Category: Features

Retirement income expert Michael Rice argues case for 12pc super rate

The Australian

3 June 2019

Michael Roddan – Reporter

The age pension will be the “primary source” of income for most Australians if the government ditches plans to force workers to hive off more of their wages into superannuation, according to research from the nation’s top retirement income expert.

Michael Rice, chief executive of actuarial firm Rice Warner, will today present a paper to the Actuaries Institute annual summit in Sydney urging the government not to derail the planned increase in the super guarantee from 9.5 to 12 per cent.

The paper, prepared by Mr Rice, Australia’s foremost actuary, and Rice Warner head of superannuation Nathan Bonarius, will be launched as the government prepares to build a case to potentially scrap the scheduled increase in the guarantee rate with a wide-ranging review of the adequacy of the $2.7 trillion super system, as recommended by the Productivity Commission.

An inquiry will also focus on generous tax concessions built into the system, which are projected to cost the federal budget more in foregone revenue than the system saves in age pension outlays until at least 2070.

There has already been fierce resistance from the funds management sector and the ACTU, which have been campaigning for a rate of at least 15 per cent.

Josh Frydenberg says the government has “no plans” to freeze the rate, while Labor has been vocal about any attempt to stop the planned increase in the amount of money Australians are forced to put away until retirement.

“If the SG was left at the current 9.5 per cent the age pension, rather than the SG, would be the primary source of income for most Australians,” the Rice Warner paper said. “An SG below 10 per cent would not be an optimal solution.”

According to analysis of different contribution rates, Mr Rice said a rate of between 10 and 15 per cent would provide a standard of living in retirement that was adequate “for most while not being excessively generous to too many”.

However, a higher rate would need to be paired with lowering some of the tax concessions for wealthier Australians.

Under their scenario, about 15 to 20 per cent of the population would be supported by welfare and social security while between 35 and 40 per cent would have enough savings to allow them to partly supplement their income with the age pension until later in life, when they would become more reliant on the government payment.

Wealthier retirees, accounting for between 40 and 50 per cent of the population, should be self-sufficient, Rice Warner said.

“An SG below 10 per cent would result in median income earners relying on the age pension for most of their retirement income,” the paper said.

“While this would provide a comfortable living standard for middle-income Australians, it’s not a desirable result if we want people to be self sufficient in retirement. Further, many people living on a full age pension (particularly renters) are living in poverty, indicating the age pension by itself is not enough.”

The Grattan Institute has found that, by the time it is fully implemented in 2025-26, a 12 per cent super guarantee would strip up to $20 billion a year from workers’ wages, or nearly 1 per cent of GDP.

The think tank has argued a higher super rate would mostly benefit wealthier Australians, punish poorer workers and cost the budget an extra $2bn a year in tax concessions.

Michael Roddan – Reporter

Michael Roddan is a business reporter covering banking, insurance, superannuation, financial services and regulation.

Goyder questions independence of industry super fund boards

The Australian

3 June 2019

Ticky Fullerton – Business Editor

In two years, Richard Goyder has transitioned pretty seamlessly from managing one of Australia’s biggest businesses, Wesfarmers, to the most senior positions in Australia’s boardrooms.

He is now chair of Qantas, Woodside and the AFL Commission. In a broad-ranging interview, what stood out was less his views on the election or the RBA rates decision, and more his experience with investors, in particular some of the industry superannuation funds.

To be clear, Goyder sees industry super as playing a vital investment role, helping to build Australia.

After all, the industry funds now manage billions of dollars in retiree savings. And he scoffs at warnings that company directors should fear industry super on the register as predators in waiting.

“Not at all. Industry super funds should be long-term investors and should be very supportive shareholders but also hold companies to account for what they’re doing in the environment and with all stakeholders in an appropriate way,” he says.

Where Goyder does have a concern is on independence of the boards of industry super.

It’s no secret that many in corporate Australia remain sceptical of the role of these union-backed funds, with major stakes in listed companies.

Their indisputable track record of returns and low-fee reputation have lured hundreds of millions of dollars in retiree savings away from retail funds.

But calls by union leaders like the ACTU’s Sally McManus to use the funds’ financial muscle to influence ASX-listed boards with activist agendas, including wage hikes for employees, have rattled business. “Just as directors’ obligations are pretty clear, I think the obligations of trustees of superannuation funds are pretty clear as well and their obligations are to the members of the fund,” says Goyder.

His own experience has caused him to question whether industry fund directors are living up to their obligations.

“Interestingly, as a CEO, when I would go and see shareholders, including superannuation, they want to talk about how the company was going and performance and outlook and investment.

“Now that I’m a non-executive director, I spend more time talking about remuneration, climate change and other factors.

“One of the things that struck me is that these funds want independent directors, but when I go and see them, they actually don’t want us to be independent, they want us to do their bidding for them.

“And at the end of the day, directors will be independent. And we’d expect them to fulfil their roles as trustees as well.”

The re-elected Morrison government says it will bring back, from the dead and buried basket, its campaign to make industry fund boards independent, which is sure to be a good stoush; the current dual representative model is strongly defended by both the unions and employer organisations.

The campaign looks to have Goyder’s support.

“Independence a two-way street and I smirk a bit when I go into some of these meetings and they talk and they say, are your directors independent? And then ‘this is what we want you to do’. There seems to be some sort of conflict there.”

With Labor so roundly beaten, one business leader suggested privately that business had dodged a bullet on industrial relations, but Goyder sees this as harsh.

