Spotlight. on the 2014 Australian Federal Budget

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1 Spotlight on the 2014 Australian Federal Budget

2 Contents 1. Budget in Review 2. Superannuation/Retirement 3. Health 4. Workforce 5. Investments 2

3 1. Budget in Review The Coalition Government s first Federal Budget delivered a very clear message that Australia must become a more self-reliant society. In the context of an aging population and the related costs accompanying this, we are not surprised by this approach. As a result of cuts to various social security programs and government services, and an accompanying moderation in the overall growth of Federal Government outlays, the Budget appears to be on a firm path towards surplus in the later part of this decade. The projected improvement in the structural budget balance provides greater policy flexibility in the event of a return of more adverse economic circumstances. Similarly, to the extent that the return to surplus also rests on a rising tax share of GDP, there may be scope for future tax relief. We believe the Federal Budget offers medium to longer-term opportunities for businesses and investors, a challenge for employers to adapt to an ageing workforce, and an imperative for individuals to better prepare now for their future working life and retirement. From our point of view there are three main themes arising: 1. Australians will need to be more self-reliant and less reliant on Government payments now and in funding their retirement 2. Increasing employment, particularly amongst older Australians is important for sustainable and affordable growth 3. There is a greater emphasis on spending on long-term projects and infrastructure rather than short-term spending Within these key themes we ve assessed the implications of the Federal Budget from a retirement, workforce, health and investments perspective. Mercer specialises in these four categories around the world. We have deep insights into the perspectives of employers, superannuation providers, investors, and individuals and we are proud to bring these insights to our analysis of the 2014 Federal Budget Federal Budget Review 3

4 Budget in Review KEY THEMES Increased self reliance now and in preparing for the future Cut backs in Family Tax Benefits A and B, increased medical costs and pharmaceutical costs, the freezing of thresholds for the health insurance rebate, indexation of the fuel excise levy, and changes to unemployment benefits, will increase costs and/or reduce incomes for Australians across the board. For retirees, the increase in the age pension age, changes to the indexation of pensions and eligibility for the Commonwealth Seniors Health Card will also impact over time. The introduction of a 2% Temporary Budget Repair Levy will hit those earning over $180,000. Effectively, all households will have higher costs and or lower income leading to reduced disposable income and less capacity to save. Retirement, superannuation, health and workplace planning One of the major policy announcements was the increase in the age pension eligibility age. We are living longer but not necessarily working longer and the Government has firmly indicated it is not prepared to continue to finance retirement at current levels. The full impact of the changes to the pension eligibility age, however, will not be felt for many years with those born from 1 July 1958 being the first to be subject to a higher pension eligibility age. The increase in the pension eligibility age to70 (already scheduled to increase from 65 to 67 by 2023) will not start impacting directly until Over time this is likely to place more pressure on employees to stay in the workforce longer. It is important to note the increase in the pension eligibility age will not necessarily force employees to defer retirement. We do not have a set retirement age. The important message for employers and superannuation providers is to be aware of and to plan for an increase in the number of older workers and fund members. This trend is already here it is not something that can be ignored until No specific changes to the superannuation preservation age have been announced but these will be considered later in the year. Numerous other policy announcements relating to retirement and health will also require greater self-reliance. Long-term spending initiatives There were a number of significant funding initiatives announced in the Federal Budget including the establishment of a $20 billion Medical Research Fund. These injections of funding will have implications and create opportunity within our labour force and for investors. In aggregate, the Budget foreshadows $50 billion in infrastructure spending over the next six years. We are cautiously optimistic these measures will result in an expansion in the pipeline of assets available for private investment, which would be a welcome development for institutional investors including superannuation funds. What should individuals be doing now? Now is the time for everyone (including those still a long-way from retirement) to assess and potentially reset retirement savings plans. People must realise the importance of saving for retirement and acknowledge that in some cases they may need to remain in the workforce for longer than they may have planned. What should employers be doing now? If they have not already done so, it is time for employers to focus on their older workforce. They should be planning for an ageing workforce and implementing policies on remuneration, talent pipelines, job rotation and flexible employment options which take into account an increasingly ageing workforce. What should superannuation providers (including trustees) be doing now? Providers should ensure their product offering is appropriate for older members. This includes consideration of: - Death and disability insurance arrangements striking the right balance between providing adequate coverage during longer working careers and ensuring that insurance costs do not represent a disproportionate amount of contributions leaving too little for retirement - Income streams which provide appropriate benefits for those who retire before pension age and greater protection for those who outlive their life expectancy. - Tools by which members can gauge their retirement needs and readiness. 4

