalty.

CHAIR —You have got a number of problems though, haven't you? You have this 21.5 per cent rate that applies. But at the same time, if a person waits until normal retirement, they can get a tax-free component for a lump sum payment.

Mr Hodge —And for the amounts that are being released, generally those amounts would be released tax-free.

CHAIR —That is right.

Ms Smith —But it is going to the objective that the government had initially intended, which was for retirement income purposes.

CHAIR —Yes. But I am saying that, if people draw it down early, they have a tax penalty compared with getting a lump sum on normal retirement. That is the point that I am making.

Mr Hodge —Yes.

CHAIR —There does not appear to be any distinction in terms of the tax payable if a member has made a voluntary contribution compared with a superannuation guarantee contribution, does there?

Mr Hodge —With a voluntary contribution, if it is released early, that component that represents the money which the member put in out of after[hyphen]tax salary comes back tax free. So, when the benefit is drawn out of the fund, whether the tax applies to all or part of the benefit depends on the component within the fund that the superannuation benefit is paid out of. If it is paid out of a contribution for which another person or the individual has received a tax deduction, then the tax applies. If it is paid out of accumulated fund earnings, then the tax applies. But if it is paid out of after[hyphen]tax contributions, then no tax is levied.

CHAIR —So it would pay people to try and identify that proportion which is a voluntary contribution, if any.

Mr Hodge —Although our understanding is that the vast majority of people who are making these claims only have superannuation guarantee contributions in the fund.

CHAIR —Thank you very much; that is very useful.

Mr Hodge —Just a final point: overall, I believe the position we are coming from is that maybe there is a need to get rid of the financial hardship provisions entirely but to expand the compassionate grounds so that you can look at a wider range of matters and then do some proper assessment. It is in that context that I made the comments about whether we should be applying a tax penalty. It could very well be that, in some of those cases, there would be a distinction to be made as to whether the money coming out the fund should be taxed or not taxed.

CHAIR —I think APRA made the suggestion earlier today that, if they articulated more clearly the compassionate grounds and maybe widened that area, that might suit the two purposes. At the same time we would have to take the word `compassionate' out and replace it by a list of specified tests that have to be met.

Mr Hodge —Yes.

CHAIR —Thank you very much.

[12.20 p.m.]