Business like almost everybody had been planning for a Shorten government and the boardroom chief says Labor would have been quick to pick up the phone to corporate Australia had it won. But clearly a clean Coalition victory is welcome news.

“Business will work with whoever, but I do think Josh Frydenberg handed down a really good budget and I feel like the table is set and we can get on with things,” he said.

It is true that the surprise result delivered a boost of confidence for business, but there one notable exception: energy.

Here Goyder has a battle on his hands. During the election campaign at Woodside’s May AGM, he lobbied hard on behalf of the gas sector, calling for leadership from the next government on a comprehensive energy policy, including emissions.

On the Monday after the surprise Morrison victory the market rallied strongly, but the energy sector fell.

Since then, Energy Minister Angus Taylor was sworn in again with emissions in his new portfolio, and he was straight out of the blocks claiming a “silent Australian” mandate to shut down any thoughts of a carbon pricing ­policy.

Resources Minister Matt Canavan doubled down at the APPEA annual gas conference last week accusing resource companies of taking unfortunate positions in their calls for a generic price on carbon.

At the same conference Conoco’s global chief Ryan Lance made it clear that investment certainty in Australia on energy was in question and that his investment capital was footloose. Goyder’s gas challenge is just beginning.

“Woodside is looking with our partners in investing millions of dollars in the northwest of the country in the coming years with Scarborough and Browse and we want certainty around what emissions regime we will be in and how we’re going to look at meeting our Paris obligations.

“These are 20 and 30-year projects. These aren’t small deals — they’re big deals employing thousands of people.”

Compounding the pressure for Woodside is the Western Australian EPA’s proposal for zero emissions from resource companies.

“Nowhere in the world is there full abatement on the sort of projects we’re looking at,” Goyder says. Energy aside, Goyder sees better times ahead for business and welcomes the prospect of an interest rate cut by the RBA tomorrow.

“Presumably there’s issues around currency, there’s issues around the housing market and consumer confidence.

“Post the election, there is an opportunity to inject some confidence into the economy and that would be a really good thing.”

He says he’s hopeful the big banks will pass on a rate cut to customers and certainly Commonwealth Bank CEO Matt Comyn in his first speech to a market event last week acknowledged that the battle to restore trust will be top of mind when he reacts to a cut in the cash rate.

I ask Goyder what on earth he makes of the quiet Australians and whether the new government hands business an opportunity to reset the relationship between them and business.

“I’ve always felt that business is a part of the solution, not part of the problem.

“The reputation issues that came from the royal commission — business does have to make sure that we operate sustainably, we operate looking after all our stakeholders, but on balance I think businesses in Australia do a pretty good job on that front and there is an opportunity to reset.

“People say actually what matters to them is their own security, their personal financial security, and business, particularly large business, employs many millions of Australians, so there is an opportunity to embrace those employees and our suppliers and our customers so they understand the really good things business does, whether it’s Woodside or Qantas, I think we do amazing things in the community.”

Shrinking financial advice sector in turmoil

Australian Financial Review

2 June 2019

Adele Ferguson – Investigative journalist and columnist

There will be a lot of pain as the industry transitions. But winning back trust doesn’t come cheap.

There are few industries facing as many apocalyptic events as the country’s 24,000-plus financial advisers, who look after billions of dollars of their clients’ money.

There are also few industries grappling with as many trust issues after being at the centre of a string of financial scandals over the past decade, which has prompted a clean-up.

For the newly appointed Financial Services Minister, Jane Hume, it will be a lot to get her head around as she is lobbied from all and sundry.

There are those calling for the current timetable to be extended to meet tougher education requirements and a code monitoring program, those wanting grandfathered commissions to remain as well as the preservation of commissions on life insurance products.

As the sector recalibrates, and some of the bigger players including Westpac and ANZ abandon the sector, she will need to think about how the new Financial Adviser Standards Ethics Authority (FASEA) works. FASEA is an independent body set up by the government in April 2017 after a series of scandals.

According to the current timetable, advisers have to comply with the new FASEA code of ethics from January 2020, code monitoring bodies need to lodge their applications with the corporate regulator by June 30 for the regime to be in place by mid-November and grandfathered commissions come to an end January 2021.

It means some big decisions will need to be made soon.

Against this backdrop, Peter Johnston, executive director of the Association of Independently Owned Financial Professionals, emboldened by the success of mortgage brokers fighting off changes to the industry, is fighting to preserve the status quo.

He is threatening to challenge the grandfathered commission legislation in the High Court when it is passed in the Senate. He told The Australian Financial Review he was looking to raise $3 million under an independent entity called the Adviser Remuneration Challenge (ARC) Fund to mount a legal argument that the changes are unconstitutional.

According to research house IBISWorld, the industry generates about $5 billion a year in revenue and a third of that comes from grandfathered commissions.

Shrinking industry

Since Hayne’s second round of hearings on financial advisers, licensees have been falling like tenpins, sometimes on a weekly basis.

On Friday Freedom Insurance Group became the latest licensee to call it a day. In a statement to the ASX it said it would close its Spectrum Wealth Advisers business. It said it would notify its authorised representatives that it was terminating their agreements and therefore not advisable to write any new business as they would no longer be covered under the agreement.

It follows other high-profile departures, including Aon, which announced last month it was exiting its Aon Hewitt Financial Advice in a management buyout. Westpac announced in March it was abandoning financial advice and before that ANZ sold its advice business to IOOF and Dover Financial pulled the plug on its advice business in June 2018 after its founder collapsed on the stand after a grilling at the Hayne commission. The sudden abandonment left 500 advisers, representing more than 50,000 clients, needing a new home.