5 2. Superannuation/ Retirement INCREASE IN THE ELIGIBILITY AGE FOR AGE PENSION The eligibility age for the age pension will be increased to age 70 from It is already being increased gradually from age 65 to 67 by 2023 in increments of six months each two years. These six month increments will now continue until Mercer s view We generally support the increase in the pension eligibility age as a sensible long-term policy. Australia is experiencing significant increases in longevity which means we are living longer and we need to fund more years in retirement than ever before. A 65 year old male is now expected to live until age 84 with 65 year old females expected to live until 87. White collar professionals tend to live even longer 86 for males and 88 for females. The age pension is now, on average, being paid for about 45% longer for males than in the 1970s (nearly 30% longer for females). Of course, if older Australians find difficulty remaining in the workforce or finding employment there will be an increase in people accessing unemployment benefits or the Disability Support pension rather than the age pension. With unemployment (Newstart) benefits considerably less than the age pension (Newstart provides up to $ each a fortnight for a couple compared to the age pension of up to $ each), this will still lead to some savings for the Government but is likely to put considerable strain on the retirement savings of those who are unable to find work. We will all need to work to hasten a cultural shift in the attitudes and policies relating to the employment, retention and reward of older people Federal Budget Review 5

6 Superannuation/Retirement INCREASE IN ELIGIBILITY AGE FOR AGE PENSION Impact on individuals The eligibility age for the age pension will increase as follows: DATE OF BIRTH ELIGIBILITY AGE Before 1 July Jul Dec Jan Jun Jul Dec Jan Jun Jul Dec Jan Jun Jul Dec Jan Jun Jul Dec Jan 66 and later 70 The increase in the pension eligibility age will not necessarily force employees to work longer. Many people retire today before age 65 so we would expect many workers in the future to retire before age 70. As happens today, some will continue working until after they have reached the age pension eligibility age. This change will not impact those who have sufficient assets/income to disqualify them from the age pension. Some other employees may be comfortable drawing down their savings at a higher rate until they become eligible for the age pension. However, employees with less savings may need to remain in the workforce for longer and many (particularly those in physically demanding occupations) may need to undergo retraining so they can be employed in other roles which are more suited to their physical capacity. Currently, only about 20% of those over age 65 are not eligible for at least a part age pension. With the increased eligibility age and the proposed changes to the indexation of pensions, more Australians will not be able to rely on a Government supported retirement. These changes shine the spotlight on the importance of additional retirement savings to supplement the age pension and provide funds to cover the period before reaching the age pension eligibility age. This is particularly important for those who will find it difficult to continue working due to health or work availability issues as well as those who want to voluntarily retire early. The Government did not announce any changes to the superannuation preservation age (the age from which retirees can access their super after retiring). This will be considered further as part of the Financial System Inquiry and the proposed Government White Paper on tax reform. The National Commission of Audit has recommended the preservation age be gradually increased to 65 and this has been supported by a number of groups. We acknowledge the need to restrict significant drawdowns before the age pension eligibility age. However consideration needs to be given to the difficulties which might be faced by those who cannot work or find work in the period from age 60 to 65. Options such as allowing some drawdowns from age 60, perhaps similar to the current transition to retirement arrangements, must be considered. 6