Then there are licensees who have had their financial services licence cancelled by the Australian Securities and Investments Commission, including Bristol Street Financial Services, Financial Circle, Jade Capital Partners and Evermore Money Management.

The turbulence has prompted industry speculation that CBA might take a similar scorched-earth approach to Westpac after announcing in March that it had puts its wealth demerger on hold to prioritise the recommendations of the royal commission, including remediating customers.

It has created unprecedented turmoil in the sector as advisers seek a new home. It has also created uncertainty for clients. When a licensee no longer exists and a customer has received poor advice, how will they be remediated?

The loss of trailing commissions, or grandfathered commissions, is one of a series of big events facing the advice sector in the next five years. The second key event is the introduction of compulsory exams for advisers from January 2021, and the third event is making advisers degree-qualified by 2024.

The industry estimates that such transformative events will shrink the industry by a third or even half – equivalent to the loss of between 8000 and 12,000 advisers – by 2024 as some retire, sell up or close down. The shrinkage could even be higher if the banks continue to withdraw funding in this area.

Given the reforms taking place, the market is flooded with advice businesses for sale. According to CountPlus boss Matthew Rowe, three years ago for every one advice firm for sale there were 12 buyers. Now there are eight sellers for every one buyer.

In the past four months the ASX-listed CountPlus made three acquisitions to bolster its network of accounting and advice network as converged accounting and advice firms become more active players in the financial advice sector in Australia. Its plan is to invest in more advice and accounting firms through equity partnership rather than outright ownership.

AMP biggest advice army

On Friday online industry magazine Professional Planner’s Tahn Sharpe and team released its annual list of licensees. It said the largest licensee owner remains AMP with 2412 advisers registered on ASIC’s financial adviser register, losing 143 in 2018 and another 216 in 2017. IOOF jumped to second place with 1802 advisers after bulking up with the transfer of 700 ANZ advisers into its growing army. The third highest is NAB with 1515, followed by CBA with 1414.

After that it gets interesting, with National Tax and Accountants Association ranking fifth with 1021 advisers, followed by Easton Investments with 855, reflecting the trend towards limited licensing arrangements for accountants who offer advice to SMSFs.

According to Professional Planner, the National Tax Accountants Association sole licensee the SMSF Advisers Network had 33 advisers in 2016, compared with 853 in 2018 and 1021 in 2019.

Westpac ranked number seven with 632 advisers and ANZ ranked 10 with 385 advisers, reflecting their extrication from the industry.

But there are other changes taking place, including the emergence of new user pays models for licensees and their authorised representatives, which was previously heavily subsidised by the licensees.

Under the traditional model, largely dominated by vertically integrated operators, namely the banks and AMP, which at one time controlled up to 80 per cent of the financial planning industry, licensees subsidised the costs of authorised representatives in return they sold the licensees financial products.

But as the vertically integrated model loses its dominance, the industry will shift to a user-pays model.

To put it into context, the industry estimates the true cost of authorised representative services are up to $45,000 a year per adviser, plus professional indemnity insurance. It is understood that the average cost being charged under the subsidised model was $12,000 a year per adviser.

In March, listed licensee and advice services firm Centrepoint kicked it off when it flagged a new pricing arrangement for its authorised representatives from July 1. Centrepoint, which is ranked number 11 on the Professional Planner list, will increase the prices it charges to authorised representatives to better reflect the true cost.

Others will follow suit. There will be a lot of pain as the industry transitions. But winning back trust doesn’t come cheap.

Australians don’t want a Dickensian retirement

Australian Financial Review

30 May 2019

Martin Fahy

Australians want to have a high standard of living in retirement, and they are prepared to pay for it via a 12 per cent super guarantee.

The Grattan Institute is making the same mistake unsuccessful pundits made with respect to the federal election, by making assumptions about what Australians want.

Grattan’s modelling of our retirement is selling Australia short. More specifically, it is using misleading fiscal projections and costings to decide public policy rather than listening to people.

Based on a flawed interpretation of the data, its modelling envisages an austere future that stymies aspiration and refuses to redefine retirement to meet the changing expectations of Baby Boomers and working Australians.

Superannuation is about lifting living standards in retirement and it does this on a cost-effective basis.

We know that Australia beats most other countries when it comes to reducing the fiscal impact of the age pension. Even when tax concessions for superannuation are factored in, it is well below the current OECD average and will be even more affordable by 2050. We currently spend 2.6 per cent of GDP on the age pension, down from 4 per cent in 2015 and significantly below the OECD average of 8.9 per cent. We spend less than Canada, Germany and the UK. The only countries that have a lower fiscal burden are Mexico and Korea.

We need to recognise that the Grattan definition is not what Australians aspire to. We know that Australians would rather their retirement be substantially self-sufficient and reserve the full age pension for those who need it most.

Retirement is the new chapter in the emerging narrative of Australian life: 30 or more years of retirement, punctuated by the joys of travel, children and grandchildren, as well as adequate aged care and health care.

We cannot think of retirement in binary terms. The reality is people will continue to work on a flexible basis as they move into their later years, in order to stay healthy and productive.

Australians have been shown to be remarkably responsible about saving for retirement and are willing to delay gratification to achieve this. In fact, a new ASFA survey released today conducted by CoreData, found 90 per cent of people supported compulsory superannuation and 80 per cent supported lifting the Superannuation Guarantee to 12 per cent from its current 9.5 per cent of wages.

Further, the survey found that 80 per cent of people would like to be able to spend at least the amount defined in ASFA’s comfortable Retirement Standard for home owners. That’s $61,061 per year for a couple, and $43,255 per year for a single person. In fact, nearly 40 per cent want to be in a financial position to spend even more than that.

The Household, Income and Labour Dynamics in Australia Survey has also investigated retirement expectations. It found that the view of people aged 45 years and over of what they need for retirement aligns closely with ASFA’s comfortable Retirement Standard.

With increased longevity, people look forward to a rewarding retirement, with the ability to choose the right balance of work, community and recreation to enjoy a full and active life. And they’re happy to pay for it.

Increasing the super guarantee to 12 per cent is a way of ensuring the best future for all Australians. Refusing to move to 12 per cent condemns nearly 70 per cent of Australians to dependence on the age pension during retirement. For people to properly prepare for the future, they need to be able to plan with certainty. For government, that means resisting the temptation to constantly tinker with superannuation settings.

The election result has clearly shown that Australians aspire to a better retirement than their grandparents or their parents. They don’t want to be a burden to the state, or their children, and they take pride in their financial independence. The changes that were made to the age pension in 2016 have made the system sustainable from a fiscal point of view and the time is right to move to a 12 per cent super guarantee now.

Superannuation means we’re not mortgaging our kids’ futures with ever-increasing age pension costs. Compulsory super means that our retirement income system is affordable for both individuals and future governments.

We cannot allow the story of Australian retirement to be the Dickensian misery that the Grattan Institute would foist upon us. It should instead be a vision for Australia’s bold and prosperous future.

Dr Martin Fahy is chief executive of the Association of Superannuation Funds of Australia.

Class warfare shifts to super as campaign grows to clip industry funds’ wings

The Australian

28 May 2019

Ticky Fullerton

$3.8 billion. That is the latest lump of retiree savings that AustralianSuper has awarded to IFM Investors to look after and grow. How good is industry super!

In the post-Hayne, post-Fox- and-the-Hen-House era of ­nationwide cynicism towards financial services, the profit for members sector is luring literally billions of dollars across from the retail funds.

IFM Investors is itself owned by the industry funds and the latest mandate takes its funds under management to a cool $130bn.

IFM’s chief Brett Himbury is a type for the times, low key with the pitch perfect message of workers’ savings driving investments for the benefit of the people: Main Street, not Wall Street money, driving impressive returns, much of it from infrastructure.

“Often understated, but motivation is a critical ingredient in driving superior net returns,” Himbury explains.

“If you are motivated solely by the returns to investors and not confused or distracted by any other motive, that has to help.

“Then it’s about your asset allocation, then it’s about your manager selection and then it’s about your fees, and so those funds that have performed superior have got a terrific unrelenting motivation on member returns.

“They have had an asset allocation which has accessed, among other things, the illiquidity premium in unlisted markets. They have been really focused on a smaller number of relationships so they can use their scale to drive fees down.”

Worrying for retail active managers is that increasingly industry funds are choosing to bring investment management in-house.

AustralianSuper recently sacked three managers and their loss would seem to be IFM’s gain.

But this development is symptomatic of a much bigger political issue because with money brings power and influence.

Critics of industry super see two clear threats to business: the first is a push for broadscale wage hikes from within the boardroom driven by union activists like the ACTU who have already declared this to be their agenda; the second is that industry funds with so much money and a mandate to grow have major listed companies in their crosshairs to take private.

John Howard on election night called the result a vote to end class warfare pushed by Labor but, ironically, since the result there has been a concerted campaign from the right side of politics warning government of the risks of union-backed industry super spreading its wings and demanding those wings be clipped.

They see the Keating legacy of industry super now delivering huge and unrepresentative union power right into the boardrooms of ASX companies. Class warfare is shifting to the super sector.

Reaffirmed Treasurer John Frydenberg has already committed to a review of super, and we can all expect a good stoush on whether the Productivity Commission’s recommendations on single default super for new employees and a top-10 best in show are carried.

Himbury says he simply wants political and business leaders to get on board. “It would be lovely if governments and companies and chairmen absolutely scrutinise the challenges, but really better understood us and, in so doing, looked at the opportunity as well as the risks of embracing IFM, the industry funds sector.

“Because there is a magnificent opportunity for members, for participants and for the country.”

Himbury promises to be active, not activist, on a register. He proffers a now familiar line that pressure for environment, social and governance changes are not just good for society, but good for the enterprise long term and hence good for long-term returns.

Whether this argument also extends to pressure for wage hikes is one of those known unknowns, but like industry super leaders Heather Ridout and Greg Combet, Himbury does not see unions riding roughshod.

“Let me be clear — the industry super fund on the (shareholder) register is working for working people and that’s it. There’s the unions and the employers that sit on the boards of industry super funds,” Himbury says.

“There’s clearly a lot of discussion about the role of unions, but it is a dual representative model that has worked so well.

“Look, I acknowledge the debate and it’s not going to go away, but I would really love to try and evidence — and we can — how our form of capital has really helped enterprises improve their proposition to customers and drive up superior enterprise value, which has driven superior returns to our members. If we could shift that thinking that would be fantastic.”

There’s is a big leap of faith required from business that unions will not influence industry super to the detriment of a company’s growth and profitability.

Some see the dual representative model as far from balanced, with the typically middle-ranking employer representatives a pushover for unions, and as keen to entrench a current system that ain’t broke. Interesting then, that the new Morrison government is to reignite the battle for independent boards. The shock Morrison victory was a clear blow for industry fund leaders: the faces said it all. Himbury was flying back from the US as the result came through.