7 INCREASE IN ELIGIBILITY AGE FOR AGE PENSION Impact on Employers Many employers will need to reconsider their attitude to the employment of older people. Older workers can provide considerable experience and skills and with the increase in the age pension eligibility age, many may be more willing to continue working, possibly in a part time capacity. Retraining of older workers into less demanding roles will also be important. Refer to Section 4: Workforce for more details on implications and opportunities for employers Impact on Superannuation Providers (including trustees) Superannuation providers need to reconsider their death and disability insurance and retirement offerings - for example, questions such as: Should death and disability (lump sum and income stream) insurance be provided to the age pension eligibility age? need to be asked. Many large super funds are already facing significant increases in insurance premiums, due primarily to higher levels of disability claims. Some of these funds are considering whether tightening the definition of disablement in their insurance policies or reducing the level of disability cover available may be preferable to potential premium increases. The need for such tightening may become even more evident as members start to be impacted by the new eligibility ages, which may lead to an increase in disability claims from older workers who become physically unable to continue working. The lack of a broad range of products providing protection against the risks retirees face is a major shortcoming in Australia s superannuation system. The general shift towards increased self-reliance in retirement means superannuation providers should be considering how best to provide members with a sustainable income for life. Although legislative change would make this easier, there are still options under current legislation which could enhance superannuation income streams for those who live into their nineties and beyond. The changes also provide opportunities for trustees to encourage members to increase contribution levels so they can become more self-reliant in retirement whilst noting members disposable incomes may reduce, at least in the short term, reducing their capacity to save. A good retirement income calculator can assist members to understand the amount of superannuation they will need in retirement and how the changes to the age pension will impact on their position Federal Budget Review 7

8 Superannuation/Retirement OTHER SOCIAL SECURITY CHANGES FOR RETIREES The Government has announced a further three changes to the income and assets tests that will impact pensioners from 2017: - indexation of income and assets test free areas for the age pension will be paused for three years from July deeming thresholds will be reset from $46,600 to $30,000 for single pensioners and from $77,400 to $50,000 for pensioner couples from September pension increases will be linked only to the Consumer Price Index (CPI) ensuring a slower rate of growth (than the current indexation to average male income) from September From September 2014 the income threshold for the Commonwealth Seniors Health Card (CSHC) for selffunded retirees will be indexed annually to CPI. Currently it is not indexed. From 1 January 2015, deemed income from account based pensions will be treated as income for determining eligibility for the CSHC. Existing account based pensions held by CSHC holders at the implementation date will not be impacted. Payments of the Seniors Supplement will cease from the June 2014 payment. The Seniors Supplement was a quarterly payment to assist older Australians who were eligible for the CSHC to pay regular bills such as energy, rates, phone and motor vehicle registration up to a maximum of $ for a single ($ for a couple). The Government will not proceed with the Housing Help for Seniors trial announced by the previous Federal Government in the Budget and due to commence on 1 July The trial was to encourage seniors to downsize their homes. Impact on retirees The lower level of indexation from 2017 will have limited impact initially but over time will become very significant. After about 5 years of the reduced indexation, age pensions could be up to 10% lower than if no change had been made. For those not receiving an age pension due to assets or income, the changes will mean that some people will lose an entitlement to concessional health care costs and the small associated Seniors Supplement payment. The changes to the age pension and eligibility requirements for the CSHC will mean less income support overall for people of age pension age. CSHC holders with an existing account based pension may lose their entitlement if they roll over their account based pension to another provider. Impact on working individuals Employees will need to accept a lower age pension in real terms when they eventually retire. They will need to consider increasing their voluntary savings before retirement. 8

9 EXCESS NON-CONCESSIONAL CONTRIBUTIONS REFUNDS ALLOWED BUT TAX RATE HIGHER The Government will introduce an option for individuals with excess non-concessional contributions made from 1 July 2013 to withdraw the excess contributions and any associated earnings. If withdrawn, the associated earnings will be taxed at the individual s marginal tax rate. Any excess non-concessional contributions which are not withdrawn will be subject to excess non-concessional contributions tax. The rate of excess non-concessional contributions tax is 46.5% in 2013/14 and is currently legislated to increase to 47% from 1 July We expect the rate of 47% will increase to 49% for the three years from 2014/15 to 2016/17, as part of the 2% Temporary Budget Repair Levy arrangements. Mercer s View This policy is welcomed as the current excess non-concessional contributions tax regime is overly punitive, with inadvertent breaches common due to the complexity of the contribution rules. However we are concerned about the requirement for the associated earnings component of the refund to be determined. This could impose substantial compliance costs on superannuation funds. The Government has indicated that Final details of the policy will be settled following consultation with key stakeholders in the superannuation industry and the determination of associated earnings will be a key area for focus. It remains to be seen whether the Government will attempt to restrict the refund option to inadvertent breaches and, if so, how inadvertence is to be established. Impact on individuals The consequences of making excess non-concessional contributions will be much less severe but care should still be taken. This is not only because the letter of the law is not yet available, but also because disadvantage may still arise from making excess contributions, such as: - Inadvertently triggering the 3 year bring forward rule and cutting off access to this option for the next three years; and - Funds are likely to charge a withdrawal fee to make the refund. Hence any employees wishing to make substantial additional contributions should consult with their financial adviser before proceeding. Impact on employers No impact. Impact on superannuation providers (including trustees) Providers and trustees will welcome the change from a member viewpoint but will be wary until they see the fine detail of the changes, particularly the method of determining the associated earnings component of the refund Federal Budget Review 9

10 Superannuation/Retirement SUPERANNUATION GUARANTEE FROZEN AT 9.5% FOR 4 YEARS The Government will change the schedule for increasing the superannuation guarantee (SG) rate to 12 per cent, as follows: PERIOD SG RATE 1 July 2014 to 30 June % 1 July 2018 to 30 June % 1 July 2019 to 30 June % 1 July 2020 to 30 June % 1 July 2021 to 30 June % From 1 July % Mercer s View Mercer welcomes the removal of uncertainty as to whether the Government would attempt to retrospectively reduce the 2014/15 SG rate to 9.25% after the new Senate commences in July. However we do not support the freezing of the SG rate for four years, given the adverse impact this will have on retirement savings. Delaying the increase could bring short-term savings to the Government s bottom line, but we do not believe it is good long-term policy. Delaying or decreasing superannuation savings will make it more difficult for current employees to be more self-reliant resulting in higher age pension costs in future which will partly offset the Government s short-term savings. Impact on individuals Employees will receive the benefit of a higher SG rate from 1 July 2014, as compared with the Government s previous policy, which would have frozen the SG rate at 9.25%. However the deferral of subsequent SG increases will have an adverse impact on retirement savings and they may want to consider salary sacrificing any compensatory wage increases into super. Impact on employers Employers will now be able to budget and commence superannuation payments for 2014/15 with confidence. The SG rate beyond 2014/15 will depend on whether the Government can get this change through the new Senate. Until the Government is successful, employers will need to factor the longer-term uncertainty into wage negotiations relating to 2015/16 and later years. Impact on superannuation providers (including trustees) Contribution inflows to funds in years beyond 2014/15 will be lower under the Government s new proposed SG increase schedule than under the current schedule. Funds will need to factor this into their business planning and cash flow projections as well as any calculators available to members and financial planners. 10

11 LOW INCOME EARNERS GOVERNMENT SUPERANNUATION CONTRIBUTIONS The Federal Budget papers do not specifically refer to the Low Income Earners Government Superannuation Contributions (LIEGSC) but do indicate that, other than the change in the schedule for increasing the Superannuation Guarantee rate to 12 per cent, the Government intends to proceed with the repeal of the minerals resource rent tax and other associated measures as announced. The associated measures presumably include removal of the LIEGSC for contributions made from 1 July Mercer s View Mercer opposes the removal of the LIEGSC as we consider it is an important equity measure to address the issue of some low income earners being taxed at a higher rate on their employer superannuation contributions than if they those contributions were paid as salary, while for other low income earners, the employer superannuation contributions tax rate of 15% is only slightly lower than their marginal tax rate. Furthermore, because the LIEGSC is paid as a super contribution it has the potential to add to the retirement savings of low income earners. Impact on individuals The removal of the LIEGSC will have a negative impact on the superannuation savings of low income earners. It is also likely to adversely impact on their attitude towards superannuation resulting in a negative view which could continue into later years when they may have higher incomes and superannuation may be more tax effective. Impact on employers No impact. Impact on superannuation providers (including trustees) Contribution inflows to funds will be marginally lower than would be the case if the LIEGSC was not removed. Funds will need to factor this into their business planning and cash flow projections. Funds will also need to make sure members are aware of the planned removal of the LIEGSC and consider strategies to address the potential negative impact of the removal on the attitude of low income earners to superannuation Federal Budget Review 11