I put it to him that Labor’s controversial changes to franking credit policy would have benefited industry super with yet more funds pouring in from self-managed super.

“No and it hasn’t happened for a range of reasons, but I think the growth of the system, super all up and the growth of industry super will still be strong and continued because of the broader proposition that has otherwise delivered for working people. It’s a wonderful asset.

“We’ve got other assets that we dig out of the ground. How about mining, for want of a better word, the super pool? We, the industry funds sector and the super sector more broadly, whatever the government of the time, are really looking forward to a much more collaborative and co-operative relationship, so we can do some great things together.”

Well, perhaps Himbury would say that wouldn’t he, talk up collaboration, especially given the surprise turn of events in Canberra? One way or another, IFM needs asset growth and higher returns. Super savings in Australia have already reached 140 per cent of GDP.

“Growth in the country and around the world is coming off and we’ve got to look at productivity measures to sustain and improve the growth prospects, and again I think there’s an exciting opportunity for the private sector and the public sector to really look at how we might engender and sustain greater productivity growth.”

Yet this exciting opportunity Himbury talks about is the other contentious area for boards. AustralianSuper is reported to have plans to take at least one ASX listed company private a year, and given the well aired conflicts that emerged in both the failed Healthscope takeover and the successful Navitas play, does Himbury think boards should fear having industry super or IFM as a stakeholder on their register? “Absolutely not. I think they should question, and they should critique, but I would hope that they don’t fear. This is a large, growing pool of capital that would love to work with enterprises, respect the role of boards, respect the role of management, but provide a long term source of sustainable capital to enable them to invest in their business to grow the enterprise, to impact society, to improve the service to their customers and enhance the returns to members.

“I hope and believe that the more discerning companies and boards are clearly looking at some of the risks but opening up and embracing some of the opportunity to work with a different long-term form of capital that can help them.”

There you have it chaps, this won’t hurt a bit.

Ticky Fullerton is the Sky News Business Editor

Combet calls for a super ceasefire

The Australian

27 May 2019

Michael Roddan

Greg Combet has called for the “traditional battlelines” over the union- and employee-backed industry superannuation sector to be “put aside” in the best interests of members, signalling his desire to work with Scott Morrison over looming reforms to the $2.7 trillion retirement savings system in the wake of Labor’s unexpected election loss.

In comments made to a closed-door briefing last Wednesday for industry fund executives, Mr Combet, a former Labor minister and current chairman of Industry Super Australia, said the sector needed to take a leading role in overhauling the default super sector and “properly” meeting the recommendations of royal commissioner Kenneth Hayne, which is likely to break the ties between the super sector and the industrial relations system.

“We want to work with the government,” Mr Combet told the executives, according to speaking notes obtained by The Australian. “I want to make clear. I think this is a very important case for collaboration.

“It is just so important that some of the traditional battlelines over industry super are put aside. Can we please just put it aside and work for the benefit of people in this country who ­depend upon the superannuation system for their retirement savings? The principal thing that we need to continue focusing on, and engaging in discussion about, is essentially member outcomes.”

The comments were made as the re-elected Morrison government geared up to take aim at the superannuation system, after a series of legislative speed bumps over the past two terms of parliament.

Josh Frydenberg has indicated the government is likely to pursue a wide-ranging review of the superannuation system, as recommended by the Productivity Commission, which will potentially examine whether the compulsory contribution rate should be lifted from 9.5 to 12 per cent of wages, as planned. An inquiry was also likely to focus on generous tax concessions built into the system, which are projected to cost the federal budget more in foregone revenue than the system saves in age-pension outlays until at least 2070.

The government will also act on the royal commission recommendation to dismantle the current default system enjoyed by the industry fund sector that allocates the savings of the least engaged members to funds anointed through the enterprise bargaining system. Mr Hayne recommended “stapling” savings to a member in order to end the proliferation of multiple ­accounts in a system where one in three super accounts are unintended multiples, which, when combined with a significant degree of poor performance, is costing savers almost $3 billion a year in lacklustre returns and fee gouging.

The Treasurer has hinted at reviving legislation limiting the number of union or employer-group appointees on super fund boards, which has repeatedly faced a Senate roadblock.

Mr Combet said it was time to start “sorting through the system” to ensure workers were being tipped only into “high-quality, good-performing products”.

“We need a set of performance benchmarks that start to provide a greater focus on the … chronically underperforming funds, so no matter what they are, they start to be weeded out of the system,” Mr Combet said.

Michael Roddan – Reporter

Michael Roddan is a business reporter covering banking, insurance, superannuation, financial services and regulation.

Retirement incomes face review

Australian Financial Review

24 May 2019

John Kehoe and Phillip Coorey

Treasurer Josh Frydenberg will commission a review of the retirement income system, including the interaction of superannuation, government pensions and, potentially, taxation.

In an interview with AFR Weekend, Mr Frydenberg said he would consult with cabinet colleagues and Treasury to act on the Productivity Commission’s recommendation to conduct a review of retirement incomes.

“My intention would be to establish that review,” Mr Frydenberg said.

“I am positively disposed to a review of the retirement income system as recommended by the Productivity Commission.”

Mr Frydenberg also signalled that the Morrison government was likely to rekindle its campaign to force a dilution of union and employer group representatives on the boards of industry superannuation funds.

“There are a number of superannuation reforms that remain outstanding from the last term of government,” Mr Frydenberg said.