12 Superannuation/Retirement TEMPORARY BUDGET REPAIR LEVY IMPACT ON SUPERANNUATION The Government will introduce a three year temporary levy (the Temporary Budget Repair Levy) on high income individuals from 1 July 2014 until 30 June The Temporary Budget Repair Levy will apply at a rate of two per cent on individuals taxable income in excess of $180,000 per annum. The Fringe Benefit Tax rate will also increase from 47% to 49% for three years from 1 April A number of other tax rates currently based on calculations that include the top personal tax rate will also be increased. We expect these will include: - The excess non-concessional contribution tax rate - The rate of no-tfn tax (the extra contributions tax payable by funds on employer superannuation contributions for members who have not provided their Tax File Number to the fund) Mercer s View The tax rate on excess non-concessional contributions will become even more draconian. It is unclear why it is necessary for this rate to be linked to the top marginal rate, however the proposal to allow excess nonconcessional contributions to be refunded should make this rate largely irrelevant. From a wider perspective, the levy helps ensure that the costs of returning the Federal Budget to surplus will be shared by almost all Australians. Impact on individuals As concessional contributions within the concessional contributions cap are not included in taxable income, salary sacrificing up to their cap will become even more attractive to employees on incomes that are (or would be) subject to the Temporary Budget Repair Levy. Impact on employers No impact in relation to superannuation but employers will need to adjust their tax withholding schedules and allow for the higher Fringe Benefit Tax rate in relation to salary packaging arrangements. Impact on superannuation providers (including trustees) Minor impact following passage of the enabling legislation providers and trustees will need to modify fund administration systems (in respect of no-tfn tax) and review fund communications material which could, for members with incomes over $180,000 highlight the importance of contributing up to the concessional contribution cap where feasible. OTHER ISSUES Other measures with a superannuation impact include: - The Government has restated its commitment to cut the company tax rate by 1.5 percent from 1 July This measure, if implemented, will result in lower franking credits for investors including superannuation funds. - A new bilateral Social Security Agreement with India is to be established covering the Age Pension and removing double coverage of superannuation from 1 July 2015, subject to the completion of legal and treaty processes for both countries. - From 1 July 2016, the Government will establish a modern, fully funded, accumulation superannuation scheme for new members of the Australian Defence Force. The existing defined benefit Military Superannuation and Benefits Scheme will be closed to new members from this date. The introduction of new, fully funded arrangements will reduce the government s unfunded superannuation liability by an estimated $126 billion by The First Home Saver Accounts (FHSA) scheme will be abolished from 1 July 2015 due to lower than forecast take-up rates. New accounts opened from Budget night 2014 will not be eligible for concessions. The Government co-contribution will cease from 1 July Tax concessions, and the income and asset test exemptions for Government benefits associated with these accounts, will cease from 1 July From 1 July 2015 account holders will be able to withdraw their account balances without restriction and FHSA accounts will be treated like any other account held with a relevant provider 12

13 3. Health The Government will make a number of changes which will generally increase healthcare costs for individuals. The changes include: CHANGES TO INDEXATION OF HEALTH REBATES AND LEVIES - Indexation of the Medicare Levy Surcharge and private health insurance rebate thresholds will apply for the 2014/15 tax year but will then be paused for 3 years until the end of the 2017/18 tax year - Medicare Benefit Schedule (MBS) fees excluding GP items will not be indexed for 2 years from 1 July INCREASED CONTRIBUTION TOWARDS HEALTHCARE COSTS - From 1 July 2015 Australians will generally be asked to co-contribute an additional $7 to the cost of GP consultations, out of hospital pathology and imaging services. Doctors who bulk bill and do not currently charge the patient will be expected to charge the $7 co-payment. Where patients are currently charged a fee, a $5 reduction in the Medicare rebate is likely to be passed on to the patient together with doctors also able to charge a further $2. The bulk-billing fee will be capped at 10 services a year for concessional patients and children under 16 and will not be expected for chronic disease management and health assessments. Savings from this measure will be directed towards the Medical Research Future Fund with an aim to deliver better health outcomes for all Australians in future. - From 1 January 2015 most patients will pay an extra $5 towards the cost of each Pharmaceutical Benefits Scheme prescription. Patients who hold concession cards will only pay an additional 80c. MEDICARE SAFETY NET THRESHOLDS LOWERED - From 1 January 2016 a new Medicare Safety Net will have lower thresholds for most people meaning that the government will assist those patients who incur high out of pocket costs. However there will be other changes to the Safety Net which will result in overall savings to the Government of over $266 million over 5 years. Mercer s view The shift from public to private payment for healthcare services is consistent with global trends and has the potential to create a stronger need for alternate options for provision of healthcare services and insurance products in the future. Globally we have seen the employer take on a greater role in the provision of health benefits and services as they seek to more effectively manage the impact of health risk within their workforces. Impact on individuals Australians will be required to make a greater contribution to the cost of their healthcare. As a consequence of pausing indexation of the Medicare Levy Surcharge threshold, a greater number of Australians will be forced to consider private health insurance as an alternative to paying the Medicare Levy Surcharge. Additionally, the pause in indexation of the threshold for the private health insurance rebate will mean that employees will creep into lower rebate brackets over time and thus reduce their Government rebate and increase the effective cost of private health insurance premiums. This has the potential to lead individuals to reassess the affordability of private health insurance and increase pressure on public health services. The lack of indexation of MBS fees, the co-payment on GP consultations and the increase in the cost of PBS prescriptions will result in potential increased out of pocket expenses for all health consumers. Impact on employers In Section 4: Workforce we have outlined details on how employers might use these changes to drive higher levels of employee engagement, differentiate their employer brand, and potentially even increase productivity Federal Budget Review 13