Mr Frydenberg said it was “clear” from both the Productivity Commission and the Royal Commission findings “that there is a strong case for reform to strengthen accountability and governance, improve member outcomes and the overall efficiency of the system”.

Recommendations from the mooted retirement income system review could give the re-elected Morrison government, which faces criticisms for having a light policy agenda beyond cutting income taxes, foundations for a reform package to take to the next election.

An examination of retirement incomes could trigger anxiety among seniors and the superannuation industry, who have endured ongoing changes over several years to super tax breaks, pension payments and Labor’s failed plan to end cash refunds of dividend franking credits.

Superannuation a policy agenda

The Productivity Commission’s review of the efficiency and competitiveness of superannuation, released in December, recommended to the Morrison government that it initiate a broader review of the retirement income system, including super, pensions and taxation.

Prime Minister Scott Morrison during the election pledged not to change the taxation of superannuation.

Federal budget savings from paying lower pensions will only exceed the cost of superannuation tax concessions by 2060, or 2100 including the accumulated debt the system is racking up now, according to the Grattan Institute think tank, using Treasury’s long-term projections.

The Productivity Commission wanted an independent assessment of whether the compulsory superannuation system set up 27 years ago was achieving its original stated objective of raising national savings – by increasing private savings and taking pressure off the government budget.

The commission wanted an inquiry to explore if any reduction in reliance on the government pension helps the federal budget, given that higher-income earners receive big superannuation tax breaks.

The commission also wanted to see if compelling workers to forgo a portion of their salary in favour of deferred superannuation savings benefits the poor and wealthy fairly.

Low-income earners make a relatively large immediate sacrifice of forgone income they could spend today, while the wealthy receive big superannuation tax concessions.

The PC said the inquiry should be conducted before compulsory super is increased from 9.5 per cent of wages to 12 per cent, due to be phased in between 2021 and 2025.

Mr Frydenberg said the government had “no plans” to change the superannuation guarantee (SG) rise.

The Abbott government delayed the scheduled compulsory compulsory superannuation increase employers pay employees.

Higher super contributions are paid for through lower wage increases, according to numerous economists, including former Treasury secretary Ken Henry’s tax review and the independent Parliamentary Budget Office.

Increasing compulsory superannuation to 12 per cent of wages will cost Australian workers $20 billion a year in take-home pay and exacerbate sluggish wage growth, according to Grattan Institute analysis.

Grattan Institute fellow Brendan Coates said a retirement income system review was needed.

“We still haven’t worked out what the purpose of the system is and how the different parts of it work together,” Mr Coates said.

“We need to work out the target for an adequate retirement income and what the trade-off should be between living standards while working versus in retirement.

“We are still providing such large super tax breaks too.”

Before the planned longer-term review reports, more immediately Mr Frydenberg said the government will implement the banking royal commission’s recommendation to “staple” a single default superannuation account to new employees entering the workforce to save consumers millions of dollars in fees from unintended multiple super accounts.

He would also “move quickly as possible” on making life insurance inside superannuation opt-in, rather than default – a move resisted by the industry.

Dilute union influence

Mr Frydenberg indicated the government would revisit plans to dilute the influence of unions and employer groups on the boards of industry super funds.

After being unable to secure enough Senate support, the government, in August last year, shelved plans to mandate one-third of independent directors for all super fund boards.

Currently the boards are comprised of an even mix of union and employer group representatives.

As well as not having enough Senate support, the politics of chasing industry super became toxic after the sector emerged from the banking royal commission with a clean bill of health whereas the retail finds were hammered.

The Coalition government also needs to figure out if and how the default superannuation system is removed from the industrial relations system – as recommended by the Productivity Commission and resisted by Labor and trade unions.

The last national savings inquiry was concluded in 1993 by economist Vince FitzGerald and a team of Treasury officials for the Keating government.

John Kehoe writes on economics, politics and business from the Canberra press gallery. He is a former Washington correspondent. Connect with John on Twitter. Email John at

Phillip Coorey is The Australian Financial Review’s Political Editor based in Canberra. He is a two-time winner of the Paul Lyneham award for press gallery excellence. Connect with Phillip on Facebook and Twitter. Email Phillip at

Superannuation saved by ScoMo coup

The Australian

22 May 2019

Glenda Korporaal

The re-election of the Morrison government means people saving for their retirement can focus on what they need to do before June 30 instead of worrying how they might be hit by a slew of changes under a Shorten government.

In theory at least, the basic framework of superannuation as well as negative gearing, capital gains tax, the taxation of trusts, and dividend imputation — and even the tax-deductibility of accounting fees — is now protected from government intervention for the next three years.

“We now have some certainty in terms of government superannuation policy,” said Peter Burgess, the general manager technical services with AMP’s SuperConcepts.

“Now off the table are the Labor Party’s proposals to remove refundable franking credits which clearly would have impacted many SMSFs, reductions in contribution caps and other superannuation concessions.”

If Labor had been elected, the abolition of cash refunds for franking credits, which would have kicked in from July 1, would have made some savers think twice about investing in Australian shares, particularly those with self-managed super funds. It could have encouraged more ordinary Australians saving for their retirement to take the riskier path of ­investing in offshore shares.

Uncertainty about the treatment of super under Labor could have discouraged people with SMSFs from putting in extra post-tax dollars into their super before June 30. (Some 1.2 million Australians now have SMSFs in both ­accumulation and pension mode with total assets of $726 billion, a sizeable chunk of the $2.65 trillion in super as of December.)

But even for those without SMSFs, savers on lower incomes with blue-chip Australian shares would have worried about losing potential cash refunds once they moved into retirement.