14 4. Workforce How should employers react to the move towards more self-reliance and an ageing workforce? For many years, there has been a move to change the employment relationship from one of employer paternalism to employee ownership. We believe this Budget will further strengthen this trend, with a move towards greater individual self-reliance. We believe the Budget has provided a number of opportunities for employers to drive higher levels of employee engagement and for employers to further differentiate their employment brand. Remuneration plays a significant role in an employee s decision to stay with or leave an employer. However, once remuneration is broadly competitive and meeting the requirements of the employee, the broader employment offer takes on a more significant role. A number of announcements in the Budget create opportunities. PAID PARENTAL LEAVE The introduction of a paid parental leave (PPL) scheme with an income cap of $100,000 per annum including superannuation has been announced to support workforce participation rates and help employers maintain their engagement with mothers. This maximum paid parental leave benefit of up to $50,000 provides for six months of maternity leave for employees with an income of $100,000. Mercer s View Our recent Australian Benefits Review report, which surveyed 350 companies, shows companies at the moment typically fund 12 weeks paid parental leave as part of their existing programs. As the costs of the PPL scheme will be met by a levy on the largest 300 Australian companies, it may create an opportunity for the remaining employers to topup the benefits provided by the PPL scheme. In this way the provision of a more competitive reward offering that supports caregivers to remain with infant children through their first year without the pressure of an earlier return to the workforce due to financial circumstances serves to create a strong employment brand and encourage employee retention. GP CO-PAYMENT Australians have the benefit of accessing a universal healthcare system that is the envy of many countries. From 1 July 2015, previously bulk-billed patients can expect to contribute $7 per visit towards the cost of standard GP consultations and out-of-hospital pathology and imaging services. Similar increases will apply to non-bulk-billed patients due to a reduction in the Medicare rebate. Mercer s View In many countries globally, it is not unusual for employers to provide funding for outpatient medical care. Australian companies may adopt a similar approach as part of a broader employee welfare strategy. For example, the cost of each bulk-billed GP visit to the employer is slightly more than $13 per visit, inclusive of FBT. Assuming employers offer a reasonable cap of, say, 12 visits per year, the maximum FBT-inclusive cost to the company is approximately $157 which is a small amount that can be treated as an employer expense. In reality not everyone will visit the doctor 12 times a year. Yet, to the employee nothing would have changed for his/her medical expenses. This benefit could increase the willingness of employees to visit the doctor thereby potentially improving the health of the employer s workforce. We also think there could be opportunities for a new insurance product that could be developed in Australia for employers to help them manage their outpatient employee medical expenses. More importantly, employers need to think more holistically about the health and wellness programs offered to employees. Employers need to ensure employees have the opportunity to access preventative health initiatives and programs in order to maintain the health and well-being of the workforce. 14