Labor had decided to exempt people on the age pension from their proposed abolition of cash refunds for franking credits.

But the question is whether those in this situation actually knew of the distinction or, if they did, were prepared to believe it.

And if they did, they could have been encouraged to spend some of their savings to qualify for the age pension and still retain the potential for cash refunds from their franking credits after July 1.

Whichever way you cut it, Labor’s proposals were set to distort the system and generate concern that more tax hikes on savers and changes to the super system could be on the cards from a party focused on “taxing the rich”, including retirees.

A generation ago few ordinary Australians even had shares.

But now it is common for ordinary Australians heading to retirement to have a small portfolio of blue-chip shares including some such as Commonwealth Bank and Telstra held since their privatisations.

With its roots in the English class warfare mythology (which must be a mystery to a generation of aspirational new Australians from non-English backgrounds), the Labor campaign harked back to another era when ordinary Australians did not own shares.

Australian shares are the biggest single component of SMSFs which benefit from cash refunds once they move into retirement mode where their investments are tax-free. The fact is that the cash refunds from franking credits only benefit people whose tax rate is below the company tax rate of 30 per cent. People with marginal tax rates of 30 per cent or higher would never get franking credit tax refunds anyway.

Superannuation is not a big deal for the very rich and the poor rely largely on the age pension.

But the development of the compulsory super and the evolution of SMSFs created a new generation of middle-of-the-road Australians who had set their sights on managing their affairs for a self-funded retirement.

Constantly changing the goalposts to reduce the ability to contribute to super and reduce its attraction has already eroded some confidence in the system.

Labor was prepared to go another step further with its policies.

To be fair to Labor, the party decided that retirees and near-retirees with shares and those with SMSFs were easy targets, unable to organise themselves politically to oppose their proposed changes.

But they didn’t count on the well of concern in some circles about changes to super announced by the Turnbull government under Treasurer Scott Morrison before the 2016 election.

The Turnbull-Morrison government did a good job of portraying middle-income people wanting to put extra money into super as being greedy tax avoiders.

Anger at the tax changes, which included the imposition of the $1.6m cap on the amount which could be put into super in the tax-free pension mode, the end of the attraction of transition to retirement schemes and constantly lowering contribution caps — and the rhetoric surrounding the announcement — were all too easily dismissed. Indeed, if anyone knew the anger in some circles about the changes to super it would have been Morrison.

Some argue that anger almost cost Turnbull the 2016 election with otherwise Liberal voters not putting their hands in their pockets for donations or to help distributing how-to-vote cards and opting to make a protest vote for minor parties in the Senate.

Fast forward to this election and the Morrison government was all too willing to find itself back on the side of aspirational savers once Labor announced its policies. And having seen how easy it was for Morrison to change the rules on super a few years ago, there was a cohort of people like Geoff Wilson and Self Managed Super Fund Association chair Deborah Ralston who realised the need to lobby hard against the changes. Hopefully stability of the system can prevail and the results of the election will reduce the power of the Treasury to argue that super is an “easy nick” which can be targeted in the future for more tax revenue.

How the ALP will accelerate super switch to industry funds

The Australian

8 May 2019

James Kirby – Wealth Editor

Labor’s controversial plan to scrap franking credit rebates will accelerate the exodus of superannuation investors from existing banks to industry funds and investment platforms.

A new report from stockbroker Ord Minnett suggests the trend — which has seen billions of dollars move out of retail funds and over to union-linked industry funds — will be further accelerated by investors seeking to protect themselves from the ALP franking credit plans.

The report also reveals that so-called “investment platforms” such as Netwealth or HUB24 could be major beneficiaries of this flood of money — the broker estimates both listed companies could double their super assets.

As the report suggests, “the royal commission sparked changes and this wave of change has yet to crest: Labor’s proposed banning of franking credit refunds could see many SMSF assets migrate to platforms or other pooled super vehicles.

“We estimate that more than $200 billion of SMSF assets are in pension phase, and that even more are in accumulation phase but still generating franking refunds.”

The exodus of superannuation money from the banks and self-managed super funds has also been spurred by major changes in the financial advice industry that are yet to fully play out.

It is clear already that advisers fleeing the banks and setting up under new independent licences are taking their clients with them.

The move will often involve a review of the client arrangements again prompting large movements of money which end up at industry funds or investment platforms (where investors can make direct investments).

In terms of major investment flows, the double stimulus provided by changes in financial advice arrangements coupled with the fear of losing out on franking credits once again plays primarily into the hands of the nation’s largest funds, which are classified as “pooled investments”. Under the pooled investment structure big funds will be able to substantially (but not entirely) sidestep the ALP scrapping of franking credits because retirees are only a minority of their members and the franking credits get used at the so-called “fund level”.

The most recent super data shows money pouring out of retail funds and into industry funds even with the very poor conditions of the last quarter of 2018.

Australian Prudential Regulation Authority data shows that industry fund money under management was $607bn at December 2018, versus $605bn at June 2018, with net contributions of $17.5bn. Meanwhile, in the six months to December 2018, retail superannuation money under management fell by $36bn and net contributions were negative.

As Ord Minnett suggests: “Industry data provides us comfort that while there is a strong structural trend toward industry super funds, the specialist platforms are benefiting from the structural trend of advice away from the aligned bank and AMP platforms. We see the exodus of advisers from the banks and AMP benefiting HUB and Netwealth while the exodus of clients is benefiting industry funds.”

The confirmation from stockbroking analysts that industry funds will gain even further advantage from the ALP changes will increase pressure on the nation’s biggest funds to improve transparency.