15 PLANNING FOR THE WORKFORCE OF THE FUTURE The pension age is not the same as the retirement age. Employees are still able to choose to retire early. From an employer s perspective, although the implementation of the increased age pension eligibility age stretches out to 2035, it would make sense to begin laying the foundations for the inevitability of an ageing workforce. We are living longer and inevitably working longer. Tackling the older workforce will require employers to undertake workforce analysis to clearly define the types of older workers that will exist (e.g. professionals versus staff, award versus non-award). Overlaying the workforce analytics against the strategic direction of the business will result in employers being best positioned to address the future. Initiatives employers could introduce will vary based on the profile of their older workers. Some will require retraining into less demanding roles focusing on leveraging their knowledge and experience. For others, it may involve new skills that could be more effectively employed. Another avenue could be setting up consulting roles (e.g. transforming experienced managers into coaches to help newer managers manage). If employees are / will be staying at work longer, employers will need to consider: - The impact this will have on talent pipelines, how to ensure there is continued movement through the pipeline and the extent to which career aspirations of younger high performers are impacted by senior employees staying in their current roles - Establishing opportunities for different forms of employment and forms of contribution, such as role re-design; alternative work patterns, including part time / job share and flexible working arrangements; and so on - Succession planning taking likely retirement timeframes into account - More flexible employment and reward systems including transition to retirement strategies - Implications for remuneration strategies including ensuring reward systems do not impede the shift to more flexible engagements - Recognising that workers compensation in some States may not provide income benefits past the pension eligibility age (currently 65) - Greater individualisation of employment and reward plans to achieve mutual objectives - Retraining plans to assist older employees transfer to less physically demanding roles - Reconsidering downsizing options as it may become more difficult to shed older workers through redundancy and voluntary early retirement plans KEEPING EMPLOYEE WEALTH FRONT-OF-MIND A key theme for this budget is with the pension age being increased to 70 over the next 20 years, the importance of developing and implementing wealth creation strategies at earlier career stages to secure the financial security of employees takes on even greater importance. Employers can take a lead in helping their employees obtain a better grasp of their wealth position by providing them with a clearer understanding of the type of rewards on offer as well as their real time value. The use of technology enabled employee portals, via workplace and mobile devices, are opportunities to help bring the organisation s reward offer to life. They can also serve as channels through which employees can access additional quality information and tools and take up services that provide opportunities to receive more tailored advice Federal Budget Review 15

16 5. Investments INFRASTRUCTURE INVESTMENT INITIATIVES The Budget provides more information regarding the recently announced intention to provide financial incentives to States and Territories to invest in new infrastructure. The Government will establish the Asset Recycling Fund (ARF) on 1 July 2014 with an initial size of approximately $5.9 billion. This is designed to encourage States to sell existing infrastructure and invest the proceeds in new assets. Further funding support has also been announced for infrastructure projects including WestConnex in Sydney, East-West Link in Melbourne and Perth Freight Link. In aggregate, the Budget foreshadows $50 billion in infrastructure spending over the next 6 years. Mercer s view Mercer is cautiously optimistic that the measures announced in the Budget will result in an expansion in the pipeline of assets available for private investment, which would be a welcome development for institutional investors including superannuation funds. 16

17 For further information, or visit our website at: Adelaide Level 6, 70 Franklin Street South Australia 5000 Tel: Fax: Brisbane Riverside Centre Level 20, 123 Eagle Street Queensland 4000 Tel: Fax: Perth Level 6, 225 St Georges Terrace Western Australia 6000 Tel: Fax: Sydney Darling Park Tower Sussex Street New South Wales 2000 Tel: Fax: Melbourne 727 Collins Street Victoria 3008 Tel: Fax: Mercer is a global consulting leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset their people. Mercer s 21,000+ employees are based in more than 40 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. This document is intended to inform clients of Mercer s views on particular issues. It is not intended to be provided to any person as a retail client and should not be relied upon or used as a substitute for professional advice specific to a client s individual circumstances. Whilst Mercer believes the prospective information and forward looking statements made by Mercer in this report are based on reasonable grounds, they are predictive in character and may therefore be affected by inaccurate assumptions or by known or unknown risks and uncertainties. This document has been prepared by Mercer Consulting (Australia) Pty Ltd (MCAPL) ABN , Australian Financial Services Licence # Any advice contained in this document is of a general nature only and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this document you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering and seek advice from a licensed, or appropriately authorised financial adviser if you are unsure of what action to take. MERCER is a registered trademark of Mercer (Australia) Pty Ltd ABN Copyright 2014 Mercer LLC. All rights reserved Federal Budget Review 17

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