Though the largest funds have consistently suggested they will not be affected by the franking credits plan, it became clear this week that every fund will have to review their “crediting” arrangements for paying retirees if the changes goes through.

With superannuation law demanding that all members in any super fund are treated “equitably”, a change to the tax status of retirees will create a dilemma for funds: if the funds keep paying the retirees as if their special tax status in relation to franking still existed, non-retired members may be disadvantaged. If the funds reduce retiree income there will be major protests.

Either way the funds will be under pressure to detail more clearly how they distribute payments to their members.

Super is a national disaster and coalition is to blame

The Australian

7 May 2019

Judith Sloan – Contributing Economics Editor

When it comes to monumental policy failings of the Coalition’s period in government, a standout is superannuation.

The changes that were made to the regulation and taxation of superannuation, as well as the ones the Coalition failed to make, in aggregate deserve an F — a big, fat failure.

The Coalition has come close to destroying self-managed super­annuation while giving an epic leg-up to union-sponsored industry super funds. It has paved the way for these funds to dictate the types of companies that will be allowed to operate in this country and how they will operate. Low-income workers continue to be ripped off while genuine superannuation savers have been speared in the eye.

Superannuation now exists primarily for the benefit of the industry rather than the members. It’s been a debacle.

Notwithstanding the clear pledges made in 2015 by Scott Morrison as treasurer that a ­Coalition government would not make changes that would hurt members, the measures contained in the 2016 budget were a repudiation of this.

Without any grandfathering, a cap was set for tax-free super­annuation balances; lower limits were put in place for both concessional and non-concessional contributions; the contributions’ tax was lifted for some members; and other complex restrictions were put in place.

They were essentially the wishlist of the industry super funds. These funds had the ear of influential bureaucrats able to persuade the ill-informed, gullible Coalition economic ministers of these changes.

It has made superannuation a much less attractive retirement ­income option for medium to high-income earners as well as hitting retired superannuants. (Low-income earners will always rely on the age pension and were not ­affected by these budget changes.)

It was hardly surprising that there was such a severe reaction from the Coalition’s base, including some Liberal members. It was a blatant broken promise, yet this didn’t prevent the minister principally responsible for the changes, Kelly O’Dwyer, insisting she was proud of them.

Then again, she had described superannuation tax concessions as gifts from the government, not unlike Bill Shorten’s description of cash refunds for franking credits.

Having made these ill-considered changes — and note that the surge of revenue from superannuation taxes has not been forthcoming in part because they are so dependent on the state of the share market — there were needed reforms to protect low-income workers, particularly those with multiple accounts.

The government faffed around for the next three years, putting forward bills and then withdrawing bills. The key issues were the consolidation of multiple accounts, the enablement of single default accounts, limits on fees, making insurance opt-in for low-balance accounts, the governance of super funds to include independent trustees, and defining superannuation’s purpose.

The end result of this unedifying process was legislating the role of the Australian Taxation Office to merge inactive accounts, a useful if modest outcome. But the great bulk of the Coalition’s super reform agenda was not completed.

Superannuation is a particularly dud product for low-income earners with a number of jobs within a short period of time. They typically end up with multiple accounts and are charged fees and unwanted insurance by each. At 30 they find their overall super­annuation balances trivial.

The obvious answer is to insist that workers are enrolled in a single fund that follows them through their working life unless they choose to change. This was a recommendation of the final report of the banking royal commission. But no progress was made on this.

The final issue on which the Coalition failed was in relation to the legislated increases in the super contribution charge, increases simply impossible to justify. The present rate is 9.5 per cent, but according to the legislated schedule, this rate will increase to 10 per cent on July 1, 2021. The rate will ratchet up over the subsequent years to 12 per cent in 2025.

This is bad news for low-­income earners, particularly with low wages growth.

The Grattan Institute estimates that the increase will strip $20 billion from wages. For a 1 per cent boost in retirement incomes, workers will lose 2.5 per cent of their wages. Moreover, every half a percentage point increase in the super guarantee charge costs the federal budget about $2bn a year.

Unsurprisingly, the father of compulsory superannuation, Paul Keating, has taken exception to the Grattan Institute’s suggestion that the SGC should be frozen at 9.5 per cent. Having previously conceded that the SGC reflects itself in the form of lower wage rises, he thinks the world has changed so that employers will bear the burden of any increase.

Demonstrating that perhaps Keating’s understanding of economics always was shallow, he quotes misleading figures about wage and productivity growth (using arbitrary starting points and failing to understand the distinction between consumer and producer wages) to suggest that employers can absorb an increase in the SGC without having an impact on wages.

But just think this through: if employers are able to restrict productivity gains from flowing through to wages, how can it be the case that employers will voluntarily absorb the impost of a higher SGC? What Keating is saying is ­illogical.

The Coalition has made a complete hash of superannuation policy to the point that the system is a discredited policy when it comes to providing retirement incomes and lowering the dependence on the age pension. It is very bad for low-income earners and it is also very bad for many middle-income earners. For the very wealthy, it is irrelevant.

Things will be worse under Labor given its complete capture by the industry funds. The SGC increases will proceed, there will be more taxation on members, the elimination of cash refunds for franking credits will devastate self-managed superannuation and there will be no progress on the ­establishment of single default funds because the industry super funds don’t want it.

The industry super funds will become more dominant and influential, including by forcing companies to take into account non-commercial considerations under the heading environment, social and governance.

Just don’t forget, it was the ­Coalition started this ball rolling.

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